Best & Safe ways of getting tax exemptions on long term capital gains

A capital gain is a profit earned by the investor for making the sale of assets at a cost higher than the purchase. It includes capital assets like jewellery, shares, stocks, vehicles, or any of the securities held by a person. On such profits earned, one is liable to pay capital gain taxes. There are mainly two types of capital gain taxes:

Short-term Capital Gain Taxes
Long-term Capital Gain Taxes

Short-term capital gain taxes are paid to sell assets with the investor for only 3 years like mutual funds, shares, or bonds. The short-term capital gains are not considered a security transaction tax in this scenario. It is being included in your income and taxes as per the defined Income Tax slab. 15% of short-term capital gain tax is being levied along with surcharge and education cess.

Long-term capital gain taxes are to be paid for those assets where the property is held for more than 3 years. It is 20% in addition to education cess and surcharge.

Though one is not allowed to make any tax exemptions be it a short-term capital gain tax or long-term capital gain tax as per the Income Tax department of India. The only legal way of saving tax on the long term and short term capital gain is following the rules under the Income Tax Act. One of the main exemptions one gets on paying the capital-gain tax is reinvesting the profit earned on the sale of the profit earned.

Long-term capital gain taxes exemptions

The super-senior citizens above the age of 80 years will get an exemption below Rs 500,000.
The residential Indian falls between 60-80 years old and will easily save taxes from long-term capital gains in 2021 up to 300,000 per annum.
Individuals below the age of 60 get a tax exemption limit of up to Rs 250,000 per annum.
Hindu Undivided families get tax exemption in annual income up to Rs 250,000 annually.
For NRIs, the limit is Rs 2,50,000, irrespective of their age.

Here are the three main sections under which one can save tax on long-term capital gains:

1. Section 54

It is related to long-term capital gains on selling property or house and reinvesting the earned money to purchase another residential property. If you plan to construct a new property, it should be completed within 3 years of the old property.

Example

If you are selling a property which you have held for more than 3 years. The cost of the property at the time of purchasing is 20 Lakh, but you have sold it for 42 Lakh. In case the long-term capital gains are 22 Lakh. As per the Income Tax Department of India, you are liable to pay capital gains tax on the profit earned, i.e., 20% LTCG tax, along with paying off a 3% surcharge and cess. Under Section 54, the only way of saving taxes on long-term capital gain is buying a new residential property from the money earned on the sale of old residential property.

Exceptions under Section 54

One gets exemption only from making purchases of only one property. If you are using the capital gains for buying two properties, in that case, you can claim an exemption for buying 1 house only.
You can claim tax exemption under Section 54 if you are purchasing within India. Any property purchased abroad will not get any tax exemptions on Long-term Capital gains.
You are not allowed to sell the new property purchased before 3 years. If it is an under-construction property, you can sell only after the construction is completed and you get possession of the same. In case you sell the property before years, the exemptions of long-term capital gains received under Section-54 will be revoked.

2. Section 54 EC

It is related to long-term capital gains on selling a house or property and reinvesting the amount earned on purchasing specified bonds.

Exceptions under Section 54 EC

You are allowed to make Tax exemptions on capital gains only if you invested the money in the notified securities and bonds. Consult the taxman before investing.
If you are selling the purchased bonds before completing 3 years, you are not liable to get an exemption.
No tax exemptions are allowed on capital gains in case you have applied for a loan against these purchased bonds and securities within 3 years.

3. Section 54F

It is related to long-term capital gain on the selling of any of other capital assets apart from the house and reinvesting the amount in purchasing a residential property.

Exceptions under Section 54F

The exceptions of Section 54F are almost the same as we discussed above the exceptions of Section 54.

Going with a Capital Gains Account Scheme(CAGS)

If you cannot invest capital gains within a defined period, you can deposit all the capital gains in a CAGS account. It will increase your time limit to reinvest the money in another residential property.

Exceptions under the Capital Gain account scheme(CAGS)

The Capital Gain deposit account scheme is associated with Section 54 and Section 54F. If you cannot re-invest the capital gains in a stipulated time, you can avail of the benefit of this scheme. You can create a capital gain account in any of the public sector banks. You are allowed to keep the money in the account for 2 years. In case you went into a construction-link property, you can keep the money for 3 years under the Capital gain account scheme.
The CAGS account should be created before the income tax return filing deadline, and money is to be used in buying a residential property only.

Conclusion

Overall, the sale of long-term capital assets makes you earn huge capital gains due to increasing costs and inflation each year. Following the above ways will help you save up to 20% of the long-term capital gain tax. If still you are in doubt or need to know more about saving taxes and managing your accounts work, contact OKCredit, it is one of the best apps to manage your hisab and kitab, free of cost and also guide you the ways of saving tax by choosing the right investment plan.

Also read:

1) What Happens to Indian's Tax Money after Payment?
2) Top-10 Highest Tax Paying States in India
3) Why Do We Pay Income Tax in India? Importance, Applicability & more
4) Types of Direct & Indirect Taxes in India
5) OkCredit: All you need to know about OkCredit & how it works.

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FAQs

Q. What is the right way of saving capital gain taxes?

Ans. The best way to save the long-term capital gain taxes is to reinvest the capital gain earned on buying some residential property or go with a capital gain account scheme. It will provide you with 2-3 years of deciding where to spend the money.

Q. How is the capital gain tax being calculated?

Ans. The Short-term Capital Gains Tax-= Total sales price of the asset- cost of expenses, acquisition, cost of improvement, and also deduction of exemptions under Section 54, if applicable.

Long Term Capital Assets= It is calculated by deducting the Index cost of acquisition/Index cost of improvement from the sale price.

The indexation takes place by applying the cost inflation index. It helps in increasing the cost base and minimises the gains.

Q. How long is the account of Capital gain valid?

Ans. According to the Income Tax Department of India, a taxpayer can take 2-3 years to make notified bonds and securities of capital gains or buy a residential property.

Q. What are the tax rates applicable on long-term and short-term capital assets?

Ans. Any asset held with a person for less than 3 years is a short-term capital asset and any asset held for more than 3 years is known as a long-term capital asset. The tax implications in both scenarios vary.

Q. What are the tax rates applicable on the long term and short term capital assets?

Ans. The short-term capital assets are part of the taxable income and are taxed based on the defined income tax slab. Whereas the long-term capital assets are taxed at the rate of 20 per cent.