Future Generali

How can I reduce tax liability on Capital Gains?

The government provides several tax deduction benefits for Long Term Capital Gains in India.

What are long term and short term capital assets?
Generally, assets held for more than 36 months are long term capital assets, and their sale comes under long term capital gains. However, certain assets are considered long term assets after just 12 months. These include zero-coupon bonds, equity-based mutual funds and equity shares directly invested in the stock market, among others.

What is Capital Gains Tax?
Money earned from the sale of a capital asset is a capital gain. As capital gains fall under income, they are taxed. This tax is levied in the year when the sale of your capital asset takes place.

Saving Tax on Long Term Capital Gains (LTCG)

1. Section 54:This is with regards to the sale of property such as land or houses. After 2 years, these properties are taxed as LTCGs at 20% along with benefits of indexation. If you buy a property with the sale amount, you can get an exemption under Section 54. This is applicable for 2 years from the sale and on purchase of up to 2 properties. However, this is only applicable if your capital gains are not more than ₹2 crores. The exemption can be availed just once in a lifetime.

2. Section 54EC:Section 54EC can be used for saving LTCG tax in cases where one doesn’t want to reinvest proceeds from the sale of a property into real estate. Long Term Capital Gains on real estate sales are exempted from tax if invested in specific bonds. These bonds include 54EC bonds which are issued by Rural Electrification Corporation, NHAI or others.  The investment must be made within six months. The maximum amount allowed is ₹50 lakh, with a lock-in period of 5 years. The interest, however, is taxable. 

3. Section 54F:This applies to capital gains earned from stocks, gold, or mutual funds. Capital gains from these assets are exempted if you use them for buying residential property, with some conditions. It is necessary to use the full sale amount for buying or construction of a new property. If the entire sum is not invested, the exemption can be allowed proportionately.

4. ULIPs
ULIPs are insurance products and are exempted from short-term as well as long term capital gains tax.

There is little to no relief for STCG (Short Term Capital Gains). It is thus advised for property holders to hold on to the property till it falls under the scope of LTCG and avail the tax benefits of reinvestment.

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