Here’s how investors can get up to ₹10 crore tax exemption on LTCG.
When an investor sells a house, stock, mutual fund or any other asset, it can result in a significant tax liability called Long-Term Capital Gains (LTCG) tax. But, with proper planning and provisions of Income Tax Act, tax payers can legally claim exemption of up to Rs. 10 crore on long term capital gains, says experts. Tax professionals state that Sections 54, 54F and 54EC of the Income Tax Act are the most frequently used sections to avail LTCG exemptions. These sections give taxpayers the ability to reinvest their gains in certain assets and lower or eliminate their tax liability drastically. This section applies when a property is a residential property.
If the property is a residential property, this section applies. If a person or Hindu Undivided Family (HUF) sells property which is used for a long time as a house and makes a capital gain, section 54 will come into effect. The taxpayer has to invest the gains in a new residential house in India to avail the exemption. The sale of the new property may be delayed 1 year before or up to 2 years after the sale or it may be built within the 3-year period. The exemption on reinvestment is limited to a value of ₹10 crore. The law also offers a single time investment opportunity in 2 residential properties where the capital gains are not more than ₹2 crore. Any other assets apart from those mentioned above that are sold, receive relief under Section 54F. If a taxpayer receives long-term capital gains on shares, mutual funds, gold, commercial property, and other assets, he or she may be able to benefit from exemption under Section 54F.
For this benefit, the funds from the sale need to be used for investment in a Real Estate Property in India. As long as the entire net sale consideration is reinvested, the entire capital gain can be made tax free, provided that the conditions are met and the limit of ₹10 crore is not breached. The provision has come in the news recently in the wake of an investor from Kolkata who recently claimed the excess of over ₹26 crore of long-term capital gains, and managed to avoid paying taxes on the funds, by investing the money in a residential property under a legal scheme called section 54F. Section 54EC: Capital Gains Bonds Section 54EC is an option for taxpayers who sell land or buildings and are not interested in buying another piece of real estate. As per this, the capital gains amount can be invested in the government approved bonds issued by organizations like NHAI and REC within six months of the asset’s sale. The bond, however, has a lock-in period of five years and the maximum investment limit is ₹50 lakh under this section. There are important aspects to keep in mind. These exemptions, however, come with strict timelines and conditions, warn tax experts. For tax exemption to apply, the new property purchased under Section 54 or 54F will not be able to be sold within three years of the purchase or construction date without losing the exemption claim. Further, if the amount is not used immediately for reinvestment, then taxpayers might have to keep the money in a Capital Gains Account Scheme (CGAS) before filing their income tax returns.
Strategic tax planning can make a huge difference. Strategic tax planning can make a huge difference. As long-term capital gains increasingly grow in significance to investment returns, it’s important to know about these rules to save big on taxes. The exemption is up to ₹10 crore which may sound incredible, but it is only applicable when all the statutory requirements are fulfilled and investments are made within the stipulated time frame, experts say. Taxpayers are always encouraged to seek advice from a competent tax specialist before making an investment or reinvestment decision to make sure it is done in accordance with the most recent tax laws.
