How To Save Tax On Capital Gains Tax: Types Of Capital Gains And Tax Rates
A Detailed Guide on Sources of Revenue for the Government of India
17 May 2022
Section 140A Of The Income Tax: How To Self-Assess Your Tax Amount
17 May 2022Capital gains are an important source of income. Profit gained from selling a capital asset (jewellery, land, house, etc.) is termed capital gains. However, capital gains are taxable depending on the holding period of the capital asset. If you are planning to sell a capital asset and want to save on capital gains tax, this blog will provide all the crucial details. Read on to learn!
Table of contents
What is Tax on Capital Gains?
When an individual sells their capital asset, the amount that they earn as income is taxable. So, they need to pay tax in the year when the transaction has taken place. This amount is commonly referred to as capital gains tax.
Types of Capital Gains
The types of capital gains are categorised based on their period of holding:
- Long-Term Capital Gains
When an individual sells a capital asset after 36 months of its purchase, it is considered a long-term capital gain.
But, there is an exception. Please note that if movable assets like jewellery and debt mutual funds are held for 36 months or more, they will fall under long-term capital gains.
- Short-Term Capital Gains
When a capital asset is sold within 36 months of its purchase, the income is considered short-term capital gains.
However, there is an exception. Please remember that the period of 36 months is reduced to 24 months for the sale of immovable assets. So, for example, if a house is sold after only 24 months of its purchase, the income earned will fall under long-term capital gains.
Some capital assets are considered short-term capital gains if their holding period is 12 months or less. However, if they are held for more than12 months, they will be considered for long-term capital gains.
Given below is the list of such assets:
- UTI (Unit Trust of India) units
- Zero Coupon Bonds
- Equity Mutual Fund units
- Equity shares in a company that is listed on the stock exchange
- Preference shares in a company that is listed in a recognised stock exchange
- Securities like bonds, debentures, and government securities that are listed on a recognised stock exchange in the country
Tax & Tax Rates on Long Term Capital Gains (LTCG)
The table given below provides the details related to tax and tax rates on long-term capital gains:
| Tax | Percentage of Tax | Applicability |
| Long-Term Capital Gains Tax | 20% | Every Long-Term Capital Assets except for the sale of equity funds and equity shares |
| Long-Term Capital Gains Tax | Over 10% and above Rs. 1 Lakh | Applicable for sale of units of equity funds and equity shares |
Tax & Tax Rates on Short Term Capital Gains (STCG)
The table below provides the details of tax and tax rates on short-term capital gains:
| Tax | Percentage of Tax | Applicability |
| Short-Term Capital Gains Tax | As per relevant Income Tax Slab rate because Short-Term Capital Gains are added to an individual’s ITR | For the time when securities transaction tax is not applicable |
| Short-Term Capital Gains Tax | 15% | For the time when securities transaction tax is applicable |
Also Read: Capital Gains Tax on Sale of Property: Meaning, Calculation And Tips To Get Tax Exemption
How to Save Tax on Capital Gains
When one sells a capital asset, one needs to pay a substantial amount as tax. However, there’s no need to worry because there are ways to save tax on capital gains.
Some of the ways are discussed below:
- Exemptions under Section 54F
Suppose an individual or a Hindu Undivided Family (HUF) sells off a capital asset other than a house and uses the amount to purchase/construct a house. In that case, they can seek exemptions under Section 54F for the amount received for sale.
‘Net Consideration’ is an essential concept that one should know if they wish to avail of exemptions under Section 54F. It is the amount that remains after the deduction of incurred expenditures after the sale of the capital asset.
- Purchasing Bonds under Section 54EC
If an individual sells an immovable property but doesn’t use the amount to buy a house, then he/she can purchase capital gains bonds under Section 54EC to avail of tax exemptions.
However, one should invest the amount within 6 months of the sale of the property. The maximum amount for which one can avail of exemptions is Rs. 50 lakh. There is a lock-in period of 5 years, i.e., capital gains bonds will be automatically redeemed after 5 years. Moreover, one cannot sell or transfer these highly secure bonds to anyone.
- Capital Gains Account Scheme (CAGS)
There have been many instances when people had found it difficult to invest their capital gains before filing their ITR for the financial year when they sold the capital asset.
Capital Gains Account Scheme (CAGS) available in authorised banks offers the perfect solution to this problem. People can use CAGS to store their capital gains until they are ready to reinvest them in assets specified as per Section 54 and Section 54F.
Furthermore, CAGS makes the depositors eligible for capital gains exemption upon reinvestment of the amount.
- Capital Losses for Offsetting Capital Gains
One can use capital losses to reduce the tax payable for capital gains.
For example, suppose someone owns two stocks and sells both. Suppose that the person experiences capital gain for one sale and capital loss for the sale of the other stock. He can show the capital loss to claim tax deductions for capital gains in this situation.
- Investing for Long term
If one holds any company stock for a very long time, one is eligible to pay low capital gains tax.
Also Read: Taxation of Capital Gains From Mutual Funds: Debt Funds, Equity Funds & More
Final Word
To sum up, capital assets are secure sources of income. However, if one decides to sell off capital assets, they must pay appropriate taxes on capital gains. The classification of capital assets depends upon their holding period. Though people have to pay massive taxes on their profits, they can reduce the payable amount if they know how to save taxes on capital gains.
FAQs on How to Save on Capital Gains Tax
Ans: Taxpayers need to follow these steps to calculate long-term capital gains:
Step 1: First, you need to add the entire value of consideration
Step 2: Then, you need to deduct the incurred expenses during the transfer of the asset
Step 3: Next, you need to deduct the Indexed Cost of Acquisition (ICOA) and Indexed Cost of Improvement (ICOI)
Step 4: Then, you will receive the gross long-term capital gain from which he/she needs to deduct the ITA-approved exemptions to get the long-term capital gain
Ans: Given below are the steps to calculate short-term capital gains:
Step 1: First, you need to add the entire value of the consideration which is the amount that he/she will receive after the sale of a capital asset
Step 2: Next, you need to deduct the incurred expenses that took place during the transfer
Step 3: Finally, you need to deduct the Cost of Acquisition and Cost of Improvement to arrive at the short-term capital gain
Ans: Given below is the list of assets that do not fall under ‘capital assets’:
Items like movable furniture, paintings, personal vehicles
Items of daily use like clothes, utensils, footwear
Agricultural lands located in rural areas
Raw materials used for business
Stock in any trade of business or any profession
Government-issued gold bonds and gold deposit bonds of gold deposit schemes
Ans: Yes, tax has to be paid on capital gains in India. If it is a long-term capital asset, 20% LTCG tax is applicable. If it is a short-term capital asset, the purchaser of the property should deduct the taxes as per the NRI’s Income Tax Slab. It is advisable to consult the Assessing Officer of the jurisdiction as he can accurately determine the tax payable for capital gains. The NRI should make sure that taxes are deducted on capital gains and not on the sale proceedings.
Ans: Cost of Acquisition is the amount that the purchaser pays for acquiring the property. Cost of Improvement is the amount the buyer pays for changing or modifying or improving the capital asset.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
