How to save taxes on long-term capital gains

While the primary purpose of investments such as equity share, gold, real estate, etc is to maximise wealth, you need to take into consideration the tax impact of these decisions.

Most capital assets are termed long-term assets if these are held for more than three years (two years as per proposed amendment in Budget 2017 in case of immovable property). Few assets like listed equity shares, certain listed securities and units of equity oriented mutual funds, etc. are considered long-term if they are held for more than 12 months. The nature of capital gain (whether long-term gains or short-term gains) depends on the nature and holding period of the asset.

As per the tax laws, long-term capital gains (LTCG) are taxed at 20 per cent (post indexation) and short-term capital gains (STCG) as per the slab rate. If it is a long-term gain from trading in equity or equity oriented mutual funds on which STT(Securities Transaction Tax) is paid at the time of sale, it is exempt from tax . Any STCG arising out of the transfer of listed shares on which STT is paid at the time of transfer is taxed at 15 per cent.

Tax laws provide for deduction of certain expenses from the sale value and certain tax exemptions, especially in the case of long-term capital gains.

Capital gains are calculated after reducing certain costs and expenses from the sale value of the capital asset. Common examples of these arecost of acquisition (brokerage or commission paid , stamp duty and registration charges); cost of improvement (civil modification expenses, legal charges, etc); cost of transfer (brokerage or commission paid , stamp duty and registration charges, legal charges).

In the case of long-term capital assets, income tax law allows the indexation of the cost of acquisition and improvement using the cost inflation index of the year of purchase and the year of sale to help reduce the taxable value of the capital gain.

Section 54: This provides exemption of LTCG on sale of house property to the extent the gain amount is used to purchase another house property New house should be purchased/acquired within one year before the sale or two years (three years in case of construction) after the sale.

Section 54F: Provides exemption of LTCG on sale of any asset other than a house property if a new residential house property t be purchased/constructed. New property should be purchased/acquired within one year before the sale or two years (three in case of construction) after the sale. You should not own more than one house (other than the newly acquired one) on the date of transfer..

Under both sections, if you sell the property within three years after its acquisition, exemption allowed earlier will be reversed in the year of such sale. Any unutilised capital gain should be invested in “Capital Gain Account Scheme” before due date of return filing (July 31) to be used for acquisition or construction of the house within the time allowed.

Section 54EC: This Section provides exemption on sale of any long term capital asset to the extent the gains are reinvested in certain specified bonds such as that of the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).These bonds should be purchased within six months from the date of sale of original asset or before the due date of return filing. Maximum allowed investment and related exemption is restricted to ₹50 lakh. The money invested is locked in for three years.The bonds offer 6 per cent taxable interest.

The writer is Managing Director, H&R Block India

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