HOW TO AVOID OR REDUCE YOUR CAPITAL GAINS TAX

Dear readers, we learn about capital gains and its tax calculation in previous article. (Read: KNOW ABOUT CAPITAL GAINS AND CAPITAL GAIN TAXES)

But the most important thing is “can we avoid it or at least reduce this tax burden on our income”. Yes, there are the ways to reduce your capital gains tax and these are all authenticated ones by Income Tax department.

For instance: Satya bought a house in July 2014 for Rs 50 lakh, and the full value of consideration received in FY 2017-18 is Rs 1.8 crore. Since this property has been held for over 3 years, this would be a long-term capital asset. The cost price is adjusted for inflation and indexed cost of acquisition is taken. (How to calculate indexed cost of acquisitionvalues?) Using the indexed cost of acquisition formula, the adjusted cost of the house is Rs 1.17 crore. The net capital gain is Rs 63, 00,000. Long-term capital gains are taxed at 20%. For a net capital gain of Rs 63, 00,000, the total tax outgo will be Rs 12,97,800. This is a significant amount of money to be paid out in taxes. This can be lowered by taking benefit of exemptions provided by the Income Tax Act on capital gains.

So let’s know the ways of saving tax on capital gains.

Exemptions on Capital Gains:

Section 54:

Exemption on Sale of House Property on Purchase of another House Property.

The exemption under section 54 is available when the capital gains from the sale of house property are reinvested into buying another house property. The taxpayer has to invest the amount of capital gains and not the entire sale proceeds. If the purchase price of the new property is higher than the number of capital gains, the exemption shall be limited to the total capital gain on sale. The new property can be purchased either 1 year before the sale or 2 years after the sale of the property. The gains can also be invested in the construction of a property, but construction must be completed within three years from the date of sale. In the Budget for 2014-15, it has been clarified that only 1 house property can be purchased or constructed from the capital gains to claim this exemption. It’s important to note that this exemption can be taken back if this new property is sold within 3 years of its purchase/completion of construction.

Section 54F:

Exemption on capital gains on sale of any asset other than a house property.

Exemption under Section 54F is available when there are capital gains from sale of a long-term asset other than a house property. Entire sale consideration and not only capital gain should be invested to buy a new residential house property must be purchased to claim this exemption. The new property can be purchased either one year before the sale or 2 years after the sale of the property. The gains can also be invested in the construction of a property, but construction must be completed within 3 years from the date of sale. In Budget 2014-15, it has been clarified that only 1 house property can be purchased or constructed from the capital gains to claim this exemption. It’s important to note that this exemption can be taken back if this new property is sold within 3 years of its purchase. The entire sale proceeds towards the new house will be exempt from taxes if you meet the above-said conditions. However, if you invest a portion of the sale proceeds, the exemption will be the proportion of the invested amount to the sale price or exemption = cost of new house x capital gains/net consideration.

Section 54EC:

Exemption on Sale of House Property on Reinvesting in specific bonds.

Exemption is available under Section 54EC when capital gains from sale of the first property are reinvested into specific bonds.

If you are not very keen to reinvest your profit from sale of your first property into another one, then you can invest them in bonds for up to Rs. 50 lakhs issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).

Capital Gains Bonds by NHAI and REC:

The bonds that are specified under Section 54EC are issued by the NHAI and REC. The key features of these bonds are:

·  * These bonds give an interest rate of 5.75%. Income tax has to be paid on the interest accrued, however, as per the tax slab of the individual.

·  * These bonds are AAA-rated, indicating their stability and security.

·  * You can buy the bonds physically or in demat format.

·   Each bond costs Rs. 10,000 – which means that these bonds can be bought only in the multiples of Rs. 10,000, capped at 500. The maximum amount you can invest in these bonds is Rs. 50 lakh.

· * These bonds are not listed on any stock exchange.

· * The documents required to buy these bonds are: self-attested copy of the PAN card, self-certified address proof copy, and 1 cancelled cheque.

The money invested can be redeemed after 3 years, but they cannot be sold before the lapse of 3 years from the date of sale.

The homeowner has six months’ time to invest the profit in these bonds. But to be able to claim this exemption, you will have to invest before the tax filing deadline.

You can also invest in residential property and bonds. Both investments will be considered for exemption.

When can you invest in Capital Gains Account Scheme?

Finding a suitable seller, arranging the requisite funds and getting the paperwork in place for a new property is one time-consuming process. Fortunately, the Income Tax Department agrees with these limitations. If capital gains have not been invested until the date of filing of return (usually 31st July) of the financial year in which the property is sold, the gains can be deposited in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988. This deposit can then be claimed as an exemption from capital gains, and no tax has to be paid on it. However, if the money is not invested, the deposit shall be treated as short-term capital gains in the year in which the specified period lapses

Who can deposit in Capital Gains Account Scheme?

Section Number	Capital gains made on	Category of person
54	Sale of residential house	Individual or HUF
54B	Sale of land used for agricultural purpose	Individual or HUF
54D	Compulsory acquisition of land and building	Any taxpayer
54E	Sale of any long term capital asset	Any taxpayer
54EC	Sale of long term capital asset being land or building or both	Any taxpayer
54F	Sale of any long term capital asset not being residential property	Individual or HUF
54G	Transfer of asset (machinery, plant or building, land or right in land or building) in case of shifting of industrial undertaking from urban area	Any taxpayer
54GA	Transfer of asset (machinery, plant or building, land or right in land or building) in case of shifting of industrial undertaking from urban area to Special Economic Zone	Any taxpayer
54GB	Transfer of residential property	Any taxpayer

Saving Tax on Sale of Agricultural Land:

In some cases, capital gains made from sale of agricultural land may be entirely exempt from income tax or it may not be taxed under the head capital gains.

a. Agricultural land in a rural area in India is not considered a capital asset and therefore any gains from its sale are not chargeable to tax. For details on what defines an agricultural land in a rural area, see above.

b. Do you hold agricultural land as stock-in-trade? If you are into buying and selling land regularly or in the course of your business, in such a case, any gains from its sale are taxable under the head Business and Profession.

c. Capital gains on compensation received for compulsory acquisition of urban agricultural land are exempt from tax, under Section 10(37) of the Income Tax Act.

If your agricultural land wasn’t sold in any of these cases, you can seek exemption under Section 54B.

Section 54B: Exemption on Capital Gains from Transfer of Land Used for Agricultural Purpose

When short-term or long-term capital gains are made from transfer of land used for agricultural purpose by the taxpayer or his parents for 2 years immediately prior to the sale, exemption is available under Section 54B. The amount, investment in the new asset or capital gain, whichever is lower, that is reinvested into a new agricultural land within 2 years from the date of transfer is exempt.   The new agricultural land, which is purchased to claim capital gains exemption should not be sold within a period of 3 years from the date of its purchase. In case you are not able to purchase agricultural land before the date of furnishing of your income tax return, the amount of capital gains must be deposited before the date of filing of return in the deposit account in any branch (except rural branch) of a public sector bank according to the Capital Gains Account Scheme, 1988. Exemption can be claimed for the amount which is deposited. If the amount which was deposited as per Capital Gains Account Scheme was not used for purchase of agricultural land, it shall be treated as the capital gain of the year in which the period of 2 years from the date of sale of land expires.  

I think, this article provides you enough ways to save your tax on capital gains. Please comment, if there is any query / suggestion. Share this article with needy ones.