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How To Save Capital Gain Tax 2020-21

dateKnowledge Centre Team dateNovember 05, 2020 views56 Views 4 Minute Read

How To Save Capital Gain Tax 2020-21

Introduction :

Capital assets can be defined as assets of significant value such as property, vehicles, collectibles, securities and art in some cases. With regards to businesses, capital assets are those assets which are not intended to be sold in the regular course of operations over the period of a financial year and must also possess a useful life span exceeding this duration of time. The taxes levied on the income generated by their sale is referred to as capital gains tax and is determined by the duration of ownership of the asset as well as the positive difference between its sale and purchase price. This taxation is only applicable if the asset is sold after a certain period of ownership.

As the sale of capital assets can be a significant source of revenue/ income, it is important to understand how to save on capital gain tax to maximize one’s returns.

Types Of Capital Assets :

Based on the duration of ownership, capital assets can be divided into two categories:

Short Term Capital Assets : An capital asset held for a period of 36 months or less is a short-term capital asset. However in case of a equity share/security listed in a recognized stock exchange in India or a unit of the UTI or a unit of an equity oriented fund or a zero coupon bond, is being held not more than 12 months will be considered short capital assets and further, in the case of a share of a unlisted company, or an immovable property, being land or building or both, is being held not more than 24 months from its date of purchase will be considered short term capital asset. When dealing with debt mutual funds, short term capital gains are added to an individual or HUF’s income tax and charged accordingly based on the bracket they belong to. Other short term capital gains such as those from equity mutual funds are taxed at a rate of 15% subject to a further cess of 4%.

Long Term Capital Assets : Assets that have been owned for a period exceeding 36 months immediately before the date of sale are referred to as long term capital assets. Some items such as equity or preference shares, debentures, government securities, bonds, investments in equity oriented mutual funds, UTI units and Zero Coupon Bonds are considered long term capital assets after a period of 12 months. Sales of equity shares or equity oriented mutual fund investments greater than 1 lakh are taxed at a rate of 10% while other forms of long term capital gains including those from debt mutual funds are taxed at 20%. The additional cess of 4% is also levied.

As per the Union Budget of 2020, dividends paid by companies to shareholders are taxable at the hand of shareholder only however while paying out the same Company will deduct the TDS at a rate of 10% if the dividend amount exceeds Rs. 5000 for the financial year. Hence, any income generated through capital gains by an individual or HUF is generally subject to this form of taxation. Despite this, there also exist a number of methods by which individuals may be able to figure out how to save capital gain tax. Some of these exemptions are:

Exemptions Under Short Term Capital Gains:

  • Section 54B: This is also applicable to long term capital gains and involves the transfer of agricultural land when the income from sales is reinvested in purchasing land elsewhere. The land must be purchased within 2 years of the initial sale and if its value is less than that of what was sold, the balance is taxed accordingly.
  • Section 54G: Gains from the sale of land, buildings or equipment to move a venture from an urban to rural areas are exempt under this section, provided that the gains are reinvested in the purchase of similar assets for the same purpose.
  • Section 54GA: Applicable for the transfer of land, buildings or equipment from an urban area to a Special Economic Zone under the same conditions as Section 54G.
  • Section 54GB: Exemptions on capital gains from the sale of property between April 1st, 2012 and March 31st, 2017 provided that the income is invested in equity shares from an eligible company.

Exemptions Under Long Term Capital Gains:

Section 54: This full exemption is allowed in cases involving the sale of a house owned for more than three years. This is applicable if either a new house has been purchased one year prior to sale, will be purchased two years following the sale or will be constructed three years following it. The property being bought/ constructed must be within the country however and the claimant must also either be an individual or an HUF. Thus, companies cannot avail this. If the claimant has sold their property in the previous financial year and is yet to facilitate the purchase of property or begin construction, then the amount gained on sale of property must be deposited in a bank under the 1988 Capital Gains Account scheme. These accounts are only available in certain select banks.

If the new house comes at a cost less than that of the old one, the difference is taxed at 20%. If the new house is sold within three years of the transaction, the capital gain is deducted from the exemption on the old house and treated as a short term capital gain.

Section 54D: Exemption on gains from the sale of industrial land or buildings, used for industrial purposes for at least 2 years, to the government if the income is reinvested in purchasing land or buildings for industrial use.

Section 54EC: Exemptions on capital gains from the sale of long term assets invested in assets of the NHAI or Rural Electrification Corporation. This is only applicable if the investment has a lock in period of 3 years and is purchased within 6 months of the sale. The investment must also be more than or equal to the capital gain from the sale otherwise, the balance amount from the sale will be taxed.

Section 54F: Capital gains from the sale of assets other than residential houses used for purchasing residential houses subject to the same terms as Section 54.

Conclusion :

There are quite a few ways mentioned above through which an individual or HUF decide on the ideal way of how to save capital gain tax.The best life insurance policies offer the benefits of different tax gains in a single policy, with the Invest 4G ULIP from Canara HSBC Oriental Bank of Commerce Life Insurance. However, these exemptions can only be availed in certain situations of eligibility and upon following the laid-out procedures thoroughly. Understanding how this works is essential to maximizing your revenue from your investment activities.


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