How to Save Long Term Capital Gain Tax

Find out how to save Long Term Capital Gain Tax

Key Takeaways

Long-term Capital Gain Tax is applicable when you sell long-term capital assets.
You can get tax exemptions on the basic exemption limit.
By buying or constructing a new property, you can reduce your tax liabilities as well.
Bonds issued by NHAI and RECL are capital tax-saving investments.
You can invest proceeds from the sale of capital assets in the Capital Gains Account Scheme.

Capital assets, when sold, yield capital gains. Categorised as income from other sources, these capital gains are taxed under various Sections of the Income Tax Act, 1961. To encourage investors to reinvest their capital gains, the government has rolled out tax saving schemes and processes, which provide exemptions on capital gains tax. Let us understand how to save Long Term Capital Gain Tax.

What is Long Term Capital Gain Tax?

Long-Term Capital Gain (LTCG) tax is the tax levied on gains that arise from selling capital assets held for more than 36 months, or 12 months in the case of equities or equity-related mutuals.

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Saving Long Term Capital Gains Tax – Eligibility

To know how to save Long Term Capital Gain Tax, you first need to know your basic tax exemption limits based on your age and residency status

If you are a resident Indian of 80 years and above, the exemption limit is INR 5 Lakh.
If you are a resident Indian in the 60 -80 years age group, the exemption limit is INR 3 Lakh.
If you are a resident Indian below 60 years of age, the exemption limit is INR 2.5 Lakh.
If you are a Non-Resident Indian, the exemption limit is INR 2.5 Lakh no matter your age.
If you are a part of a Hindu Undivided Family (HUF), the exemption limit is INR 2.5 Lakh.

How To Save Long Term Capital Gain Tax on Assets

Sale of the Property

If you sell a built-up house and use the capital gains to construct or purchase a new residential property, you will be exempt from Long term Capital Gains Tax under section 54. You must buy the new property 1 year before selling the existing property or 2 years after selling. If you want to construct the new property, you must complete the construction within 3 years of selling the existing property. Also, you must redirect the entire capital gains into buying or constructing the new property. Any excess amount would be applicable for Long term Capital Gain Tax.

If you use capital gains earned from selling any other capital asset to buy or construct a new residential property, you will be exempt from LTCG Tax under section 54F. However, the total net sale value must be used instead of only capital gains.

Reinvest in Bonds

Under section 54EC, you can reduce tax liabilities on long-term capital gains by investing the entire capital gain in the National Highways Authority of India (NHAI) and Rural Electrification Corporation Limited (RECL) capital gain bonds.

Capital Gain Account Scheme

Under this scheme, you can enjoy LTCG tax exemptions without buying any residential property. You can park the underutilised capital gains in this scheme without paying long-term capital gains tax.

Conclusion

Gains on the sale of capital assets like properties are usually higher. Ultimately, the tax levied on such gains are also higher. However, you can save tax by way of exemptions or reinvestments.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.