Rajiv sold off a significant portion of his equity shares to fund his son’s wedding. As tax returns season approaches, Rajiv is looking out for ways to reduce his long-term capital gains tax liability. He did not suffer any long-term or short-term capital losses that he can set off against the long-term capital gain, which means he has to look for other avenues to save tax. But how can he do that?
Like Rajiv, there are many others preoccupied with methods of saving tax in the last three months of the financial year. This guide explains the two types of capital gain tax and ways to save on them.
Any gain or profit on the sale of equity shares and equity mutual funds is taxed as capital gains. Depending on the period for which the assets are held, the capital gains are classified as long term and short term.
Short-term capital gains on equities and equity funds are taxable at 15%. Earlier, there was no tax on long-term capital gains on equity. However, from April 2018, the government has imposed long-term capital gains tax on equities at 10% for gains exceeding Rs 1,00,000.
There are different provisions in the Income Tax Act which Rajiv can use to reduce long-term capital gains tax. However, there are no exemptions for short-term capital gains. They can only be set off against short-term capital losses. If Rajiv is wondering how to save long-term capital gains tax, here is a handy guide:
How to save long-term capital gains tax in India
Section 54 of the Income Tax Act deals with how to save long term capital gains tax. Let us look at the sections on Rajiv can save tax on long-term capital gains:
Under Section 54F, Rajiv can get an exemption on the capital gains tax by investing the capital gains earned on equities on a new house. Prior to April 2018, the gains on sale of equities and equity mutual funds were not subject to tax. Since no tax was charged on capital gains, there was no question of exemption being availed. However, since amounts above Rs. 1,00,000 are taxed at 10%, this exemption can now be availed.
There are a few conditions with regards to this section:
• The person availing the exemption has to be an individual. It is not available to an HUF, a company, any institution etc.
• The capital gains exempt depends on the sale proceeds invested to buy the new house. If the entire sale proceeds are invested to buy the new residential property, then the entire capital gains will be exempt. If only part of the sale consideration is invested in the house, then the capital gains are exempt accordingly.
• The individual must not own more than one residential house.
Rajiv can use this section to save tax. He has to make sure the funds are invested within a particular time period. If it is not possible to invest within that time period, he can deposit the funds from the sale in a special bank account set up under the Capital Gains Account Scheme and avail an exemption.
Rajiv can also save on long-term capital gains tax by investing the gains in bonds issued by:
• National Highways Authority of India (NHAI)
• Rural Electrification Corporation (REC)
• National Bank for Agriculture and Rural Development (NABARD)
• Power Finance Corporation
• Indian Railway Finance Corporation (IRFC)
The amount of exemption is restricted to a maximum of Rs 50 lakh. However, from 1st April 2019, this exemption is available only if the asset is land and building. So, no exemption can be availed under Section 54EC from 2019-20.
If you’re wondering how to save capital gains tax in India, you can do so by reinvesting the amount earned on sale of equities in a new residential house and in notified bonds as per the guide above.