How to save Tax on Capital Gain

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How to save Tax on Capital Gain

Overview

The general categorization of assets is of two types Long term capital assets and short-term capital assets. As per Indian Tax laws, the capital gain arising on the transfer of LTCA (Long term Capital Assets) is recognized as Long term Capital Gain and the transfer of STCA (Short term Capital Assets) is identified as Short Term Capital Gain.

Types of Capital Assets STCA LTCA
  • Listed security
  • Units of UTI
  • Equity oriented Mutual funds
  • Zero coupon Bond
Held for one year or less than one year Held for more than one year
  • Unlisted share
  • Immovable property (Land)
Held for 2 years or less than 2 years Held for more than 2 years
  • Any other assets
Held for 3 years or less than 3 years Held for more than 3 years

Any profit or gain arising from the transfer of Capital asset shall be chargeable under the head Capital gain in the year of transfer.
The term transfer also includes:

  • Sale, exchange, or relinquishment of asset 
  • Extinguishment of right in the asset
  • Compulsory acquisition in any law

Calculation of Capital Gain 

The general principle for calculating Capital gain is reducing the value receivable for the asset by the cost of the asset, but for LTCA, Income tax provisions state that the Cost of Acquisition and Cost of Improvement of the asset should be indexed.

So, we can conclude that Capital gain is the fair value of Consideration reduced by:

  1. Expenses incurred in connection of transfer
  2. Cost of acquisition
  3. Cost of Improvement 

 Rates of STCG and LTCG

As per Income Tax Act, 1961 tax rate applicable for STCA falling under section 111A is 15% subject to payment of Security transaction tax. Other STCA will be taxable as per slab rates.

Assets (LTCA) being part of section 112A are taxed @ 10% with the exemption of ? 100000 without indexation benefit and other LTCA are taxed @ 20%.

Tax saving on Capital Assets

  • Any LTCG on the transfer of residential House property being a building or land can be exempted by deploying the proceeds of capital gain in buying residential house property in India within one year before the date of transfer or two years after the date of transfer or in constructing a residential house within three years from the date of transfer of asset.
  • Any LTCG/STCG arising on the transfer of agricultural land used by an individual or his/her parents for agricultural purposes can be exempted if he/she buys agricultural land within two years from the date of transfer. 
  • STCG/LTCG arising out of transfer of plant and machinery or shifting of industrial undertaking from urban to a rural area or to SEZcan be exempted if the proceeds are utilized in purchase or construction of the new plant and machinery/ land/ building or shifting original asset to that rural area.
    The time period for investment in new asset is within 1 year before and 3 years after the date of transfer.
  • Section 54F states that LTCG arising from transferring any capital asset (other than residential house property) can be exempted if the utilization of that capital gain is by way of the purchase of one residential house in India within 1 year before or 2 years after the date of transfer or construction of one house property within 3 years from the date of transfer.
  • LTCG arising out of the compulsory acquisition of land which was used by an individual in the business of industrial undertaking can be exempted if the proceeds are used in buying the new land/ building for industrial undertaking within three years from the date of transfer. 
  • In the above points the exemption is available even if the capital gain sum is deposited in the Capital gain account Scheme before the date of filing of return.
  • LTCG arising out of transferring of land, building or both can be exempted by deploying the sum in bonds redeemable after 5 years. The category of bonds:
  1. National Highway Authority of India
  2. Rural Electrification corporation limited
  3. Power Finance Corporation
  4. Indian Railway Finance Corporation 
    The maximum Capital gain exemption is subject to ? 5000000. And the time limit for subscribing to the bonds is 6 months from the transfer of the original asset.
  • STCG is taxable as per normal tax rates and hence the basic exemption limit of ? 250000 can be utilized in the case of a resident individual, ? 300000 for senior citizen and ? 500000 for super senior citizen.


Author : Aditi

Date     : 21-Jul-2022


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