In India, capital gains tax is applicable on the profits earned from the sale of capital assets. The tax treatment and exemptions vary based on the holding period and the nature of the asset.
>Tax Treatment:
Short-term Capital Gains (STCG): Assets held for less than 36 months (24 months for immovable property) are classified as short-term capital gains and taxed at the applicable slab rates.
Long-term Capital Gains (LTCG):
Equity and Equity-oriented Mutual Funds: LTCG on listed equity shares or equity-oriented mutual funds exceeding INR 1 lakh is taxed at 10%, without indexation benefit. Gains up to INR 1 lakh are exempt from tax.
Other Assets: LTCG on other assets is taxed at 20% with indexation benefit or 10% without indexation, whichever is lower.
> Exemptions:
Section 54: Exemption on LTCG from the sale of residential property if the proceeds are invested in another residential property within a specified time frame.
Section 54F: Exemption on LTCG from the sale of any asset (except residential property) if the proceeds are invested in a residential property.
Section 54EC: Exemption on LTCG if the proceeds are invested in specified bonds issued by government-approved institutions.
Section 54B: Exemption on LTCG from the sale of agricultural land if the proceeds are used to purchase agricultural land.
Section 54GB:Exemption for individuals and Hindu Undivided Families (HUFs) in India. This exemption applies when the taxpayer sells a residential property and invests the capital gains in eligible startups.
In India, there are several investment options that individuals can consider to save on capital gains tax.
One of the most popular ways to save on capital gains tax in India is by investing in tax-saving instruments under Section 80C of the Income Tax Act. Investments such as Public Provident Fund (PPF), National Savings Certificate (NSC), Tax-saving Fixed Deposits (FDs), and Equity Linked Saving Scheme (ELSS) mutual funds offer tax benefits and can help reduce taxable income.
Another option to save on capital gains tax is to invest the capital gains amount in specified bonds issued by government-approved institutions like Rural Electrification Corporation (REC) and National Highways Authority of India (NHAI). These bonds, commonly known as capital gains bonds or 54EC bonds, have a lock-in period of 3 years and provide tax exemption on the capital gains amount invested.
Individuals can invest the capital gains from the sale of a property in another residential property to avail capital gains tax exemptions under Section 54 of the Income Tax Act. This option is applicable if the new property is purchased within a specified time frame.
The government of India has introduced the concept of "Startup India" to promote entrepreneurship and innovation. Investments made in eligible startups, as recognized by the Department for Promotion of Industry and Internal Trade (DPIIT), may be eligible for capital gains tax exemptions under Section 54GB of the Income Tax Act, subject to certain conditions.
Long-term capital gains (LTCG) arising from the sale of listed equity shares or equity-oriented mutual funds held for more than 1 year are tax-exempt up to a specified limit. Investors can consider investing in listed equity shares or equity-oriented mutual funds for the long term to avail of this benefit.
