When you sell a property, painting, jewellery, sculpture, land or even securities after holding them for a considerably long period, the profit accrued on such sale is taxed differently. This income earned on the sale of long-term assets is known as long term capital gain (LTCG).
To put it a little more technically, profits or gains arising out of sale of capital assets are called capital gains. For a gain to come under the category of LTCG, the asset should be held for longer than 36 months prior to the sale. At the same time if it’s held for fewer than 36 months, it is taxed as short-term capital gain (STCG), as pointed out by the income tax department’s tutorial on LTCG (link below).
However, as per the new rules that came into effect from 2018-2019, the period of holding was shortened from 36 to 24 months in case of immovable property such as land and property. At the same time, the period of holding is considered 12 months in case of listed shares and securities for the purpose of long-term capital gain.
The long-term capital gain draws a tax of 20 percent (plus surcharge and healthy & education cess). From the transfer of listed securities and units, capital gain is levied at 10 percent (before adjusting the inflation) or at 20 percent (after adjusting the inflation) – whichever the taxpayer deems to be advantageous.
To seek exemption under section 54 of the Income Tax Act, the individual must use the proceeds of capital gains to buy a new house or to construct a new property. The new house should be bought either one year before or two years after the sale of the asset that attracted LTCG. It must be noted that if the seller wants to construct a new property, it must be completed within three years after the sale of property that accrued the capital gains.
One can also save capital gains tax by using the proceeds to acquire the bonds issued by NHAI (National Highways Authority of India) and RECL (Rural Electrification Corporation Ltd). This exemption is available under section 54EC of the Income Tax Act, 1961.
Those who are unsure of what to do immediately with the proceeds of capital gains are supposed to open a capital gains account with a bank. The money saved in the account can be withdrawn to either buy the property, for construction purposes, or to buy the bonds by NHAI or RECL. It must be noted that the money can be withdrawn only for the purpose of construction of a house or for buying a property, and not for any other purpose. On the top of it, the funds must be utilized within three years of withdrawal.
So, it is vital to have clarity as to where you will invest your capital gain proceeds in case you are planning to seek capital gains exemptions –property, construction, or bonds. Else, one can always cough up appropriate tax to help the nation building.
Points to remember
1. Gains or profits arising out of sale of fixed assets are long term capital gains. It is levied at 20 percent.
2. Profits on any sale is considered long term capital gain when the asset is held for more than 36 months. The time period is 24 months in case of land and property, and 12 months in case of shares and securities.
3. To seek exemption on LTCG tax, you can invest in purchase of property, or construction of house within two years or three of sale, respectively.
4. Investing in tax saving bonds issued by NHAI and RECL will also enable you to seek tax exemption.