types of capital gains
The Income Tax Act, 1961 classifies capital gains into two types, ‘long-term’ and ‘short-term’, based on the period of holding such capital asset.
For any asset, (such as house, land and building) to be classified as a long-term capital asset, the said asset must be held for more than 24 months from the date of its acquisition, otherwise it will be treated as short-term capital. Asset If the asset is transferred before the expiry of 24 months, the gain will be short-term capital gain (STCG) or loss. If sold after 24 months, it will result in Long Term Capital Gain (LTCG) or loss.
In addition, LTCG will be taxed at the rate of 20% indexation benefits And STCG will be taxed at income tax slab rates applicable to the taxpayer.
How to Save Income Tax on Capital Gains from House Property
- Tax exemption under section 54 on investment in second residential house
Any individual taxpayer can claim exemption under this section if the capital gain is derived from the sale or transfer of a house. Tax exemption can be claimed when the house property sold has resulted in a long-term capital gain. Those profits should be invested in any other residential house property in India. The tax exemption available will be the lesser of the following amounts:
1. Investment made in new residential house property; either
2. Amount of Capital Gains
To claim tax exemption under section 54, the new house property must be purchased either 1 year before or 2 years after the sale of the old house property. In case of construction, the new property must be constructed within 3 years of the sale of the old property.
In case capital gains arise from the compulsory acquisition of house property by the Government, the period of purchase or construction of a new house shall be determined from the date of receipt of compensation.
However, if the new house property is sold before the lock-in period of 3 years, the tax exemption under section 54 will cease and such amount will be reduced by the cost of acquisition of the new property sold and capital gains calculated accordingly. Will . For example, a taxpayer claiming exemption of Rs. 20 lakh through investment. 60 lakhs in a new property. However, if he sells the property before the expiry of the lock-in-period of 3 years, the cost of the new asset will be treated as Rs. 40 lakhs (Rs. 60 lakhs less Rs. 20 lakhs) For the purpose of computing capital gains, Rs. instead of the original cost of . 60 lakhs.
Tax exemption under section 54 can be claimed only in respect of house property purchased/constructed in India. Accordingly, no such tax exemption can be claimed in respect of a house purchased outside India.
Generally, one house property gets tax exemption. However, there are some exceptions. From FY 2020-21, tax exemption is available for two-house properties if the amount of capital gains does not exceed Rs 2 crore. This option can be exercised by the taxpayer only once in his lifetime.
- Tax exemption under section 54EC by investing in specified bonds
Individuals can claim tax exemption under section 54EC in respect of LTCG from the sale of any property (residential and commercial). They are required to invest in bonds notified by the government to claim tax exemption. Such specified bonds have a lock-in of 5 years. If the bonds are sold before the expiry of 5 years, the tax exemption will not be available.
In order to claim tax exemption, investment in specified bonds is required to be made within a period of 6 months from the date of sale/transfer of such asset. The quantum of such tax exemption shall be the lesser of the following:
1. Capital Gains; either
2. The amount invested; either
3. Rs. 50 lakhs
At present, specified bonds under which taxpayers can invest are: Rural Electrification Corporation (RECL), Indian Railway Finance Corporation (IRFC) and Power Finance Corporation Limited (PFCL).
- Tax exemption under section 54G by investing in specified company
This section provides tax exemption on LTCG received from sale of house property to individual taxpayers. Tax exemption can be claimed if the net sales consideration received on the sale of assets is invested in equity shares of a qualified specified company (usually a startup). In addition, the company must use the funds to purchase certain plant and machinery, office equipment (such as computers and computer software, etc.) or any vehicle for official use within a period of 1 year.
Such investment is required to be made on or before the due date of filing of income tax return. So, if the house is sold in February 2022, the investment in the startup/company should be made on or before July 31, 2022. will be allowed in proportion to the amount invested.
Other things to keep in mind for claiming capital gains exemption
Due to practical difficulties, at times it is not possible for the taxpayers to make the above investments within the specified time period. Thus, to address such concerns, the Capital Gains Account Scheme (CAGS) was introduced.
Taxpayers who could not invest within the stipulated time frame can deposit the money in CGAS account to avail tax exemption. CAGS account can be used by taxpayers only if they claim tax exemption by investing capital gains in any other house property or company/start-up.
CGAS deposit is required to be done on or before the due date (31st July) for filing ITR or before the actual date of filing of ITR, whichever is earlier. The amount deposited in this scheme can be withdrawn at any time for the specified purpose of investment in any other residential property or equity shares of eligible specified company. However, if the taxpayer fails to invest from CAGS within the stipulated time frame i.e. 2 years in case of purchase of new property or 3 years in case of construction of new property, then capital gains will be taxable.
(The author is the founder of RSM India – a tax consulting group.)