How to save tax on Long Term Capital Gains
Every person tries to park their funds in the valuable assets like property, shares, mutual funds, gold, etc. to earn gains over a period of time. But do you know that all the gains you achieve from these valuables are taxable under the Income Tax Act? Such gain is known as “Capital Gain Tax”.
Some people have a misconception that capital gains tax is applicable on properties only. Friends, capital gains tax has a wide scope and applies to even shares, mutual funds, bonds, etc. Let’s discuss what is capital gains tax and how you can save tax on long-term capital gains...
What is Capital Gain Tax?
“Capital Gain Tax” is the tax chargeable on the profits and gains derived from the sale of capital assets by any person in India. It should be noted that “Inventory” held in business is not treated as a capital asset. Generally, the capital gain is derived by any person on the sale of properties, shares, bonds, jewellery, mutual funds, artifacts, etc. In India, the capital gain is subjected to tax at various tax rates. For this purpose, capital gains are classified into two types namely, short-term capital gain & long-term capital gain.
What are the types of capital gains?
Capital gain is of two types, short-term capital gain & long-term capital gain. The type of capital gain is decided on the basis of the holding period of any asset by any person. When any asset (other than shares & immovable properties) is held for less than 36 months, the gain derived on such asset will be short-term capital gain. However, in the case of immovable properties, the holding period is 24 months or less, for being classified as “short term capital gain”. In the case of shares, the holding period is 12 months or less in the case of short-term capital gains.
What is Long-Term Capital Gains Tax?
When an asset is held by any person for a period of more than 36 months, such asset is called a “Long-Term Capital Asset” and the profits derived on the sale of such asset would be treated as “Long-Term Capital Gain”. Generally, long-term capital gains are liable to tax at the rate of 20% in India subject to indexation benefit.
However, in the case of assets such as equity & preference shares, equity-based mutual funds, etc., the threshold period is 12 months. Thus, if shares or mutual fund units are held for more than 12 months, the gains on the sale of such assets will be treated as “long-term capital gains” Even, special tax rates have been prescribed for shares & mutual fund units.
Taxes on Long Term Capital Gains
As discussed above, long-term capital gain tax is charged at the rate of 20%. In addition, surcharge & cess is also liable at the applicable rates. Further, in special cases, the tax rate has been prescribed at 10% also. Do you know if you have earned long-term capital gains on the sale of listed equity shares & equity-oriented mutual fund units, tax shall be charged at 10% only on gains in excess of Rs. 1 Lakh. In the case of short-term capital gains, the applicable tax rate is 15%.
Long-term capital gains are subjected to the prescribed tax rates as seen above. There is no exemption limit available in case of long-term capital gains except Rs. 1 Lakhs in case of listed equity shares & equity-oriented mutual funds.
How to save tax on long-term capital gains?
This is the most important question for every taxpayer earning long-term capital gains. Please note that there is no tax saving option in case of short-term capital gains but the Government provides various tax saving options in case of long-term capital gains. Let’s discuss the various tax saving options:
Investment in Residential House Property
This is one of the most popular tax-saving options in the case of long-term capital gains. Section 54 & section 54F of the Income Tax Act provide these options. If you have derived long-term capital gains on the sale of a residential house, you can reinvest such capital gain in another residential house and get a tax exemption under section 54 of the Act. Such reinvestment could be made by construction of a new house within 3 years from the sale of existing property or by the purchase of a new house within one year before or two years after the sale of existing property. Similar benefits are available under section 54F in respect of long-term capital gains derived from the sale of other assets. You should also file income tax return timely and claim an exemption under section 54/54F for saving tax on long-term capital gains.
Opening Capital Gain Account
It is sometimes seen that people don’t get the right residential property to invest in, at the time of sale of existing property. In such cases, they are debarred from getting tax exemptions on long-term capital gains. Such taxpayers have been given an option of opening a bank account with their bank which is known as a “Capital Gain Bank account”.
You can open this account with your bank and deposit sale proceeds of capital gain in such an account. Later, you can withdraw the amount from this account to make the investment in purchase or construction of another residential property within the time limit of 2 years/ 3 years as discussed above. This way, you will be able to save tax liable on long-term capital gains. File your income tax return online to save tax on long-term capital gains.
Investing in Capital Gains Bonds
If you don’t want to make reinvestment in another residential property, there is one more option for you. You can purchase capital gain bonds issued under section 54EC to save tax on long-term capital gains. These bonds are pretty secure as these are issued by Government undertakings like NHAI and RECL. One more interesting thing about these bonds is that the interest earned on capital gain bonds is tax-free. You need not pay any tax at the time of maturity of these bonds.
Conclusion:
The payment of tax on long-term capital gains is compulsory and you cannot escape from your tax liability. The best way is not to escape but to save tax on capital gains legitimately. You can take benefits of the above tax-saving tips and save maximum tax on your capital gains.
