Understanding Capital Gain—Types & Long Term Capital Gain Exemption

Understanding Capital Gain: Types & Long-Term Capital Gain Exemption

Capital gains are earnings that an individual receives as an income from the sale of an investment. It pertains to various assets, including stocks, bonds, commodities, and real estate. There are several tax jurisdictions where capital gains are taxed if an individual sells an asset after owning it for a specific time. Long-term capital refers to all long-term investments that provide returns after a particular time.

They can also involve investments that provide profits over one to three years. For equity shares, to be precise, a holding period of one year qualifies as “long-term”; however, for real estate, the threshold usually is two years. There’s also a long term capital gain exemption that one needs to know when dealing with assets.

When someone invests money, they do so to make profits, either for a quick earning or for using it in the future. In India, the Income Tax Act of 1961 establishes the terms “long-term” and “short-term.” Both short and long-term capital gains depend upon the kind of investments made.

Types of capital gains

Generally, there are two types of capital gain: short and long-term. Let’s discuss both in brief.

Short term

Usually, the short term, as the name goes by, is for a short period. The short-term capital asset retains for 36 months or less. Different requirements exist for immovable properties like land, buildings, and houses. For these immovable assets, 36 months’ requirement is less than 24 months as of FY 2017–18.

Long-Term:

Long-term capital gains retain for more than 36 months. While discussing immovable properties like land, buildings, and houses, they’re subject to long-term gains only after being held for 24 months.

What comes under long-term capital gains?

It is often easy to determine what a long-term capital gain could be. The rule says that any investment that provides you with a return from 1 to 3 years is long-term capital gain.

Any individual who held their investment for three years–After selling that investment, the money they earn is a capital gain. With that, one should know there are long term capital gain exemptions too. Let’s take some examples of the same.

Sale of property:

Real estate has to be the best investment option. Since when you sell property, the returns are higher than what you’ve invested. If you hold your property for three years and then sell it, it’s a capital gain, and the money from the sale is a long-term capital gain.

Sale of agricultural land:

Similarly, when discussing agricultural land retained for 1-3 years, the return after selling the land will be determined as a long-term capital gain.

Mutual fund investments:

These are again one of the most common forms of investments. And, if you hold the funds for a matter of a year, the capital you earn from it is the long-term capital gain.

Stocks:

Any form of return on stocks or bonds qualifies as a long-term capital gain, which are the investments that one holds for a long period.

Long-term capital gains tax

The capital gain tax is imposed whenever a person sells a capital asset for a profit, including houses, cars, stocks, bonds, and collectables like fine art. The Income Tax Act of India imposes taxes on all capital asset transactions, and long-term and short-term capital gains taxes are two types of capital gains taxes.

These taxes gets imposed on movable and immovable assets, such as residential buildings, vacant lots, debentures, units of equity-oriented mutual funds, government securities, UTIs, and zero-coupon bonds. It also includes assets like shares (both equity and listed).

The standard long-term capital gain tax formula is 20% plus any applicable surcharge. Additionally, there are certain circumstances, usually termed special situations, where a person has assessed a 10% tax on their capital gains overall.

Any long-term capital gains of more than Rs. 1,000,000 from the sale of listed securities comply with Section 112A of the Indian Income Tax Act. The government recognises profits from selling assets listed on an Indian stock exchange. It can be zero-coupon bonds and any mutual funds or unit trusts sold before July 10, 2014.

Long term capital gain exemptions

When talking about long term capital gain exemption, it can be intimidating. Since many people don’t know if they can get rid of taxes on their investments, let’s see in detail the maximum tax exemption for the 2019–2020 fiscal year.

  1. Residents of India who are 80 years or older and those who earn less than Rs. 5,00,000 annually are excluded.
  2. Residential Indians aged 60 to 80 years will also be exempted from the LTCG tax if their earnings are around Rs. 3,00,000 per annum.
  3. For those individuals, who are aged 60 years or younger, the exemption limit is Rs. 2,50,000 every year.
  4. Hindu Undivided Families earning less than Rs. 2,50,000 per year are eligible for long term capital gain exemption.
  5. While talking about NRI, the exempted amount is Rs. 2,50,000, be it any age group.
  6. Sections 80C to 80U of the Indian tax code discuss the prohibition that should be considered well in advance. It prohibits individuals from deducting any amount from their long-term capital gains tax.
  7. The entire profit earned from selling the investment is a taxable income; the whole amount will be charged with a fixed rate of 20% under the long-term capital gain.

Main exemptions on long-term capital gain taxes

Section 54

This section defines long-term capital gains made while selling a home, and then the gain received is used to purchase a different one, which means investing the profit in buying another home.

Section 54EC

This section discusses capital gains from a long-term asset, specifically a home. The profits earned from selling the home will then be reinvestment. But, the reinvestment is not on a new property but in certain bonds.

Section 54F

It is a long-term capital gain on selling any asset other than a home. The profits received get reinvested in the purchase of a home.

Capital gains account scheme (CAGS)

You can deposit the sum in a CAGS account if you cannot invest the long-term capital gains within the allotted time. The funds will be used to construct or acquire another residential property within a specified time frame.

Saving taxes on long-term capital gain: how to do that?

Wondering how you can save your tax when dealing with long-term assets? Here’s how:

Real estate investments

To avoid paying tax or understanding long term capital gain exemption, you can do a thing. Invest in buying a brand new house. This way, you reinvest your money in another property, and that’s how your money moves. It gets covered in sections 54 and 54F.

If a Hindu undivided family sells their house and invests the money to buy another one. They will also be free from a long-term capital gain tax under section 54. The property has to be purchased within a year or two years after the sale of your current property. If the seller decides to build a new home, it must be finished within three years.

Additionally, if the seller wants to be excused from paying taxes, the only way to do so is to invest the total capital gain for purchasing the new property. In any other case, any surplus funds that were not reinvested to buy property. According to the law and act stated in India, an individual has to pay tax for that. Remember, the funds can only be exempted if you buy or invest in a house.

In case a Hindu Undivided Family sells a capital asset other than a residential property. Furthermore, using the same profits to buy or build a dwelling, section 54F provides that the entire amount is free from taxes.

In this instance, the total net selling price, as opposed to only the capital gain. The money will be subject to proportionate basis taxation under the Income Tax Act of India if the entire net sale consideration is not invested. The remaining requirements will be comparable to Section 54.

Investing in bonds

By transferring the entire sum to buy bonds issued by NHAI and RECL, one can use Section 54EC to avoid paying long-term capital gains tax. The official website of the Income Tax Department of India has a list of these bonds.

Conclusion

Tax is one of the most crucial parts of an individual life when living in India. So, when dealing with long-term capital gains, you need to understand taxes calculations; this guide will clarify taxes, the long term capital gain exemption, and so on.

Now that you know about long-term and short-term capital gains, you can make decisions accordingly. It will help you figure out how you can save your taxes too. You can make intelligent and reasonable decisions when buying a house. Think about long-term gains as a way to reinvest in more and earn more!

FAQs

What's the tax when I sell a capital asset in less than 1 to 3 years?

The assets will qualify for short-term capital gains since they were sold before turning into long-term assets. The taxes will comply with the rules governing short-term capital gains.

Long-term capital gain tax: What is it?

The tax levied on long-term capital gains sold after a long period is known as the long-term capital gain tax. Long-term Capital Gains are gained after selling an asset that has been held for more than three years.

In case I sold my house in India and reinvested in buying another one in a different country, is LTCG exemption possible?

The new property purchased or built must be located in India to be exempt from LTCG.

Do I have to pay tax if I’ve earned losses in the capital invested?

Not at all. Losses in this situation may be deducted from the cost of investments for the fiscal year. However, to receive this advantage, you need to work on preparing a tax filing.

What tax rate applies to long-term capital gains on selling real estate?

A fixed rate of 20% is applied to capital gains on the sale of residential property.

Is the NRI liable to pay tax on the gain made on selling an investment in India?

In India, any sort of property sale is subject to tax deductions. If the property is for a short term, NRI gets tax deducted based on their income tax slab. For a long-term capital gain tax, it has to be around 20%. NRIs need to know that the tax is deducted from the earnings gained and not the money generated by the sale.

Is there a deduction for long-term capital gains under sections 80C to 80U?

By sections 80C to 80U, long-term capital gains are not eligible for deductions.

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