Jul 4, 2012

How to save Long Term Capital Gains Tax

If you earn anything, it’s minus taxes; if you buy anything it’s plus taxes,” goes a
witty one-liner, which is quite true for all practical purposes. Like most other
earnings, when you make a capital gains by selling your residential property, you
are liable to pay tax. Here, your gain is the difference between the price at which
you buy and the price at which you sell.
You can make two kinds of capital gains by selling a house property, depending
upon the time you have sold the property. Says Parag Paranjpe, a Nagpur-based
chartered accountant and certified financial planner, “If you hold a house for less
than three years before selling it, then it is considered a short-term capital gain
(STCG) and you have to pay tax according to your income-tax slabs. If you sell
the house after three years or 36 months, then it’s considered long-term capital
gain (LTCG) and you have to pay 20% of the profit as tax.”
On LTCG, you can claim tax exemption under certain conditions. Also, you get
the indexation benefit on LTCG. Here are some ways through which you can
claim exemption.
Buy a new property
One way to get an exemption on LTCG received from sale of a house property is
to buy a new residential house within the stipulated time period.
Says Parizad Sirwala, partner, KPMG, an audit and consulting firm, “To get the
exemption, you need to purchase the new residential house within a period of
one year prior to or two years after transfer of the original house. As far as
under-construction house goes, the construction needs to be completed within
three years from the date of transfer of the original house.”
If you don’t plan to construct your own property, you can even book a
residential under-construction house to avail this exemption.
You can get an exemption for an amount equal to the cost of a new house, or
the amount of capital gains, whichever is lower. So let’s say, you sold your
house for Rs80 lakh, made LTCG of Rs40 lakh, and bought a new house
worthRs20 lakh. On the remaining Rs20 lakh amount, you will have to pay LTCG
tax at 20%, that comes to Rs4 lakh.
There is a good chance that you may not get a new house of your choice within
the stipulated time period. In that case, the Capital Gains Account Scheme
(CGAS) can come to your aid.
Open a CGAS
You can deposit the capital gains amount in a CGAS before the due date of filing
tax returns (31 July) to save LTCG tax. But treat CGAS as a parking place, where
you can deposit money until you find a house that suits you, but of course within
a time limit. The amount has to be parked in CGAS with the intention to use the
funds to buy a new house within two years or to construct one within three
If you fail to buy or construct a new house within the stipulated period, the
entire amount is treated as LTCG and you will have to pay tax on it. For instance,
let’s say, you sold a property in April 2010. The capital gain made should be used
to either buy a house by April 2012 or construct a house by 2013. Until then,
you can deposit the money in a CGAS account before the date of filing returns,
which in this case was be 31 July 2011, to save tax.
If you do not acquire the new property till April 2013, the LTCG would be taxable
in the fiscal year 2013-14.
Where can you open it? You can open a CGAS account at an authorized
government-owned bank.
It’s important to remember that the amount you withdraw from CGAS should be
used to purchase a house within two months from the date you’ve withdrawn
these funds. Paranjpe says, “In case you buy a new house, ensure that you do
not sell the new house within three years or you stand to lose the exemption. In
such a case, you will have to pay LTCG tax in the year you sell the new house.”
Invest in 54EC bonds
But what if you don’t want to buy a property at all with the LTCG amount? You
can still get tax exemption, but you will have to invest the amount in specific
bonds that fall under section 54EC of the Income-tax Act. These bonds are
issued only by the National Highways Authority of India and Rural Electric Corp.
To get the tax benefit, you have to hold these bonds for at least three years.
Keep in mind that as per the said section, capital gains have to be invested in the
bonds and the benefit is allowed to the extent of the amount invested.
Therefore, if you’ve made LTCG of, say, Rs30 lakh and have invested it in one of
these bonds, the amount will be exempt from tax. But if you invest only a part,
say, Rs10 lakh, you will get an exemption only on that part and will have to pay
LTCG tax on the remaining Rs20 lakh.
Sirwala says, “To avail the exemption, you need to invest the whole or part of
the capital gains in these bonds within a period of six months after the date of
such transfer.”
As per the Act, the exemption under this section is available provided the
investment is made on or after 1 April 2007. Exemption is allowed on an
amount up to Rs50 lakh in one fiscal. Paranjpe says, “Since the rule says that the
maximum amount is Rs50 lakh per fiscal, you can take advantage if the six-
month limit falls between two fiscal years.”
In fact, you could time the sale of your house property in such a way that this
period of six months actually falls between two fiscal years. So, if you sell the
house between October and March, you come in the six months limit between
two fiscal years. In that case, you can invest Rs1 crore in total over two financial
years and get the tax benefit ( see table ).
Bond features: You can invest a minimum of Rs10,000 and a maximum of
Rs50 lakh. The face value is Rs10,000 per bond and you can buy up to 500
bonds. The bond is available for three years and can be redeemed only after
three years. They come with a coupon rate of 6%, payable annually.
If for some reason, you are unable to keep the bond for three years, your tax
exemption will be withdrawn and you will have to pay LTCG tax in the
subsequent year. Also, if you avail a loan against such bonds within three years,
you will have to let go of the exemption.

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