Capital gains exemptions are provisions in tax legislation that allow taxpayers to avoid or minimize taxes on profits earned from the sale of certain assets. In India, capital gains are classed as short-term or long-term based on the asset’s holding tenure. Here’s a summary of the capital gains exemption in India.
Short and Long-Term Capital Gains:
- Short-Term Capital Gains (STCG) are profits from the sale of assets held for less than 36 months (12 months for listed equity shares and securities).
- Long-Term Capital Gains (LTCG) are profits from the sale of assets held for more than 36 months (12 months for listed equity shares and securities).
Exemptions for Long-Term Capital Gains
- provision 54 (Residential Property): This provision allows persons to seek an exemption from LTCG resulting from the sale of a residential property if the profits are used to purchase or construct another residential property within a stipulated time frame.
- Conditions: The new property must be purchased or built within two to three years after the sale date. The exemption is limited to a single residential property.
- Section 54EC (Specified Bonds): Exemption is possible for LTCG provided the proceeds are invested in certain bonds issued by the National Highway Authority of India (NHAI) or the Rural Electrification Corporation (REC) within six months after the sale.
- Conditions*: The investment amount is limited to ₹50 lakhs per financial year, and bonds must be held for at least five years.
- Section 54F (Other Assets): Applies to LTCG derived from the sale of any asset other than a residential property, if the net sale proceeds are used to buy or build a residential property.
- Conditions*: The new property must be purchased within two years or built within three years, and the taxpayer cannot possess more than one residential property at the time of sale.
Exemptions for Short-Term Capital Gains
- Section 111A: STCG derived from the sale of equity shares or equities-oriented mutual funds subject to Securities Transaction Tax (STT) is taxed at a 15% concessional rate.
Other Exemptions:
- Section 10(38): Previously granted exclusions for LTCG on the sale of listed equity shares and mutual funds, however this was removed in the 2018 Budget. LTCG over ₹1 lakh is now subject to a 10% tax.
Conclusions:
Capital gains exemption provisions in India provide significant tax relief to investors by encouraging the reinvestment of earnings in specific assets such as residential homes and bonds. To fully benefit from these exemptions, taxpayers must follow the exact conditions and dates provided in the tax code. Understanding these rules can assist individuals and corporations in minimizing their tax liabilities and improving their investment plans.
