The meaning of the word capital gain is hidden in the word. It can be defined as the accumulated profit from the sale of a capital asset. Simply put, such profits can be made through investments or the sale of real estate.
Capital gains can be short-term or long-term, depending on the duration. That is why any profit is marked as ‘income’, so any profit is liable to tax. In investment terms, this tax is called capital gains tax.
Now the question is, what is the tax on profits? The answer is a resounding yes. When an asset is transferred from one owner to another, such taxes are levied. Although not all capital gains are liable to tax. The method of paying tax for long-term profit is very different from short-term profit. Taxpayers can use a variety of financial strategies to reduce their capital gains tax burden.
There are Two Main Types of Capital Gins as Capital Gains Tax
There are two main types of capital gains as capital gains tax. First, gain short-term capital. Any asset held for less than 36 months is termed as short term asset. In case of immovable property, this period is 24 months. Profits from the sale of such assets are considered short-term capital gains and are taxed.
Second, make long-term capital gains. Any asset held for more than 36 months is termed as long term asset. Profits from the sale of such assets are considered long-term capital gains and are taxed accordingly.
However, investments such as preferred shares, equities, UTC units, securities, equity-based mutual funds and zero-coupon bonds are also considered long-term capital assets if an investor holds them for more than one year.
There are various provisions regarding short-term profit and long-term profit taxation. Under section 80C of the Income-tax Act, if an investor decides to sell his property within a year, short-term capital gains will be taxed at 15 per cent. In the case of long-term mutual funds, 10 per cent tax will be levied on equity-based funds and shares of one lakh rupees.
In India, capital gains tax exemption is easily available. People can reduce the burden of such taxes by availing the tax benefits provided by the Indian Income Tax Act. Such benefits can be obtained when the proceeds from the sale of one asset are reinvested in another asset.
Pursuant to section 54, tax deduction is available on profits earned by selling an existing residential property and reinvesting money for the purchase of another residential property. According to the 2019 budget, any citizen of the country will be able to get a discount on their long-term capital gains collected through the sale of his residential property. They can get a discount if they invest in a maximum of two residential properties. However, in this case the capital gain should not be more than 2 crore.
If the value of the new property is less than the unit sold, under Indian Income Tax Act, an investor has to pay tax on the remaining amount. However, only one taxpayer can get such exemption once.
Pursuant to Section 54F of the Income-tax Act, you can get a rebate on profits earned from the sale of any property other than residential property. This benefit is obtained by raising capital through the sale of long-term assets that are not residential property. To get such a discount, the investor concerned has to reinvest to buy a new property. Such a purchase should be made 12 months before or at least 24 months after the sale.
Pursuant to Section 54C of the Income-tax Act, exemptions are available on profits earned by selling existing residential property and re-investing it in fixed bonds. If an investor reinvests the proceeds from the sale of the first property in a fixed bond within six months, the person concerned can avail a rebate under the said section. Funds invested in such bonds can be applied after 60 months.
Tax exemption is available on capital gains received through transfer of land for agricultural purposes. An individual may get a rebate under the aforesaid section on short-term or long-term capital gains collected through transfer of agricultural land. However, the property must be transferred 24 months before the sale of the said assets. In order to purchase a new asset within 36 months from the date of such transfer, the exempted amount has to be reinvested. Remember, any person over the age of 60, with a minimum annual income of Rs 3 lakh, will be exempt from long-term capital gains tax.
The reason why every taxpayer wants to reduce the capital gains tax burden is that it wastes a large portion of their capital earnings. However, this tax burden can be reduced by adopting several simple strategies. Such as retaining an asset for a longer period of time, reinvestment of profits, etc.
In addition, taxes can be saved by investing in a capital gain account scheme. As a strategic measure to reduce capital gains tax, an investor can deposit their earned capital into a profit account. This strategy can be adopted at a time when they are failing to invest in a new residential property within the stipulated time to save their taxes.