Exemption From Capital Gains Tax – Three different routes to save tax on long-term capital gains 4 min read 13 Aug 2019, 23:51 IST Bindisha Sarang

There are provisions in various sections of the Income Tax Act that can help you save on LTCG tax.

Exemption From Capital Gains Tax

Just like you pay taxes on the income you earn, selling your capital assets also invites taxes. Gains from transfer of capital assets like house, shares and gold are subject to capital gains tax and there are certain benefits that you can avail to save tax on capital gains. While there is little relief when it comes to paying short-term capital gains (STCG) tax, there are provisions to save on long-term capital gains (LTCG) tax. We list three such provisions to help taxpayers save tax.

Capital Gains Tax: Types, Exemption And Savings

Real estate, be it land or a house, is a major asset. Gains from the transfer of such assets attract capital gains tax. If you sell a house within 24 months, you have to pay STCG tax on the gain as per your income tax slab. After 24 months you have to pay LTCG tax which is levied at 20% with indexation benefits. Section 54 gives you relief if you sell one property and buy another. “Exemption under Article 54 is possible if the capital gains from the sale of property are reinvested in the purchase or construction of a maximum of two houses. Before Budget 2019, the exemption was limited to one property only,” said tax and investment expert Balwant Jain. Post-Budget, it was extended to two houses. However, the capital gain on sale of house property should not exceed ₹2. crore on two properties. may be required for exemption from reinvestment.

To claim exemption on entire LTCG amount, you need to reinvest the entire amount. “If the full amount of LTCG is not reinvested, then proportionate relief is possible,” said Ashok Shah, NA Shah Associates LLP, a chartered accountancy firm. Remember that if you sell this new property within three years, your exemption will be cancelled. Income from the purchase and sale of new property will be taxed as short-term capital gains. New properties must be purchased one year before the sale or two years after the sale of the property. Or new residential properties constructed within three years of the sale of the property. if you cannot use it to buy or build new houses, you should put the amount into a capital gains account scheme (CGAS). Even if you have taken a home loan to buy a new property, the capital gains exemption is valid under section 54 and also if you have used it to repay the home loan.

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This is the section you can use if you want to save LTCG on sale of property and are not interested in reinvesting the gains in real estate. “Section 54EC allows exemption from LTCG on sale of land and building if the amount of capital gain is invested in certain specified bonds. The exemption is available for both residential and non-residential properties,” said Shah. The bonds mentioned here mean 54EC bonds issued by the National Highways Authority of India, Rural Electrification Corporation and others. You have six months to invest in these. “Maximum amount allowed ₹50 lakh and now the lock-in is for five years instead of three years. The rate is not attractive; if possible, you can buy property instead of bonds,” said Mrin Agarwal, finance guru, founder director, Finsafe India Pvt. Ltd and co-founder, Womantra. The interest rate on these bonds is 5.75% and is taxable. Post Budget 2018, section 54EC only limited to real estate income.

But what if you have capital gains from assets like gold, stocks or even mutual funds? Even LTCG on assets other than residential property can be withheld under section 54F if you decide to use the proceeds to buy residential property under certain conditions. “Unlike section 54 and 54 EU, you have to invest all the selling costs, not just the capital gain, to buy or build a new residential property to claim this exemption,” he said. , freedom is allowed in proportion. Let’s say you transfer ₹20 lakh worth of gold that you bought for ₹10 lakh five years ago. To avoid tax on LTCG of ₹10 lakh (₹20 lakh minus ₹10 lakh), you need to reinvest the entire ₹20 lakh. If you invest only 50% of the sales receipts, only 50% of the LTCG amount i.e. ₹5 lakh will be tax free and the remaining ₹5 lakh will attract tax.

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How Much Is The Capital Gains Tax On Real Estate?

Also, to avail the benefit, “on the date of transfer, you should not own more than one house other than the house purchased for claiming exemption under this section,” Jain said. Like section 54, the new property must be both acquired. one year before or two years after the date of transfer or the new property must be built within three years from the date of transfer. Remember that the rebate can be withdrawn if this new property is sold within three years of purchase.

Can multiple divisions be used to pay less tax? Deduction can be claimed under both section 54 and 54EC by adding investment in new property and specified bonds, Shah said. Regarding the availment of exemption under Section 54 and 54F concurrently with investment in the same house, Jain said, “If all the conditions are fulfilled, the assessee can claim exemption under Sections 54 and 54F for investment in the same house.”

So calculate LTCG on various capital assets and avail tax benefits. Do not neglect the rules regarding fixed time, closing period and other provisions while reinvesting.

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An Overview Of Capital Gains Taxes

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You are now subscribed to our newsletters. If you can’t find any email from us, please check your spam folder. During the 2020 election campaign, President Joe Biden proposed certain changes to the Internal Revenue Code that would, among other things, change existing property and estate law. gift tax. There are two possibilities you should be aware of: the reduction of the estate tax exemption and the elimination of the stepped-up basis on death. The former will affect only multi-millionaires, while the latter may affect more modest estates and their heirs.

The first change would reduce the current estate tax exemption levels. Before the Tax Cuts and Jobs Act of 2017, the estate tax exemption level was $5 million each year, which increased based on inflation. The relief for married taxpayers has been doubled. Under the Tax Cuts and Jobs Act of 2017, the estate tax exemption more than doubled to $11.7 million in 2021 for single taxpayers and $23.4 million for married taxpayers. As long as your property is assessed under the exemption amount, no federal estate tax is owed, and the vast majority of estates owe no tax at all. President Biden has expressed interest in reducing the estate tax exemption. This can be more than halved or reduced by $3.5 million in 2009 for individuals and $10 million or $7 million for married taxpayers, respectively.

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Another possible tax change is how property is valued when it is transferred at death. “Cost basis” is the monetary value of an object for tax purposes. When determining whether capital gains tax is owed on an estate, basis is used to determine whether the asset’s value has increased or decreased. For example, if you buy a stock for $10,000, that is the basis of the cost. If you later sell it for $50,000, you will have to pay taxes on the $40,000 increase in value.

Figuring Out Capital Gains When An Inherited House Is Sold. Spoiler: They’re Probably Small

Under current law, when a property owner dies, the value of the property “steps up.” This means that the current fair market value of the inherited assets becomes the “new” basis in the hands of the beneficiaries. For example, let’s say you inherited a house that was bought for $100,000 years ago and is now worth $1 million. You will receive $100,000 up to $1 million in increments of initial cost. If you sell the property immediately for its fair market value, you will report no gain on your taxes because your basis will be the current fair market value of $1 million.

According to an article in the New York Times, the current administration may propose repealing the major enhancement rule. Previously, it was difficult to determine

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