Long Term Capital Gain Tax: How can you save it?

Every person wishes to have a piece of property one day, which he could claim to be his own. But the process and the later obligations of owning a property isn’t as easy as dreaming to have one. A list of documentations, legal requirements, and other obligations are associated with buying a piece of property. One such requirement and consideration is the capital gain tax.

Aside from property, in case you own any capital assets as investments, like vehicles, shares, bonds, etc. that might help you earn profits in the future, you will be liable to pay the capital gain tax or the long term capital gain tax. 

Let’s peek in to understand what exactly is the capital gains tax. 

What is a Capital Gain Tax? 

A capital gains tax is that tax on the profit which is realized on the sale of a non-inventory asset, i.e., a capital asset. Generally, capital gains are realized from the sale of stocks, bonds, precious metals, real estate, and property. Capital gain tax is not imposed by all the countries. Most of the countries have different rates of taxation for individuals and corporations. 

Capital gain tax is of two types, short-term capital gain tax or the long term capital gain tax. While in short term capital gain tax any asset which is held for less than 36 months is known as a short-term asset. When it comes to the immovable properties, the duration is 24 months. The profits that are generated through the sale of such an asset would be treated as short-term capital gain and would be taxed consequently. 

Long term capital gain tax is something of greater importance and is to be looked at crucially. 

What is Long-term Capital Gain Tax? 

Any asset which is held for a period of more than 36 months is called a long-term asset. The profits received through the sale of such assets would be treated as long-term capital gain and would attract the tax consequently.

Assets like preference shares, equities, UTI units, securities, equity-based Mutual Funds and zero-coupon bonds are also categorized as long-term capital assets if they are held for over a year. Transactions pertaining to any such capital asset is taxable under the Income Tax Act of India, and any other surcharge that may be applicable on the sale. 

Taxes on Long Term Capital Gains

Long-term capital gain tax is normally calculated at the rate of 20%, plus the surcharge and cess as applicable. It also includes the special cases where an individual is charged at 10% on the total capital gain; these situations are listed below: 

• Long-term capital gains reaped by selling listed securities of Rs. 1,00,000, and more. It is in congruence with the Section 112A of the Income Tax Act of India.

• Returns earned by selling securities listed on a prominent stock exchange in India, zero-coupon bonds, and any Mutual Funds or UTI which was sold on or before 10th July 2014.

Exemptions on Long-term Capital Gain Tax

Many individuals want to exempt themselves from such taxes as their share of profits gets reduced due to this taxation. However, an individual will be exempted from paying taxes, including this one if their annual income is lower than the predetermined limit. The following is the tax exemption limit for the financial year 2020-2021:

1. A resident of India, who is 80 years of age or above will be exempted from this tax if their annual income is below Rs. 5,00,000.

2. A resident of India between the age bracket of 60 to 80 years will be exempted from long-term capital gains tax in case they earn a maximum of Rs. 3,00,000 per annum.

3. For those individuals who are 60 years or younger, the exempted limit for long term capital gain tax is Rs. 2,50,000 every year.

4. Hindu Undivided Families in India can celebrate this tax exemption if the annual income of the family is under Rs. 2,50,000.

5. For non-residential Indians (NRIs), the exempted limit for long term capital gain tax is flat Rs. 2,50,000 irrespective of the age of the individual.

Individuals are not liable to earn any tax reduction under Section 80C to 80U from long-term capital gains tax in India.

The whole profited amount will be considered as taxable income and will be charged a flat 20% tax under long-term capital gain. There is no minimum exemption limit on the full amount, which makes it vulnerable to large taxes.

Saving Tax on Long-term Capital Gains

Following are the ways you can save taxes on Long term capital gains. You can go through some Schemes, invest in residential property and can even invest in bonds, read all the options in details.

1. The Capital Gain Account Scheme

The capital gain account scheme enables an investor to relish tax exemptions without buying a residential property. The Government of India permits withdrawal of funds from this account to purchase houses and plots only, and if it is withdrawn for any other purposes, the funds have to be utilized within three years of withdrawal. Otherwise, the total profit amount will be charged in congruence with the long-term capital gain tax rates as acceptable.

2. Investing in the bonds

If one wishes to save tax, then he could also follow Section 54EC to save on long-term capital gains tax by transferring the total amount to obtain bonds issued by NHAI and RECL. The list of such bonds is accessible on the official website of the Income Tax Department of India.

3. Investment in residential property

One could also purchase new residential house property to save taxes on long-term capital gains. These exemptions are linked to Section 54 and Section 54F. Under Section 54, an individual or Hindu Undivided Family will surely be exempted from paying long-term capital gains tax in case they sell a built-up house and use the capital gain to buy or build a new residential property. 

The new or fresh property has to be purchased either one year before or two years after the sale of the current or the existing property. If the seller wants to construct a new property, then it must be completed within 3 years after selling the house.

Conclusion

The financials of India say that taxes are mandatory for the government. The individuals of India are highly obliged to pay the long list of taxes, whether it’s the income tax, property tax, GST, etc.

Long-term capital gain tax is another tax that has to be paid by individuals who possess capital assets like property, shares, bonds etc. However, individuals can save this tax to an extent if they have proper information about the tax saving options or the tax exemption options. 

So if you are facing difficulties in paying a large amount of long term capital gain tax, then read the above-mentioned points once again and try to minimize your taxes.

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Tax Benefits under Section 80C of Income Tax Act

 

Section 80C of Income Tax Act, 1961 talks about deductions of tax. The Section 80C directly reduces the taxable income because of the section 80C the tax liability comes down drastically. Most of the person enjoys the fruits of section 80 C directly or indirectly. The maximum rebate of Tax is up to Rupees 1.5 Lakh. Presently an individual who is less than 60 years and his income is Rupees 2.5 lakh or less is exempted from paying tax but through section 80C exemptions can be increased up to 4 lakhs. However, there are several conditions also on section 80C. Exemptions of tax helps an individual to improve his/her financial status, provide incentive for education, on investing money of different Governmental schemes etc.

WHAT IS TAX DEDUCTION?

Tax deduction helps in reducing the taxable income; it decreases your overall tax liabilities and helps you save tax, however, depending on the type of tax deduction you claim, the amount of deduction varies. In other words, it could be said that it is subtracting the tax liability or increasing the exemptions. However, these may be subject to the restrictions of the provisions of law.

 MOST BENIFICIAL EXEMPTIONS U/S 80C OF THE INCOME TAX ACT

• All types of Provident Fund (PF): It includes Public Provident Fund (PPF), Voluntary Provident Fund (VPF) and Employee Provident Fund (EPF). On provident funds there is exemption of tax up to Rupees 1.5 lakh on single fiscal year.
• Tax saving Fix deposits:  Investments made under tax saving fixed deposits like 5 years post office time deposits, 5 years tax saving bank deposits etc. are entitled to take advantage of rebate up to Rupees 1.5 lakh under sec 80C of Income Tax Act, 1961.
• National Pension System: It is a postal saving scheme. It is of fixed duration (5 or 10 years). The investments done in NPS are entitled to tax exemptions of Rupees 1.5 Lakh under Section 80C, apart from this, one can invest Rupees 50,000 additionally under the subsection 80CCD (1B).
• Sukanya Samridhhi Scheme: It is an important initiative by the government under “Beti Bachao Beti Padhao Abhiyan” so the accounts opened under Sukanya Samridhhi Scheme are exempted from tax under section 80C of Income Tax Act, 1961.
• Senior Citizenship Saving Scheme (SCSS): An individual above 60 years of age can avail this scheme. Under this scheme senior citizens are exempted from tax up to Rupees 1.5 lakh under Section 80C of Indian Tax act, 1961.
• Life Insurance Policies: Investments made on life insurance policies for you, for your Spouse, for your children etc. are exempted from tax under section 80C of income tax act, 1961. The maximum exemption is Rupees 1.5 lakh.
• Education: It is also included in the section 80C of Income Tax Act, 1961. Higher tuition fees are exempted from tax. Tuition fees can be of a person or his/her children. According to the income tax act 1961, any kind of tuition paid for children whether before admission or at the time of admission or after admission is exempted from tax. The maximum exemption is Rupees 1.5 Lakh. It is considered as one of the most beneficial exemption as it helps the parents in saving money and it also promote education. However, donations are not a ground to avail deductions.
• Investment for wealth Building and Goal: All Equity Linked Saving Scheme (ELSS), Unit Linked Saving Scheme (ULSS), etc. can be used to avail section 80C of income tax act 1961. For rebating tax up to Rupees 1.5 Lakh.
• National Saving Certificate: Investments made under this included in Section 80C of Income Tax Act, 1861.
• Home loan: Through section 80C of Income Tax Act, 1961 an individual can avail the exemption from tax on Home loans. This can provide relief on paying EMI etc.