People having long-term capital gains (LTCG) can avail tax exemption under various sections of the Income Tax Act by making prescribed investments. LTCGs are usually taxed at 20%. This tax can be avoided by making investments as per Sections 54 and 54EC.
Section 54: Profit on sale of property used for residence
Capital gain arising on transfer of a residential house is exempt u/s 54 if such capital gain is reinvested. The house may be let out or self-occupied.
For immovable property, being land or building or both, the period of holding is 24 months to qualify as a long-term capital asset. Earlier, the period of holding was 36 months to qualify as a long-term capital asset. The Finance Act 2017 reduced the period of holding from 36 months to 24 months in case of immovable property, being land or building or both, to qualify as a long-term capital asset.
Investment of capital gain
On purchase of one residential house in India within one year before or two years after the date on which transfer took place, or, construction of one residential house in India within a period of three years after the date on which transfer took place, LTCG tax exemption is available. The residential house should be situated in India.
Deposit in Capital Gain Account Scheme
The assessee is given two years to purchase the house property or three years for construction of the house property, but the capital gain on the transfer of original house property is taxable in the previous year in which transfer took place. Hence, the assessee will have to take a decision for the purchase/construction of the house property by the date of furnishing of income tax return; otherwise the capital gain would become taxable. The amount of capital gain, which is not utilised by the assessee for the purchase or construction of the new house before the date of furnishing of the return of income, shall be deposited by him under the Capital Gains Account Scheme, before the due date of furnishing the return.
Section 54EC: Capital gain not taxed if invested in certain bonds
LTCG, arising on the transfer of any capital asset, is exempt u/s 54EC if the assessee has, within the period of six months after the date of such transfer, invested the capital gain in specified bonds. The bonds, redeemable after three years, are those issued by the National Highway Authority of India and Rural Electrification Corporation. The central government has notified that bonds issued by Power Finance Corporation issued on or after June 15, 2017 or Indian Railway Finance Corporation issued on or after August 8, 2017 are also eligible for exemption.
Maximum amount of investment
Investment in bonds is limited to Rs 50 lakh. If the bonds are transferred or redeemed within three years then the amount claimed as exempt u/s 54EC shall be deemed to be long-term capital gain of the previous year in which the bonds are transferred or converted into money. If the assessee takes any loan or advance on the security of such bonds, he shall be deemed to have converted such bonds into money on the date on which such loan or advance is taken. Interest earned on these bonds is taxable as ‘Income from other sources’.
Tarun Kumar is a chartered accountant Extracted from TaxGuru
