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Contact us
To Buy: 1800-258-5899 (9:30 AM to 6:30 PM)
For Existing Policy: 1800-103-0003/ 1800-180-0003/ 1800-891-0003
customerservice@canarahsbclife.in
Knowledge Centre Team
November 05, 2020
56 Views
4 Minute Read
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.
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%.
Click here to use - Income Tax Calculator
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:
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 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.
Hi I am Radhika Palkar, a practising Chartered Accountant mainly working as an advisor to foreign companies with regards to managing their operation in India. I also take keen interest in associating myself with startups, from the stage of incorporation bookkeeping to income tax filling and in advising the management in cost price analysis, thus we act like a virtual CFO for the entities in their growth phase I am here today as part of the Tax video series for Canara HSBC Life Insurance Company. In one of my previous videos under the Tax series I had explained ‘What is Capital Gain and its applicability under the Income Tax Act?’
In this video let’s understand how do we save Capital Gains tax for the financial year 20202-21:
Tax rate on short term capital Gain
1. Tax rates of STCG covered under section 111A is charged to tax @ 15% (plus surcharge and cess as applicable).
2. Normal STCG, i.e., STCG other than covered under section 111A is charged to tax at normal rate of tax which is determined on the basis of the total taxable income of the taxpayer.
Some important point to Note in this are as follows:
1. Only a resident individual and resident HUF can adjust the exemption limit against STCG covered under section 111A. Thus, a non-resident individual/HUF cannot adjust the exemption limit against STCG covered under section 111A.
2. The benefit of basic exemption is available only to resident individual/HUF. Non-residents cannot avail the basic exemption limit.
3. In the case of resident individuals/HUF, if the basic exemption limit is not fully exhausted by other income, then short term capital gain will be reduced by unexhausted basic exemption limit and the balance would be taxed @ 15%
Tax rate on Long-Term capital Gain
1) As per section 112A: Tax on long term capital asset in case of LTCG on transfer of equity shares, equity oriented units or unit of business trust in excess of Rs. 1,00,000 shall be taxable @10% following condition to be satisfied:
a) STT paid on acquisition & transfer of equity shares.b) STT paid on transfer of equity oriented units & units of business trust.
2) all Other LTCG shall be taxable @ 20%
Despite this, there also exists 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 Long Term Capital Gains:
Section 54B: Under section 54B assesse can claim exemption in both case whether it is LTCG or STCG. It involves the transfer of agricultural land and when the income from such sales is reinvested in purchasing agricultural 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 an industrial undertaking 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 to move an industrial undertaking from an urban area to a Special Economic Zone under the same conditions as Section 54G.
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, or where a new house 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.
The amount of exemption to be claimed is lower of the amount of capital gain or the cost of new house purchased. 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 compulsory acquisition of land or buildings, used for industrial purposes for at least 2 years is exempt if the income is reinvested for acquiring a new land or building for the purpose of shifting or re-establishing an industrial undertaking.
Section 54EC: Exemptions on capital gains from the sale of long term assets invested in assets of the National highway authority of India or Rural Electrification Corporation or any notified bond. 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 any long term capital assets other than residential houses is exempt if the capital gain is used for purchasing a new residential house subject to the same terms as Section 54.
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