People usually invest to get returns or make a profit from that investment. Some investments will yield returns quickly, while other investments will yield returns gradually. Long-term returns, which are often referred to as long-term capital gain (LTCG), comprise returns from capital assets.
The LTCG tax implies levying a tax on profits made from capital assets, including investments such as real estate, shares, and share-oriented products that are held for at least a year after the date of acquisition.
When a person makes a profit through the sale of capital assets such as houses, cars, stocks, bonds, or even collectibles like artwork, they are subject to capital gains tax.
The two main categories are short-term capital gain tax (STCG) and long-term capital gain tax (LTCG). The financial gain received from selling capital assets falls under the income category. Hence, the income that is received is taxed as capital gain tax.
The long-term capital gain tax rate is 20%; in addition to this rate, cess and surcharge as applicable are added. However, there are cases wherein a person is subject to a 10% capital gains tax.
The profits from the sale of any commercial property owned and used for business purposes are subject to taxation as short-term capital gains, provided no other property falls into the same asset category, regardless of how long the property is owned. However, if the net consideration is invested in residential house property and is owned for more than 24 months, an exemption can be claimed under Section 54F. Another option is to invest the indexed capital gains in capital gain bonds issued by certain institutions and then claim Section 54EC exemption.
The profit on the sale of commercial real estate that is leased will be converted to capital gains. If the property is held for longer than 24 months, it will be considered long-term and subject to 20%, regardless of the amount.
However, the tax burden can be reduced by investing in either a residential property under Section 54F or capital gains bonds under Section 54EC. If the property is kept for more than 24 months, the proceeds are taxed as normal income and are considered short-term capital gains.
The following are the ways a person can save tax on LTCG.
1) Investing in residential property (54 & 544F):
To avoid paying taxes on long-term capital gains, one can buy brand-new residential property. These exemptions are associated with Sections 54 and 54F.
If a person or Hindu Undivided Family sells a built-up house and uses the proceeds to buy or build a new residential property, they are exempted from LTCG tax under Section 54. The new property must be bought either one year before or two years after the sale of the existing property. If the seller decides to build a new home, it should be constructed within three years after the house is sold.
Furthermore, if the seller wants to be exempted from paying taxes, the entire capital gain must be used to purchase the new property. In any other case, any surplus funds that are not used to purchase the property will be subject to LTCG tax. Additionally, the funds must only be used to buy or build one property in India.
When an individual or HUF sells a capital asset that is not a residential property, and the capital gain is used to buy or build a house, Section 54F provides an exemption from tax for the full amount. However, instead of merely investing the capital gain, the entire net sale consideration must be invested; otherwise, the amount will be subject to taxation on a proportionate basis.
2) Investing in bonds (54EC):
Section 54EC can be used to save on LTCG tax by transferring the entire amount to acquire bonds issued by Rural Electrification Corporation Limited (RECL) and the National Highways Authority of India (NHAI). The list of these bonds is published on the IT Department of India’s official website.
The Income Tax Act of 1961’s Section 54EC exempts an assessee from LTCG tax if they invest in the specified assets within six months of selling their property. The cap on this exemption at Rs. 50 lakh each fiscal year.
3) Capital Gain Account Scheme:
An investor can benefit from tax exemptions under the capital gain account scheme without investing in residential real estate. The Government of India only permits withdrawals from this account to buy homes and plots; any other withdrawals must be used within three years of the initial withdrawal. Otherwise, the total profit sum will be subject to LTCG tax.
The 2018 Union Budget re-introduced the long-term capital gains tax. Every person is required to pay LTCG tax after selling capital assets worth more than INR. 1 lakh. Long-term capital gains are subject to a 20% base tax plus any applicable surcharge and cess. The government has made provisions for a few exceptions under special conditions in an effort to reduce the burden of high taxes.
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