Save Long-Term Capital Gain Tax

Long-Term Capital Gain Tax or LTCG refers to the amount earned from the sale of a property, asset, stocks, mutual funds, etc held for a specified period.

There is also short-term capital gain tax or STCG which refers to profits earned from selling assets held for a short period. This is typically less than one year for stocks and mutual funds, or less than two to three years for other assets.

Read on to learn how to save long-term capital gain tax, available exemptions, and so on.

Table of Contents:

• ⇾ Understand Long-Term Capital Gain
• ⇾ Ways to Save Long-Term Capital Gain Tax
• ⇾ LTCG and Save on Tax
• ⇾ Save LTCG with Exemptions Under Section 54
• ⇾ Save LTCG Tax with Exemptions Under Section 54F
• ⇾ Save LTCG Tax with Exemptions Under Section 54EC
• ⇾ Save Tax with Capital Gains Account Scheme (CGAS)
• ⇾ Avoid Long-Term Capital Gains Tax on Equity Investments
• ⇾ Capital Losses to Offset Gains
• ⇾ Gift or Inherit Assets to Save LTCG Tax
• ⇾ Investing in Agricultural Land to Save LTCG Tax
• ⇾ Frequently Asked Questions

Understand Long-Term Capital Gain

Capital Gains Tax refers to the tax imposed on the profit earned when a capital asset, such as stocks, real estate, bonds, or other investments, is sold for a higher price than its purchase cost.

Various factors influence the rate of capital gains tax that is imposed on taxpayers. These include the taxpayer’s income, duration of the asset held, etc. Long-Term Capital Gains Tax or LTCG is a type of capital gains tax that is applied when the assets are held for over 1 or 2 years.

Now that you know what LTCG is about, here is how you can avoid tax on LTCG profits.

Ways to Save Long-Term Capital Gain Tax

The Income Tax Act has introduced various provisions that allow you to save your income or profits from long-term capital gain tax.

• Section 54: It provides exemptions on the LTCG from the sale of a residential property wherein the profit is used for another residential property.
• Section 54F: It is similar to the exemptions of Section 54 but applies to profits earned from different sources instead of solely property.
• Section 54EC: It provides exemptions if the profits are invested in special government-approved bonds like those from the National Highways Authority of India (NHAI) or Rural Electrification Corporation (REC) within six months of selling your asset.
• Capital Gains Account Scheme (CGAS): It allows you to temporarily park your profits in a CGAS account if you have not reinvested the gains into another property before filing your income tax returns.

Other methods to save LTCG tax include exemptions under Section 112A, equity investments, etc.

Save on LTCG Tax

Below are the ways to save your income or profits from long-term capital gains tax:

• Invest in Capital Gains Bonds (Section 54EC): For profits made on selling land or buildings, invest up to ₹50 lakh in bonds issued by REC, NHAI, or PFC within 6 months.
• Reinvest in Property (Section 54F): Profits earned from the sale of other assets such as gold or land and are reinvested into other properties are exempted from tax payments. Note that the taxpayer must not own more than 1 house before reinvesting.
• Tax Harvesting for Stocks & Mutual Funds: Taxpayers have to pay 10% of the LTCG tax for profits over ₹1 lakh from the sale of stocks or mutual funds.
• Gifts or Inherited Assets: Transferring assets to family members in lower tax brackets can help reduce your LTCG tax.
• Invest in Agricultural Land: Agricultural land acquired by the government is excluded from long-term capital gains tax.
• Use Capital Losses to Offset Gains: Capital loss refers to the loss of assets such as stocks, land, mutual funds/investments, etc. Capital loss to offset gains involves using the losses from sold assets to minimize taxable profits from other assets. This helps reduce overall tax liability.

Save LTCG with Exemptions Under Section 54

According to Section 54 of the Income Tax Act, individuals are exempted from paying tax on profits from selling residential property that are reinvested into another residential property within a specific duration.

Below are the various exemptions to help save LTCG under Section 54.

• The new residential property must be bought one year before or within 2 years of selling the old property.
• An exemption can be claimed up to the lower of the capital gains amount or for the needs of a new residential property.
• An exemption on the LTCG tax if the new property costs over ₹22 lakh.

Restrictions & Conditions under Section 54

To avail of the exemptions under Section 54 for LTCG, there are certain restrictions and conditions you need to be aware of:

• Exemptions can be claimed only on the purchase of one house. In cases where the capital gains are used to claim more than one house, the exemption can be claimed only on the profits for one house.
• Only those individuals who have purchased a residential property in India are eligible for the exemptions.
• The new house bought from the profits of the old house cannot be sold within 3 years after the sale of the first house.
• The maximum capital gains that can be claimed and exempted under this section is ₹10 crores.

Save LTCG Tax with Exemptions Under Section 54F

Section 54F allows you to save tax if you use the profits gained from your other capital assets to buy or construct a new house. Here are the restrictions and conditions that come with it:

Restrictions & Conditions under Section 54F

• As mentioned in Section 54, you cannot sell the new house for 3 years after buying or finishing its construction.
• Applicants must have purchased a residential property in India to qualify.
• Exemptions can be claimed only upon the purchase of one house and therefore the taxpayer should own only one property.

Save LTCG Tax with Exemptions Under Section 54EC

According to Section 54EC, taxpayers can claim exemptions from tax on LTCG if the profits are deposited in government bonds.

Now, let’s look at the restrictions and conditions:

Restrictions & Conditions under Section 54EC

• The profits must be purchased within 6 months after the assets are sold.
• The bonds must not be sold in 5 years after they have been acquired. Doing so will cancel the accessibility of exemptions. The same is applicable if you borrow against the bonds for 5 years.

Save Tax with Capital Gains Account Scheme (CGAS)

If your profits have not been reinvested in a new property as per Sections 54 and 54F, you can make use of the Capital Gains Account Scheme or CGAS. It allows you to park or store your profits temporarily, in a separate bank account until it is reinvested.

In situations where the taxpayers have not bought or built a property before the ITR (Income Tax Return) is filed and the gains reinvested, the profits can be deposited into a public sector bank under the CGAS. For this, the CGAS account has to be opened before the ITR is filed. Note that this amount must be utilized within the following durations:

• 2 years of buying a new house.
• 3 years of building a new house.

Restrictions & Conditions under CGAS

• The amount withdrawn must be used within a period of 60 days.
• The amount withdrawn cannot be redeposited.
• The amount must be used to buy or build a residential property, in lack of which, the capital gains will be taxed in the next year.

Avoid Long-Term Capital Gains Tax on Equity Investments

Under Section 112A, a 10% tax is imposed on the LTCG amount above ₹1 lakh. It is applicable for the LTCG generated via the sale of listed equity shares and equity-oriented mutual funds or investments.

To reduce the LTCG on equity investments, methods like tax harvesting under Section 112A can be helpful. Tax Harvesting refers to the sale of investments in a strategic manner such that it reduces the tax liability.

Now, let’s look at the exemptions available under Section 112A:

• Long-term capital gains of up to ₹1.25 lakh is exempted from tax.
• Buying a new residential property in 1-2 years after selling the equity asset provides LTCG exemptions.
• No tax on LTCG if the profits are reinvested into Government Bonds within 6 months.

Capital Losses to Offset Gains

There are 2 types of capital losses:

1. Short-Term Capital Losses: It can be used to offset both short-term gains and long-term gains.
2. Long-Term Capital Losses: It can be used to offset only long-term capital gains.

In the case of Long Term Capital Losses against Long Term Capital Gains, here is what you need to know;

• There is no tax incurred if the total capital gains is reduced to zero.
• Unutilized losses will be carried forward for 8 years to offset future gains.
• Loss occurred in one investment can be used to reduce the tax.
• Upon zero profits, no tax has to be paid.
• Unutilized losses can be carried forward for up to eight years to offset future gains.

Gift or Inherit Assets to Save LTCG Tax

Capital assets that are received in the form of gifts and inheritance are not taxable in general. However, when the recipient sells these assets, the profits come under long-term capital gains and therefore become taxable at a lower rate.

A document known as ‘Gift Deed’ is used to formalize the transfer of assets in the form of gifts. This prevents immediate LTCG tax and allows tax-saving strategies based on the recipient's tax bracket.

The following methods can help save tax on LTCG on gifts or inherited assets:

• Transfer assets to family members with low income as they may fall into a lower or zero tax slab.
• Reinvest gains in residential property (Section 54 or 54F) or bonds (Section 54EC) to minimize LTCG tax.

Investing in Agricultural Land to Save LTCG Tax

Agricultural land in urban areas is considered to be a capital asset. Investing in agricultural land can help you save on LTCG tax in India under Section 54B of the Income Tax Act.

Below are the exemptions and conditions to save LTCG tax by investing in agricultural land:

• The agricultural land must be used for farming purposes for at least 2 years before it is sold.
• The new agricultural land must be bought within 2 years after the previous one has been sold.
• Under Section 54B, the new agricultural land must not be sold for at least 3 years to avoid the loss of tax exemptions or benefits.