How to save tax on long-term capital gains?

Profit arising on sale of any capital asset is termed as capital gain and bifurcated into short term or long term for tax purposes. It depends upon the period of holding and type of the capital asset.

Capital assets that are held for more than 36 months qualify to be termed as long term capital assets. From FY 2017-18, in case of immovable property being land, building or house property, if they are held for more than 24 months, they are termed as long term capital assets i.e. any immovable property will attract long term capital gains tax, if sold after holding for 24 months or more from April 1st, 2017.

Equity or preference shares of a company which is listed on recognized stock exchange of India, other securities such as debentures, bonds, government securities listed on a recognized stock exchange in India, units of UTI, units of equity oriented mutual funds, and zero coupon bonds, qualify to be termed as long term capital assets if they are held for more than 12 months.

Why it is important to save tax on long term capital gains?

Long term capital gains are chargeable to income tax @ 20%. There is no minimum exemption limit prescribed so the entire amount of capital gains will qualify for the taxable income. Hence if long term capital gains on sale of a building figures out to be ₹60,00,000, a whooping ₹12,36,000 is payable as tax. To save the huge tax, it becomes important to invest the amount of long term capital gains.

Investment in residential house property

There are two exemptions related to purchase of new residential house property in order to save tax on long term capital gains.

Investing capital gains from sale of residential house (Section 54)

If an individual or HUF earns capital gains on sale of a residential house and invests the amount of capital gains to buy or construct a new residential property, the capital gain will be exempt from tax.

Conditions attached

  1. New residential property must be purchased either 1 year before the sale or 2 years after the sale of the property. In case of construction, the new residential property must be constructed within 3 years after the sale of the property.
  2. To avail the full exemption, entire capital gains have to be invested in a new property.
  3. In case, entire capital gains are not invested, the amount not invested is chargeable to tax as long term capital gains.
  4. The amount must be invested in purchasing or constructing only ONE house property. The house property must exist in India.

Investing capital gains from sale of capital asset other than house property (Section 54F)

If the individual or HUF transfer any capital asset other than house property, and invests the amount of net sale consideration to purchase or construct a house property, long term capital gains will be exempt from tax.
In this case, it is important to note that net sale consideration must be invested instead of long term capital gains. If entire net sale consideration is not invested, long term capital gains will be taxable on a proportionate basis. Other conditions are same as described in Section 54.

Depositing under Capital Gain Account Scheme

If you are unable to invest long term capital gains in a house property before due date of filing return, you can invest the gains into capital gains account scheme. Withdrawals from this account are only permitted for investing in a house property. If they are withdrawn for any other purpose, or not utilized within 3 years, they will be chargeable to tax as long term capital gains.

Investment in bonds issued by NHAI or RECL (Section 54EC)

Section 54EC serves as an another major tool for saving tax on Long term capital gain arising from transfer of any long term capital asset. Long Term Capital Gains will be exempt if the whole or any part of such long term capital gains is invested into “long term specified asset”.

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