What is Capital Gains Tax?

The profit or gains arising from the sale of capital assets are known as capital gains. There are two types of capital gains depending upon the holding period of the assets, and both the taxes are taxable under the head “Capital Gains.” 

• Short term capital gains (STCG)
• Long term capital gains (LTCG)

Meaning of capital assets 

A capital asset is any property, tangible or intangible, purchased for investment. It includes land, building, house property, trademarks, machinery etc. 

Short term capital gains

Short-term capital gains arise when an investor sells the property held for up to 24 months for immovable properties (land or building), unlisted shares, or listed equity shares/bonds for up to 12 months.

Long term capital gains

Long-term capital gains arising from the sale of the property held for more than 24 months and equity stocks/ bonds for more than 12 months.

Chargeability of Capital gains tax

We are aware of the capital gains tax rates; it is quite disappointing to pay tax at the high rates as 20% is a significant amount of money.

However, there are few exemptions that taxpayers can avail themselves of to save tax on long-term capital gains. 

How to save tax on long term capital gains?

Exemption under Section 54: 

“Capital gain arises on the sale of a house property and then re-invests the gains on buying or constructing another house property.”

Conditions 

• You can avail of exemption under section 54 to save long term capital gain if,
• You re-invest the capital gain to buy a new house either 1 year before the transfer of the old property or within 2 years after selling it.
• In the case of the construction of a house, the construction should be completed within 3 years from the transfer of the property.
• Taxpayers can get an LTCG exemption on the sale of a house by investing in two houses up to Rs. 2 crores. 
• You cannot sell the new house up to 3 years after the purchase or completion of construction; otherwise, you have to pay tax on the whole exempted capital gains tax. 

Amount of exemption 

• Lower of the entire capital gains or up to the cost of the new residential property.

Exemption under Section 54EC: 

“Exemption from long-term capital gains on the sale of a land or building by investing amount in specified bonds.”

If you are selling a property but do not want to invest in another property, then you can choose section 54EC to save capital gains tax by investing in specific bonds.

Conditions:

• The assessee invests the capital gains in the long term specified assets within a period of 6 months from the date of transfer. 
• You can invest in specified bonds for up to Rs. 50 lakhs.
• It comes with a lock-in period of 5 years, i.e., you can redeem them after five years only. Further, the bonds are non-transferable and can’t be offered as a security. 
• The investment in bonds must be made before the due date of filing the income tax return.

*Long term specified assets include the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).

Amount of exemption

• If the cost of specified bonds is more than the capital gain arising from the transfer of the land or building, then the whole capital gains shall be exempt.
• If the cost of specified bonds is more than the capital gain arising from the transfer of the land or building, then the proportionate shall be exempt up to Rs. 50 lakhs.

Exemption under Section 54F: 

“Exemption on capital gains on transfer of any long term capital asset other than a house property.”

Conditions 

• Another way to save on capital gains tax is to avail of exemption under section 54 of the Income-tax act by fulfilling the following conditions:
• If the assessee purchases one residential house in India within 1 year before or after 2 years from the date of transfer or within 3 years after the construction. 
• The assessee must own only one residential house (other than the new house) on the date of transfer.

Amount of exemption 

• If the cost of the new asset (residential house) is more than the net consideration of the old asset (other capital assets), then the whole capital gains shall be exempt.
• If the cost of the new asset (residential house) is less than the net consideration of the old asset (other capital asset), then the proportionate shall be exempt:

Cost of the new house x Capital Gains/Net consideration

Capital Gain Account Scheme (CGAS)

Another way to save capital gains tax is to invest the amount in CGAS. Keeping in mind that buying a new property is time-consuming, the IT department allows you to deposit the capital gains in specified schemes to provide temporary relief.

It means if you are not able to invest the whole amount before the filing of your income tax return, then you can deposit your gains in banks specified under the capital gain account scheme. 

In the later financial years, you can invest this amount to buy a house property. However, the taxpayer has to utilize such an amount within 3 years. 

How to save tax on short term capital gains?

As the short term capital gains are added to the normal income of the person and taxable as per slab applicable. In such a case, the taxpayer can benefit from the basic exemption limits of the income tax slab rates.