Long-Term Capital Gains: Definition, Taxes, Exemptions & Tax Saving

Every person desires to have a piece of property that he may claim as his own one day. However, the process and subsequent responsibility of owning a home are not as simple as wishing for one. Purchasing real estate comes with a long-range of paperwork, legal regulations, and other responsibilities. The capital gain tax is one such criterion and consideration.

Aside from property, you will be obliged to pay capital gain tax or long term capital gain tax if you own any capital assets as investments, such as vehicles, shares, bonds, and so on, that may help you earn profits in the future.

Let’s take a look to see what the capital gains tax is all about.

What is a Capital Gain Tax?

A capital gains tax is a tax imposed on the profit made on the sale of a non-inventory asset, such as a capital asset. Capital gains are typically earned when stocks, bonds, precious metals, real estate, and property are sold. Not every country imposes a capital gains tax. Individuals and corporations are taxed at different rates in most nations.

Short-term capital gain tax and long-term capital gain tax are the two forms of capital gain taxes. A short-term asset has been held for less than 36 months and is subject to capital gains tax. In the case of immovable properties, the term is 24 months. Profits earned from the sale of such an item would be considered a short-term capital gain and taxed accordingly.

Long-term capital gains tax is more important and should be scrutinized carefully.

What is Long-term Capital Gain Tax?

A long-term asset has been kept for more than 36 months. Profits earned from the sale of such assets would be considered long-term capital gains and subject to taxation as a result.

If maintained for more than a year, assets such as preference shares, stocks, UTI units, securities, equity-based Mutual Funds, and zero-coupon bonds are classified as long-term capital assets.

Taxes on Long Term Capital Gains

Long-term capital gain tax is usually assessed at a rate of 20%, plus any relevant surcharges and cess. It also covers specific circumstances in which an individual has assessed a 10% tax on the total capital gain; these conditions are described below:

• Selling listed shares worth Rs.1,00,000 and more yielded long-term capital gains. It is following Section 112A of the Indian Income Tax Act.
• Returns from selling securities listed on a major Indian stock market, zero-coupon bonds, and any Mutual Funds or UTI sold on or before July 10, 2014.

Exemptions on Long-term Capital Gain Tax

Many people wish to be free from such taxes since they lose a portion of their profits as a result of them. If an individual’s annual income is below a certain threshold, they will be exempt from paying any taxes, including this one. The tax exemption limit for the fiscal year 2020-2021 is as follows:

• If a resident of India is 80 years old or older and has an annual income of less than Rs. 5,00,000, they will be free from this tax.
• If a resident of India between the ages of 60 and 80 earns a maximum of Rs. 3,00,000 per year, they will be free from long-term capital gains tax.
• Long-term capital gain tax exemption is Rs.2,50,000 per year for persons aged 60 and under.
• If the family’s annual income is less than Rs.2,50,000, Hindu Undivided Families in India can benefit from this tax exemption.
• The exemption limit for long-term capital gain tax for non-resident Indians (NRIs) is a flat Rs. 2,50,000, regardless of the individual’s age.

Individuals in India are not eligible for a tax reduction from long-term capital gains tax under Sections 80C through 80U.

The entire benefited amount will be considered taxable income and will be subject to a flat 20% long-term capital gain tax. The complete amount is not subject to a minimum exemption ceiling, making it vulnerable to large taxes.

Saving Tax on Long-term Capital Gains

The following are some strategies for reducing long-term capital gains taxes. You can look at certain schemes, invest in residential real estate, and even invest in bonds if you read all of the possibilities carefully.

The Capital Gain Account Scheme

The capital gain account concept allows an investor to benefit from tax benefits without having to purchase a home. The Government of India allows cash to be withdrawn from this account exclusively to purchase houses and plots, and any funds removed for other purposes must be used within three years of withdrawal. Otherwise, the overall profit will be levied following the appropriate long-term capital gain tax rates.

Investing in the bonds

If one wants to save money on taxes, he can use Section 54EC to avoid paying long-term capital gains tax by shifting the entire amount to NHAI and RECL bonds. The list of such bonds can be found on the Income Tax Department of India’s official website.

Investment in residential property

To avoid paying taxes on long-term capital gains, one could buy a new residential dwelling. Section 54 and Section 54F are responsible for these exemptions. If an individual or Hindu Undivided Family sells a built-up house and uses the capital gain to acquire or develop a new residential property, they will almost certainly be exempt from paying long-term capital gains tax under Section 54.

A year before or two years after the sale of the current or existing property, a new or fresh property must be obtained. If the seller wishes to build a new home, it must be finished within three years after the sale of the previous home.