How to save tax on capital gain – Profits resulting from the selling of any capital asset are known as capital gains and are differentiated for taxation purposes in the short or long term. It depends on the length of the ownership and the form of the capital asset.
Capital assets retained for further than 36 months shall count as long-term capital assets. Since FY 2017-18, in the event of immovable property like land, building or residential property, if it is owned for further than 2 years, it is known as long-term capital assets (LTCP) i.e. any immovable property would be taxed on LTCP if it is sold after a period of 24 months or more from 1 April 2017.
Equity or preference shares of a firm stated on a recognized stock exchange of India, certain instruments such as stocks, bonds, government securities issued on a registered stock exchange in Indian, UTI units, equity-oriented mutual funds units & zero-coupon bonds count as LTCA if they have been owned for further than 1 year.
Why should you save tax on long term capital gains?
Long-term capital gains are taxed at 20%. There really is no minimum acceptable exemption limit, so the cumulative sum of capital gains is available for taxable income. Thus, if the LTCG from the selling of a house is calculated to be ₹60,00,000, a huge sum of ₹12,36,000 is payable as tax. It is necessary to spend the sum of LTCG in order to avoid the massive tax.
So, How can you save tax on capital gain?
Investment In Residential house property
There are 2 deductions relating to the purchase of new residential assets in an attempt to minimize the tax impact on long-term capital gains.
Investing capital gains from the sale of a residential house (Section 54)
If a person or HUF makes capital gains by selling a residential home and spends the sum of capital gains mostly on purchase or development of a new residential house, the capital gain would be exempted from tax.
- New residential properties should be bought either 12 months before the sale or 24 months after the sale of the land. In the event of construction, the new residential property should be built in 3 years of the selling of the property.
- In order to make full advantage of the exemption, all capital gains must be invested in a new home.
- In the event that not all capital gains are spent, the balance not invested is taxed as long-term capital gains.
- The sum should be spent on the purchase or building of just one house property. Household property should be in place in India.
Investing capital gains from the sale of a capital asset other than house property (Section 54F)
If a person or HUF transfers another capital asset apart from house property and spends the balance of the net selling consideration for the acquisition or building of a house property, long-term capital gains may be excluded from tax.
In this situation, it is necessary to remember that the net selling consideration should be invested rather than LTCG. If not all of the net selling consideration is invested, LTCG would be taxable on a proportionate way Other requirements are much the same as mentioned in Section 54.
Depositing under Capital Gain Account Scheme
If you are incapable to invest your long-term capital gains in a home property prior to the deadline of the return, you will invest the gains in the capital gains account system. Withdrawals from such an account are only allowed for investment in real estate. If they have been withdrawn for some other reason or not used in 3 years, they would be taxed as long-term capital gains.
Investment in bonds issued by NHAI or RECL (Section 54EC)
Section 54EC is also another big instrument for minimizing tax on long-term capital gains resulting from the sale of some long-term capital assets. Long Term Capital Gains would be excluded if any or indeed any portion of those long-term capital gains is invested in a “long-term specified asset.”
Investments Exempt From LTCG
Most people are opting for life insurance alongside wise wealth management, which is why ULIP stands out. If you invest in ULIP, you’ll get a covering for life together with the creation of wealth. In this financial plan, a part of the investment has been either deposited in a fund that is either debt or equity, or even both. ULIP utilizes the balance number for offering life insurance coverage. There is a significant lock-in time for this investment, that IRDAI raised from 3-5 years in 2010. Throughout that lock-in phase, ULIP only helps you to turn between equity and debt depending on the view of risk appetite and market performance.
One thing that distinguishes ULIP from several long-term investments would be that the premium charged to ULIP is liable for a tax deduction u/s 80 C. In fact, returns from the maturity policy are excluded from income tax u/s 10(10D) of the Income-Tax Act. That being said, because ULIP is a long-term commodity, you can earn tax advantages after keeping your investment for at least 5 years. In that same way, you could make a profit and save tax by subdividing into a long-term investment plan with ULIP.