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How to Save Tax on Long-Term Capital Gains?

By: f2cpvtltd

Long-term capital gains (LTCG) are those profits that you earned after you have invested more than 1 lakh of money in a capital asset and that you have held for more than 3 years of purchase. LTGC is also subjected to a tax as it is considered a source of income, hence you are liable to pay 20% of your LTCG as tax if you sell any of your capital assets under LTCG. In the case of inheritance or will the tax will not be applicable as the property is not being sold or purchased.

There is a lot of confusion regarding what is considered under the capital assets on which Long-term capital gains tax is applicable and on those it is not. Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewelry are some of the examples of such assets. LTCP brings in a huge amount of profit and with it a liability to pay the necessary taxes. But why is it important to save taxes on LTCG? The straight answer would be the sheer amount that you might have to pay.

For example, if you sell a house for 80 lakhs as an LTCP then by the law of income tax you have to pay a huge amount of 16 lakhs as tax hence to save it up and use it for something resourceful people often wonder how to utilize it to its maximum potential. In this article, we will recommend some of the most beneficial and less risky options which would help you in deciding what is the best route for you regarding LTCP. There are some mostly followed and some only if necessary.

To invest in residential property 

This Is one of the most go-to options when considering saving options on Long-term capital gains. This way is also very popularly known as Section 54. This section is only applicable if your assets are in the form of land or property as it clearly states that “Exemption on Sale of House Property on Purchase of Another House Property”. After the new update in the exemption in section 54 of the 2019 financial budget, it is made necessary that to avail this benefit of exemption one has to buy at least two properties that were earlier restricted to only one. It also puts a limit on the capital gain that shouldn’t exceed the amount of 2 crores. Furthermore, it is important to be noted that this exemption can only be claimed once in a lifetime.

What the whole law says that to be completely exempted from the taxes of LTCP must reinvest the gains into two other properties which are residential and to make it clear only the amount which is gained in profit has to be reinvested and not the entire amount.

But to avail this offer one must fulfill some conditions beforehand: –

  1. The new investment in the property must be done either a year before selling the existing property or 2 years after that.
  2. The amount can also be utilized in the construction process given that the project is completed under 36 months or 3 years after the date of sale.
  3. It is to understand that the entire amount has to be reinvested of the gain and if only a certain amount is spent then that money will be subjected to the necessary taxes.
  4. Also, take note of the fact that the exemption can be taken back if the new investment property is sold with the 3 years of its purchase or completion.

What if the long-term capital gains (LTCG) are from assets other than property?

Now with people who have invested in other valuable long-term assets such as stocks, bonds, or gold they don’t qualify for section 54. Hence, there is a separate provision provided for these cases which are under Section 54F. According to which if the amount gained from the selling of the long-term assets is used in the purchase of land or property then the person/ family will be exempted from the taxes.

The important thing to take note is of the fact is that the entire amount of the sale has to be reinvested and not just the capital gain to be exempted by the taxes, unlike in the case of Section 54. It is also very important that the property is purchased a year before or 2 years after the sale and can be used in the construction given that it is completed within 3 years. The exemption can be taken back only if the new property is sold before the duration of 3 years. And if any amount is saved and not reinvested then the tax will be compensated on that amount.

It is to be noticed that the only difference between sections 54 and 54F is the amount that needs to be reinvested.

Investment in bonds

Another approach to be exempted from these taxes in case you are not interested in investing in property is to invest in various specific bonds issued by the government authorities such as the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) which can be up to 50 lakhs.

The money invested can’t be taken out until a specific amount of time that is regulated by the government of India earlier it was 3 years but after the 2019 budget, the lock-in period has been increased up to 5 years. A duration of 6 months is given to an owner to reinvest this amount in bonds after the sale, but you can apply for exemption only before the tax filing deadline.

Capital account scheme: Long-term capital gains

Selling a property is a long and document-oriented process. Hence, can take some time but if a person wants to file for the exemption the conditions are to be met before the tax filing deadline (that is usually around mid-year) in the same year as the sale of the property. To avoid such a situation the government has provided a provision that allows the investor to enjoy the exemption without reinvesting in a property by depositing the funds in the bank under the capital account.

Under which the amount can only be withdrawn for the purchase of a property when the investor finds it suitable and has gone through the paperwork and proper procedure. In case of withdrawals, the money should be invested in a property within 3 years otherwise it will be subjected to Long-term capital gains taxes.

If you keep these options in mind you can save up to huge capital and use that money in developing various other resources of profit or in personal use.

Also read: 

  1. Are you planning to follow a home loan? Here are 5 types of Home Loans in India
  2. All About Business Loan from the Comfort of Your Home

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