Income from capital gains” refers to any profit or gain arising from the sale of a “capital asset.” These profits are subject to capital gains tax in India in the year the asset is transferred. Capital gains are broadly categorized into two types: short-term capital gains (STCG) and long-term capital gains (LTCG).
Profits generated from the sale of assets like stocks, bonds, mutual funds, real estate, and other investments fall under the scope of capital gains tax in India and are applicable to both individuals and businesses. The Budget 2024 introduced notable tax-saving updates, such as reducing the tax rate on gains from other assets from 20% to 12.5% and increasing the LTCG exemption ceiling for transferring equity shares or equity-oriented units from Rs. 1 lakh to Rs. 1.25 lakh. These changes offer significant opportunities for individuals to plan their taxes efficiently while managing potential tax loss scenarios.
There are several tax-saving options to think about if you earned LTCG in a given year and wish to lower your tax liability. You may control your tax obligations and eventually increase your investment profits by implementing some of these strategies:
- Tax-Loss Harvesting: Also referred to as tax-loss selling, this strategy lowers the total amount of taxes owed. It entails selling investments at a loss to offset profits on other investments. For example, you can offset the losses to lower your taxable gain to 2.5 lakh if you have 4 lakh in profits and 1.5 lakh in losses.
- Carry Forward Losses: You have up to eight assessment years to carry forward excess losses if your capital losses are greater than your capital profits. So, for example, if your loss is 5 lakh and your gain is just 2 lakh, you can carry forward the Rs. 3 lakh loss to offset future profits for up to eight assessment years.
- Consider Investing in Section 54EC Bonds (Real Estate): Within six months of selling your real estate asset, you can consider investing the sale proceeds in Section 54EC bonds issued by the National Highways Authority of India (NHAI), Rural Electrification Corporation (REC), Power Finance Corporation (PFC), Indian Railway Finance Corporation (IRFC), or any other government-approved bonds. These bonds provide a tax exemption on LTCG of up to 50 lakh and have a mandatory five-year lock-in period during which the invested amount must stay undisturbed.
- Invest in Residential Property (Section 54): To claim a capital gains tax exemption, you may also think about reinvesting the money you get from the sale of one residential property into another residential property. The new property has to be built within three years of the previous property sale, or bought within a year before the sale. Both individuals and Hindu Undivided Families (HUF) are eligible under this provision.
- Make Use of the Capital Gains Account Scheme (CGAS): If you require further time to invest in a new residential property, place your capital gains into a CGAS account. By doing this, you may postpone paying taxes until you utilize the money to buy or build a home within three years. People who are unable to promptly reinvest their capital gains into new assets will find it extremely helpful.
Key points to keep in your mind when it comes to Capital Gains Tax in India:
- Assets will be classified as long-term or short-term based on two holding periods: 12 months or 24 months. The 36-month holding period that was previously in place has been eliminated.
- All listed securities have a 12-month holding period. Long-term securities are any listed securities with a holding duration longer than 12 months. Every other asset has a 24-month holding period; that is, an asset is considered short-term if it is held for fewer than 24 months and long-term if it is held for more than 24 months.
- For listed equity shares, units of equity-oriented mutual funds, and for units of a business trust, the short-term capital gain tax rate is 20%. However, short-term holdings of other financial and non-financial assets will still be subject to slab rates of taxation.
- The annual cap on the Long-Term Capital Gains exemption for the transfer of equity shares, equity-oriented units, or Business Trust units is Rs. 1.25 lakh. It is subject to a 12.5% tax rate.
- As per the Budget 2024, the long-term asset sale indexation advantage is no longer available. However, the tax rate for other long-term assets, such real estate transactions, is also lowered from 20% to 12.5%.
- When receiving an asset through a gift, bequest, succession, or inheritance, the prior owner’s holding period is taken into account. The holding period for bonus shares or rights shares begins on the date the bonus shares were allotted. This aspect is used to determine if the asset is a short-term or long-term capital asset.
Check out my other article on how to know the best tax regime for your income.
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