Saving Tax on Long Term Capital Gain

When there is a sale of long term capital asset, the gains are usually quite large and are taxed at 20 %. Therefore, the tax amount comes out to be a large amount liable to be paid as Long term Capital Gain tax.

However, Govt. has given the option of claiming exemption from long term capital gains tax if the taxpayer reinvests the amount in certain specified forms of investment and can thereby save tax as per following sections:

1. Section 54
2. Section 54 EC
3. Section 54 F

Section 54

The conditions that need to be satisfied to avail the benefit of this section are as follows:

1. Eligible assessee- Individual/HUF
2. The asset sold is residential property and new asset is also residential property.
3. Long term capital gain arising from sale of a Residential property shall be exempted up to the amount invested in:

(i)Purchase of another residential property within 1 year before or 2 years after the transfer/sale of property and/or

(ii)Construction of another residential property within a period of 3 years from the date of property transfer/ sale.

Provided that the new residential house property purchased or constructed is not transferred within a period of 3 years from the date of acquisition.

NOTE:  With effect from FY 2019-20, a capital gain exemption is available for purchase of 2 residential houses in India subject to the capital gain not exceeding INR 2cr. Also, the exemption is available only once in the lifetime of the seller.

Capital Gains Account Scheme

If the asset is sold in the previous year, and the seller is yet to purchase the new house property as the time limit of 2 years or 3 years has not yet expired, then the assessee is required to deposit the amount of gains in the Capital gains account scheme (in any branch of public sector, bank) before the due date for filing income tax returns. However, if the amount deposited in the Capital Gains Account Scheme is not utilized within the time limit mentioned, then it shall be treated as income of the previous year in which 3 years expire (from the date of transfer of the original asset).

Section 54 EC

The conditions that need to be satisfied to avail the benefit of this section are as follows:

• Eligible Assessee- All assesses
• The asset sold is Long term capital asset i.e., Land or building or both and new asset is Long term specified bonds notified by govt.
• Such Long term capital gain is exempted up to the amount invested in long term specified bonds of National Highways Authority of India (NHAI), Rural Electrification Corporation (REC) OR any other bonds notified by Central govt. within 6 months from the date of transfer for a minimum period of 3 years, subject to a maximum limit of INR 50 Lacs.

Withdrawal of Section 54EC Exemption

The exemption claimed under section 54EC would be withdrawn, in case the long term specified asset is transferred or converted into the money before the expiry of the period of three years or five years, as the case may be.

In case of transfer / conversion, the amount of exemption claimed under section 54EC shall be deemed to be income under ‘Capital Gains’ as long term capital gain in the previous year in which the long term specified asset is transferred or converted.

Section 54F

The conditions that need to be satisfied to avail the benefit of this section are as follows:

1. Eligible Assessee: Individuals/ HUF

2. The asset sold is a Long term capital asset other than residential property and new asset is a residential property.

3. Long term capital gain is exempted if entire net sales consideration is invested in:

    (i) Purchase of one residential property within1 year before or 2 years after the date of transfer of property or

    (ii) Construction of one residential property within 3 years after the date of such transfer

4. In case the whole sale consideration is not invested and only a part of the sale consideration is invested, exemption shall be allowed proportionately i.e.

Amount Exempt = Capital Gain* Amount Invested / Net Sale Consideration

5. This exemption is not available if any of the below conditions is satisfied:

    (i) Assessee owns more than 1 residential house on the date of transfer of such asset.

    (ii) The assessee purchases any other residential house within 1 year or constructs any other residential house within 3 years from the date of transfer.

Capital Gains Deposit Account Scheme

If the amount is not re-invested by the last day of filing of the return, then the balance amount should be deposited in the capital gain deposit account scheme.

Written By

CA Palak S Jain

CMO, Financial Analyst

Expertbells Consulting Private Limited