How to save income tax on long term capital gains in India?
During one’s lifetime, every individual sell and purchase many assets. However, when the assets change the ownership, it is obvious that some profit or loss would arise. At the time of sale of any asset, the gain that arises is a liable to be considered as a taxable income. It can be categorized either as a short-term capital gain or long-term capital gain depending on the duration the asset was held. What is short term capital gain? What is long term capital gain? How to save tax on short term or long term capital gain India?
What is Short Term Capital Gain?
If any asset (other than shares, securities, gold and jewelry) is held for less than 36 months, and sold out, the profit so arises is known as short term capital gain. This income is clubbed with your other incomes and taxed according to your applicable tax slab rates. In case of shares and securities, this time period is 12 months. Short term capital gains are taxable @15% and is shown under the head of capital gain under short term gains in the year which you book profits.
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What is Long Term Capital gain?
If any asset (other than shares and securities) has been held for more than 36 months and sold out, the profit so arises is known as long term capital gain. For shares, securities and jewelry, if they are held for more than 12 months and then sold out, the income so earned falls under the category of long term capital gain.
The income tax act contains several provisions which help the taxpayers to save tax liability on long term capital gains. It is advisable for the individuals to be aware of these exemptions and take benefit to the maximum to reduce the tax burden. The following are the popular ways of the same.
How to save income tax on long term capital gains in India?
Section 54-When one house property is purchased in lieu of other property
This section is applicable only for individuals and HUF. It says that if an individual or HUF sells any house property and long term capital gain is arising out of it, then one can purchase a new residential house within 2 years or construct a new house within a period of 3 years from the date of sale of previous one. Even if one has acquired any house property before 1 year of the sale of that property, then also he can claim this exemption.
One should keep in mind that the property which is purchased must be held for at least 3 years. If it is sold before 3 years, the entire exemption availed under this section becomes taxable.
Section 54F – when a house property is acquired in lieu of any long term capital gain
This section provides the exemptions on the long term capital gain on sale of any asset other than the house property. Like, if you sell any land or shares, securities, jewelry or any asset other than house property and purchase or construct new house property, then he can avail the exemption under this section. The rest of the provisions are same as in section 54.
From the assessment year 2015-16, it has been laid down that the assessee should possess only one residential house in India at the time of sale of the original asset. If he has more than one house under his name, he cannot enjoy the benefit of section 54F. Also, the assessee has to acquire the new house in India only. If he acquires any property outside India, he cannot avail this exemption
Section 54EC Investment in capital gain bonds
1) If any assessee has long term capital gain, he can invest that amount in the Capital Gain Bonds. These are of two types:
- National Highway Authority of India (NHAI)
- Rural Electrification Corporation (REC)
The assessee can invest up to ₹. 50,00,000 in these bonds with a locking period of minimum of 3 years. But, one should keep in mind that he has to invest within 6 months from the date of sale of the asset.
b) Deposit funds in Capital Gain Account Scheme (CGAS)
To avail the tax benefit, it is necessary to utilize the funds in new residential property, but if you are unable to find a good property before the last date of filing your tax return, you can invest your fund in CGAS. It is a temporary parking of your funds, say generally for 2 to 3 years. There are two categories of capital gain account.
Also Read: Complete A to Z income tax Provisions for 2015-2016 in simple terms
Deposit account Type A – All deposits into this account are in the form of savings. It is suitable for those taxpayers who want to construct a house over a long period of time as withdrawals are permitted as per the provisions of the scheme.
Deposit Account Type B- this account is similar to a term deposit as it is payable after a fixed time duration. The depositor can keep the funds cumulative or non-cumulative and withdrawals can be made only after a stipulated period of time.
Conclusion: Generally, the long term capital gain is in big figures and it is natural that the assessee finds himself in real tension regarding utilization of the funds in order to save the huge tax liability. The Government of India has provided various provisions to do so, but the common man is unaware of it. This article provides consolidated knowledge to the taxpayer for saving tax on long term capital gains by reinvesting the funds.
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Suresh
How to save income tax on long term capital gains in India
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7 comments
Add a comment ↓Dear Mr. K.P
I have sold my land splitting into two portions to two different persons. Can I purchase two residential properties ?
If I do not have any other income can income tax exemptions like no tax upto 2.5 lakh be used to offset long term capital gain?
Gains arising out of the sale of property, land/shares, jewellery or other assets represent long term gains depending on the periodicity of possession. Suresh KP has given great clarity on how one can avail of exemption of capital gains tax.
Dear Mr. Suresh,
May be this is foolish question, still expect a response,
Cumulative Interest from a Fixed deposit of 5 to 10 years is coming in which catogary? any relation with this capital gain.
Thanks
Saju, It would fall under “Income from other sources”. You need to declare this every year and pay income tax on it.
Thanks for the good and informative article
Informative article Suresh.