When you sell an asset be it equity or a property or debt funds, the profit accruing from it is labelled as capital gain. This gain is taxable under the Income Tax Act. There are provisions in the Act that classifies these gains as long-term capital gain depending on how long the investors had continued holding these assets.
For example, the stipulated holding period for equities is 12 months, three years in case of land or property or house and three years again in case of debt securities. The profits earned from selling any of these are termed as long-term capital gain and the tax calculated on it is long-term capital gain tax. The extent of this kind of tax can be hefty, which means that taxpayers would either feel compelled to pay the entire tax or look for ways to escape the tax burden.
Going forward, let us take you through the various Income Tax provisions pursuant to which you can save on long-term capital gains tax.
Sale of house
If you have sold your property, you may consider investing the proceeds in the purchase or construction of a new house. This way you be relieved of paying taxes on the long-term capital gain from the sale of the property. You can consider buying the new property either a year before the sale or two years after the sale of your old property. Alternatively, you may park your money in infrastructure bonds notified by the Indian government. However, these investments come with a lock-in period.
Sale of long-term assets
Other than property, you may be holding on to other long-term assets including shares, mutual funds, gold jewellery, buildings, land, large-sized machinery, etc. The land can be residential or used for commercial reasons. If the amount received on the sale of any of these properties or all of them is invested in the purchase or construction of a new residential property, then you will be exempt from the tax calculated on the capital gains earned.
Setting off losses against gains
You can save a lot on taxes by setting off your capital losses against your capital gains For example, you can resort to tax-loss harvesting by selling your stocks or shares at a loss to set them against the profit earned from the sale of your property or mutual fund units or machines, etc.
However, investors must realize that this exemption is not applicable for the sale of a property bought and sold outside India.
