When you sell an asset such as property, shares or gold after holding it for a long time, you are liable to pay income tax on the long-term capital gains. The long-term capital gains, or LTCG, are taxed at 20 percent, which could be even more than the slab you fall under. So, it is vital to know whether you can the avail deductions allowed on these gains in part or in full.
The time period that determines whether capital gains are long term is three years (36 months) for capital asset such as land and property, and one year (12 months) for the shares.
How to avail exemption on long term capital gains
Exemption on long term capital gains by purchasing notified government bonds issued by NHAI and REC, among others is mentioned under section 54EC of the Income Tax Act.
However, it is important that the profit made on the sale of asset is invested in these bonds within a period of six months of the sale. It’s only when the re-investment is made within a specified time frame, tax payers can claim exemption.
“Taxpayers can claim exemption by investing in government notified bonds and securities, which include National Highways Authority of India (NHAI) and Rural Electrification Corporation (REC) bonds,” says Deepak Aggarwal, a Delhi-based chartered accountant and financial advisor.
Details about the government bonds
| Issuer | The bonds are issued by NHAI, REC, PFC and IRFC |
| Investment required | You can make a minimum of ₹10,000 and a maximum of ₹50 lakh investment. |
| Lock-in | These bonds are AAA rated and have 5-year lock in period |
| Rate of return | They give interest at the rate of 5 percent per annum. |
| Listing | They are not listed on any stock exchange. |
Over ₹50 lakh
The income tax law allows tax payers to claim both exemptions i.e., by investing in property as well as by investing in government bonds. This provision comes handy because there is a threshold of ₹50 lakh on the purchase of bonds.
Let us suppose your total capital gains are higher than ₹50 lakh, you can use the gains to build a house and avail the benefits of tax exemption. But in case you are unable to avail either of these two options, you will be made to pay long term capital gains tax on the remainder of capital gains.
The bonds bought with the capital gains amount should be with the taxpayer for at least five years. “If you transfer the bonds before the expiry of 5 years, then the income tax exemption earlier availed stands to be withdrawn,” explains Mr Aggarwal.
In that case, you will have to pay LTCG tax on the original capital gains amount.