Uncover essential strategies to minimise tax payments on Long-Term Capital Gains (LTCG). Make informed choices with expert legal guidance.
With the 2018 budget placing the spotlight on Long-Term Capital Gains (LTCG), understanding the tax implications and methods to save on these taxes is essential. LTCG on equities exceeding ₹ 1 lakh incurs a 10% tax starting from the financial year 2018-19. This tax is applicable to both shares and equity mutual funds. While saving on LTCG tax for equities presents limited options, there are strategies available to minimise tax payments for property transactions.
Short-Term vs. Long-Term Capital Gains
Before delving into tax-saving strategies, let’s clarify key terms. Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) are crucial for understanding the tax implications of property sales.
STCG: When a property is sold within 3 years of acquisition, any resulting gain is treated as STCG. The tax rate for STCG aligns with the individual’s income tax slab, with no exemptions.
LTCG: If a property is held for more than 3 years before being sold, the gain qualifies as LTCG. LTCG tax benefits from provisions like indexation, lower tax rates, and specific deductions under the Income Tax Act.
Strategies to Save on LTCG Tax
Invest in Residential Property within Specified Timeframes (Section 54/54F):
- Conditions for Exemption: The net sale proceeds from a property sale should be invested in a new residential property within specific timeframes: 1 year before or 2 years after the sale for purchase, and within 3 years for construction.
- Other Conditions: The investor should not own more than one house (other than the new house) on the sale date and not construct any residential house (other than the new house) within three years post-sale.
- Exemption Limit: The maximum exemption cannot exceed the LTCG amount invested in the new property. Any balance LTCG is taxable at 20%.
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Deposit Funds under the Capital Gains Account Scheme (CGAS):
- Utilise CGAS: If unable to invest LTCG in another property before the tax return due date, deposit the unutilised LTCG in CGAS within the filing deadline.
- Account Types: Choose between Type A (savings account for construction) or Type B (term deposit) based on your needs.
- Usage: Withdrawals from CGAS should only be made for purchasing or constructing a residential property.
Invest in Bonds (Section 54 EC):
- Exemption Eligibility: LTCG can be exempted if invested in specified bonds within 6 months from the sale date or before the tax return filing deadline, whichever is earlier.
- Bond Categories: Invest in notified bonds by authorities like NHAI or REC Ltd. for a minimum of 3 years, capped at ₹ 50 lakh per financial year.
- Interest Taxation: While the LTCG is exempt, the interest income from these bonds is taxable.
Understanding how to save tax on long-term capital gains is crucial for optimising your tax liabilities. Whether through strategic property investments, capital gains account schemes, or investments in bonds, these approaches can help mitigate tax burdens effectively. Vakilsearch provides expert guidance and assistance in navigating the legal aspects of these tax-saving strategies. It’s essential to carefully consider these options, seek advice from professionals, and consult with financial advisors to make informed decisions and minimise tax payments while maximising returns. Make well-informed choices to secure your financial future.