Capital gains tax applies to profits earned from selling assets like stocks, real estate, or gold. While short-term capital gains are taxed at your regular income tax rate, long-term capital gains (LTCG) held for more than a specific period benefit from lower tax rates. However, even with LTCG benefits, you can still strategize to minimize your tax burden. Here’s how:
How to Save Tax on LTCG
- Invest in a New Home (Section 54 & 54F): This popular option allows you to reinvest your LTCG from selling a residential property into a new one. You can buy the new property within one year before or two years after the sale, or construct one within three years. The exemption applies to the entire capital gain or the cost of the new property, whichever is lower.
- Invest in Specified Bonds (Section 54EC): If you don’t plan to buy a new house, invest your LTCG in specific government bonds like those issued by NHAI or RECL within six months of selling the asset. This investment exempts your LTCG from tax, but the maximum investment limit is Rs. 50 lakh per financial year.
Other Tax-Saving Strategies: How to Save Tax on LTCG
- Capital Gains Exemption Limit (Section 112A): Budget 2023 introduced a yearly exemption of Rs. 1 lakh on LTCG from equity investments. This incentivizes long-term stock market participation.
- Offset Capital Losses: If you have incurred capital losses from selling other assets in the same financial year, you can offset them against your LTCG, reducing your taxable gains.
- Indexation Benefit: Indexation adjusts the purchase price of your asset for inflation, effectively lowering the taxable capital gain.
Planning and Timing: How to Save Tax on LTCG
- Strategic Selling: Consider spreading your redemptions from equity or mutual funds across two financial years to benefit from the Rs. 1 lakh exemption limit in each year.
- Tax-Efficient Investments: Invest your LTCG in tax-efficient instruments like Equity Linked Saving Schemes (ELSS) or tax-saving fixed deposits (with a lock-in period) to potentially earn tax-free returns.
Remember: Consulting a tax advisor is recommended for personalized guidance based on your specific financial situation and investment goals. By understanding these strategies and planning in advance, you can make the most of your LTCG and save money on taxes.
I’m Pradeep Ahalawat, the founder and chief writer of this blog. (Holding the degree of M.Sc. IT with more than 15 years of expereince in IT sector) With a passion for storytelling and a keen interest in current affairs, I started this platform to share my perspectives.