Which capital gain tax exemptions can investors avail?

Every earning individual in India is subject to taxation by law, and investments are no different. Fundamentally, capital gains tax is a charge placed on the proceeds received from the sale of investments, including stocks, bonds, property, or antiquities. This tax is applicable when the asset is sold and turned into cash.

Short term Vs long term

An asset's holding period is a significant aspect when factoring in the appropriate tax rate. Short-term assets (those held for less than a tenure of 36 months) are usually subject to standard taxation, which can have a significantly higher tax rate than the rate for long-term capital gains.

Long-term assets (those held for more than 36 months) are subject to reduced tax rates, which can range from 0% to 20%, determined by your income level. This contrast emphasizes the importance of using holding periods and smart asset allocation in your investment plan.

Taxation on capital gains

As prescribed under Section 80C of the Income Tax Act, short-term and long-term capital gains are subject to tax implications.

If SST (securities transaction tax) is exempt from short-term gains, investors will be taxed as per their respective income tax slab. In this situation, gains are added to the individual's taxable income under the stipulated slab rates. However, short-term gains are subject to a 15% tax rate if SST is applicable.

The tax rate on long-term capital gains exceeding an amount of ₹ 1 lakh is charged a rate of 10% for equity shares. This sum does not include the advantages of indexation and the computation of capital gains in foreign currencies for non-residents.

Tax exemptions on capital gains

Although capital gains tax may have a significant effect on returns, there are a few exemptions investors can leverage to lessen the impact on their bottom line.

• Sanctions 54 E, 54EA, and 54EB These provisions offer a combined exemption for profits from various long-term assets, including stocks, bonds, and real estate. The secret is to reinvest the profits into targeted assets, such as infrastructure bonds, government bonds, or units of particular mutual funds, and to do so within six months. To be eligible for the exemption, these investments have to be held for a minimum of 36 months.

• Section 54EC

The sale of long-term assets would qualify for exemption under this section. Investors can be eligible for this provision if they reinvest their capital in assets promoting vital infrastructure like NHAI.

• Section 54EE

Individuals with gains derived from the transfer of long-term capital assets would qualify for this provision if the proceeds were reinvested within six months. Furthermore, such investments shouldn't cross ₹ 50 lakhs in value.

• Section 54F

When capital gains from the sale of a long-term asset, other than a house, are realised, they qualify for exemptions under Section 54F. The full selling consideration—not just the capital gain—must be used to buy a new residential home in order for you to be eligible for this deduction. The earnings may also be used to finance the building of a house. However, the building must be finished within three years of the sale date.

Conclusion

Taxation on capital gains can be burdensome for investors. It hampers individuals from fully realising the true potential of their earnings. Here are a few key considerations to keep in mind -

• Hang onto assets for over a year before selling them, as they can significantly lower their tax obligation.
• Investing in a new property through capital gain proceeds further lowers your tax liabilities.
• Capital gains taxes cannot be avoided even if you’re outside India.
• Utilise CGAS (Capital gain account scheme), which permits individuals to protect their long-term capital gains until they can reinvest it in a manner as stipulated under sections 54 and 54F