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How can I set off long term capital gains?

What are long-term capital gains? 
Capital gains are the profit you earn after the sale of capital assets. Further, these are categorized as short-term and long-term capital gains. The duration for which the asset is held determines whether it is a long-term asset or a short-term asset. 

For some notified assets such as equity and debentures, a holding period of 12 months qualifies them as long-term capital assets. For immovable assets like land or house, the holding period to qualify as long-term is 24 months. The government usually sets a lower rate of tax for long-term capital gains. Currently, the tax on long-term capital gains is 20%. You need to declare the total gains while filing your income tax returns annually. Moreover, you can claim your capital losses (both short-term and long-term) against your long-term gains during a financial year. 

There is no provision for the losses to be set off against any other income heads. Therefore, long term capital loss can be set off only against long term capital gains. On the other hand, you should note that short term capital losses are allowed to be set off against both long term gains and short term gains.

You can carry forward your capital losses if you are not able to set them off in a given fiscal. These losses can be carried forward for eight years from the assessment year in which the loss was first reported. 

Why should you care about long-term capital gains? While calculating your tax liability, remember that there is no exemption on these gains. Therefore, the entire amount of returns in a year will be eligible to be taxed. However, you can set off long term capital gains by investing in certain asset classes such as:

  • Invest in property: Under Section 54, if a person sells a housing property and utilizes the money to purchase or build another residential property, he/she can avail of an exemption. If someone transfers an asset other than a house and then invests the money to buy or construct a housing property, that capital gain will also be tax-free.

  • Section 54 F: This allows you to save LTCG Tax from sale of assets other than property. Essentially, the entire sale amount (not just gains) need to be invested into a property. This can be useful in the cases of mutual funds, shares or gold, among other capital assets. 

  • Capital gains account scheme: You are allowed to withdraw from this account only if you plan on investing in housing property. If you withdraw for any other reason, you will be taxed. Also, if this account is not used in three years, you will be liable to pay tax. It allows you to park the money till you are able to use it as per sections 54 and 54F

  • Invest in bonds: Section 54EC enables exemption on LTCG if the gains are invested in specified infrastructure bonds. These may include bonds issued by the Rural Electrification Corporate and the National Highway Authority of India.

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