Introduction to Long Term Capital Gains
Capital gains refer to the profit earned from selling a capital asset such as stocks, bonds, real estate, or mutual funds. When a capital asset is sold at a higher price than its purchase price, the difference is the capital gain. Capital gains can be categorised into two types: short-term capital gains and long-term capital gains. Short-term capital gains refer to gains from the sale of capital assets held for less than one year, while long-term capital gains refer to gains from the sale of capital assets held for more than one year. Long-term capital gains tax is levied on the profit earned from the sale of assets held for more than one year. This article will discuss how to save long-term capital gain tax.
Invest in Tax Saving Instruments
One of the most effective ways to save long-term capital gain tax is to invest in tax-saving instruments such as Equity-Linked Saving Schemes (ELSS), Public Provident Fund (PPF), National Pension System (NPS), and tax-saving fixed deposits. These instruments offer tax benefits under Section 80C of the Income Tax Act 1961. Under this section, an individual can claim a deduction of up to Rs 1.5 lakh per annum from their taxable income by investing in these instruments.
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Invest in Real Estate
Investing in real estate is another way to save long-term capital gain tax. Under Section 54 of the Income Tax Act, 1961, an individual can claim exemption from long-term capital gains tax if they invest the proceeds from the sale of a residential property in another residential property within two years of the sale. The exemption amount is equal to the investment made in the new property. However, the new property must be held for at least three years to claim the exemption.
Invest in Infrastructure Bonds
Infrastructure bonds are another tax-saving instrument that offers tax benefits under Section 80CCF of the Income Tax Act of 1961. These bonds are issued by infrastructure companies and are used to finance infrastructure projects. An individual can claim a deduction of up to Rs 20,000 per annum from their taxable income by investing in these bonds.
Invest in Start-Ups
Investing in start-ups is another way to save long-term capital gain tax. Under Section 54GB of the Income Tax Act, 1961, an individual can claim exemption from long-term capital gains tax if they invest the proceeds from the sale of a capital asset in a start-up company. The exemption amount is equal to the investment made in the start-up company. However, the start-up company must be approved by the Department of Industrial Policy and Promotion (DIPP), and the investment must be held for at least three years to claim the exemption.
Use Indexation
Indexation is a method of adjusting the purchase price of an asset for inflation to arrive at the indexed acquisition cost. The indexed acquisition cost is used to calculate the long-term capital gains tax. By using indexation, the actual purchase price of the asset is adjusted for inflation, which reduces the long-term capital gains and, in turn, the tax liability.
Gift the Asset
Gifting the asset to a family member is another way to save long-term capital gain tax. Under Section 47 of the Income Tax Act, 1961, transferring a capital asset through a gift to a close relative is not considered a transfer for capital gains tax. A close relative includes a spouse, children, parents, siblings, and their respective spouses. However, if the recipient sells the asset within three years of the gift, the capital gains tax will be levied on the original owner.
Donate the Asset
Donating the asset to a charitable organisation is another way to save long-term capital gain tax. Under Section 80G of the Income Tax Act of 1961, individuals can claim a deduction from their taxable income for donations made to charitable organisations. The deduction amount equals the donation made and varies based on the charitable organisation type.
Conclusion
Long-term capital gains tax can significantly reduce the profit earned from the sale of a capital asset. However, there are several ways to save long-term capital gain tax, such as investing in tax-saving instruments, investing in real estate, investing in infrastructure bonds, investing in start-ups, using indexation, gifting the asset, and donating the asset. Individuals can significantly reduce their long-term capital gains tax liability by using these strategies and maximise their profits. It is important to consult a tax professional before making investment decisions to ensure compliance with the relevant tax laws and regulations.