How to save tax on capital gains?
How to save tax on capital gains?

The gains you make from selling a capital asset is known as capital gains. Capital gains can be long term or short term in nature and are taxed according to the duration of time they are held for. Short-term gains are counted as a part of your annual income and are taxed based on the tax slab you fall under. Long-term gains, on the other hand, invite a hefty tax of 20%.

For instance, if you sold a long-term asset for Rs.10,00,000, due to the 20% tax levied on it, you will have to pay Rs.2 lakh In taxes. Therefore, it is important to do tax-savings when you earn such gains.

Identify the capital gain

Before finding out ways to save taxes on capital gains, it is important to determine whether the gains are long term or short term. Assets like land or a house become long term in nature when held for 24 months or more. If it is held for less than 24 months, the asset is considered as a short-term asset.

In case of equities, securities like debentures, bonds, preference shares of companies listed on the stock exchanges of India, units of UTI, etc. are considered long term assets if held for more than 12 months.

Based on the kind of asset you sell, you either make long-term capital gains or short-term capital gains. And also you can know more about Capital Gains Tax on

Saving taxes by investing in a residential property

If you earn capital gains and invest the entire gain amount in a residential property, there are two types of exemptions you can avail based on the nature of your gains:

  • Gains from the sale of a residential property: If the capital gains you earned were from the sale of a house or residential property, you can invest the gains into buying or constructing a new house. By doing so, the capital gain will become exempt from taxes. The entire gains amount must be invested in the new property otherwise the amount will be taxed under long term capital gains tax.

  • Gains from assets other than residential property: If the capital gains you earned were from the sale of capital assets other than property or house, you can invest the net sale amount into buying or constructing a new land or house. This makes the gains exempt from taxes but the entire net sale amount must be invested or else the gains will be taxed on a proportional basis.

Conditions associated with investing capital gains in residential property

There are certain conditions attached when you invest your capital gains in buying a residential property. They are mentioned below:

  • The new property must be bought either 1 year before the capital gains or 2 years after the gains.

  • If you are constructing a new house, it must be constructed within 3 years of making the capital gains.

  • The gains amount should be used to buy or construct only one house and the property must be located in India.

Depositing gains under Capital Gain Account Scheme

In case you do not want to invest your gains in a house or residential property right away, you can invest your long term gains into Capital Gain Account Scheme (CGAS). When you deposit the gains in CGAS, you earn yourself a tax-free period of 3 years during which the capital gains won’t be taxed. You can withdraw the amount to invest in a house or property. Investing in CGAS is useful as it gives you time to look for good real estate offers.

If you made the gains very close to the due date of filing returns, you might not have the time to invest the amount in a house and may end up paying a hefty tax. However, by depositing in CGAS, you get adequate time to make a sound investment decision.

Investing in long term specified assets

Under Section 54EC of the Income Tax Act, 1961, you can claim tax exemption on your long term capital gains by investing the amount in long term specified assets. You can invest either the entire amount or a part of it. Mentioned below are the specific bonds you can invest in:

  • Rural Electrification Corporation Ltd.

  • Power Finance Corporation Ltd.

  • National Highways Authority of India Ltd.

These bonds can be bought in demat format or physically and are a stable form of investment. Each bond costs Rs.10,000 with a limit of 500 bonds. The interest accrued on these bonds is taxable based on the tax slab you fall under.

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