Capital Gains Exemption – List of Exemption Under Capital gain
Gains received on a sale of capital assets are termed as capital gains. Depending on the holding period of assets, such gains can either be long-term capital gains or short-term capital gains.
Gains earned through the sale of assets are placed under ‘income’ in a balance sheet. These earnings are liable for taxation. Long-term gains and short-term gains are however taxed differently.
Since capital gains tax tends to erode a considerable portion of earnings, it becomes essential for individuals to adopt tax-saving strategies that will help them reduce their tax liability.
Furthermore, the Government also offers a list of exemptions under capital gain to help individuals minimise their capital gains tax liability. Such tax deductions are termed as capital gains exemptions.
What is Short-term Capital Gain?
The proceeds earned through the sale of an asset that has been held for less than three years is known as the short-term capital gains. In the case of immovable assets, the said duration for the holding the property is 24 months.
Under Section 80C of the Income Tax Act, the short-term capital gains attract a capital gain tax at a rate of 15%. Such taxation is incurred when investors decide to sell an asset within a year.
In the event of securities being liable for a transaction tax, proceeds earned in the short-term are added on to tax returns of individuals and is taxed according to their income tax slab.
Individuals can avail short-term capital gain exemption on their short-term proceeds and reduce their tax liability on such gains accordingly.
What is Long-term Capital Gain?
The proceeds earned through the sale of an asset that has been held for more than 36 months is known as long-term capital gains.
Under Section 80C of the Income Tax Act, long-term capital gains attract a capital tax at a rate of 20% with indexation while a tax at a rate of 10 % without indexation is applied to gains of over Rs. 1 Lakh.
Assets like equities, preference shares, securities, equity-oriented Mutual Funds, UTI units and zero-coupon bonds, when held for more than a year, is considered to be long-term capital assets. The proceeds earned on them would be treated as long-term capital gains.
Individuals should find out the long-term capital gain exemptions they can claim to be able to save more in terms of payable taxes.
Exemptions under Capital Gain
To protect the income generated through a sale of capital assets and lower the overall tax liability associated with the same; several exemptions under capital gains have been introduced.
Individuals can avail such exemptions, but to do so, they need to become aware of different exemptions and learn about the conditions that come along.
Here is a list of a few basic exemptions concerning long-term capital gains for the year 2019-2020 –
- Resident individuals who are below 60 years with an annual income of Rs. 2.5 Lakh.
- Resident individuals who are 60 years or above with an annual income of Rs. 3 Lakh.
- Resident individuals who are 80 years or above with an annual income of Rs. 5 Lakh.
- Non-resident individuals with an annual income of Rs. 2.5 Lakh.
- Hindu Undivided Families with an annual limit of Rs. 2.5 Lakh.
The example mentioned below offers a fair idea of how taxation erodes capital gains –
Mr Khurrana is a 63 years old resident retiree with a monthly pension of Rs. 5000. Mr Khurrana accrued a long-term capital gain of Rs. 3.7 Lakh on selling the asset that he held for over eight years. The basic exemption limit of Mr Khuranna is Rs. 3 Lakh, which when adjusted against his pension accrues to Rs. 2.4 Lakh.
The balance of Rs. 2.4 Lakh would be further adjusted against long-term capital gain. Post adjustment, the balance long-term capital gain at hand would be Rs. 1.3 Lakh, which will further attract a capital gain tax at the rate of 20%.
Post cess, the tax liability would be Rs. Rs. 26,000; after subtracting the rebate, health and education cess, Mr Khuranna would be paying Rs. 14040 as tax.
The table below shows the difference in the treatment of tax on long-term and short-term capital gains –
|Type of gain||Short-term Capital Gains||Long-term Capital Gains|
|Computation method||Calculated by adding capital gains to income.||It is calculated on the capital gains.|
|Rate of taxation||Total income is taxed as per an individual’s tax slab.||A rate of 20% is levied on deft-oriented funds and real estate assets after indexation. A rate of 10% is levied on stocks, equity-oriented Mutual Funds, etc.|
Case-Specific Exemptions Under capital Gains
The list of exemptions under capital gain would offer individuals a better idea about such deductions and their associated conditions.
- Section 54 E, 54EA, 54EB – Proceeds earned through investment in certain securities
Capital gains accrued through a transfer of long-term capital assets come under this capital gains exemption. Individuals can avail such long-term capital gain exemption, if they reinvest in specific securities like UTI units, government securities, targeted debentures, government bonds, etc.
However, the following conditions are required to be fulfilled–
- Individuals must reinvest in such new securities within six months from the day the capital assets were transferred.
- If individuals decide to sell the new securities before 36 months, the exemption that was previously offered would be deducted from its cost to find out the capital gains.
Additionally, a loan availed against new securities before 36 months; it would be treated as capital gains.
- Section 54EC – Proceeds earned through the sale of a long-term capital asset is exempted when reinvested in specified long-term assets.
Capital gains accrued through the sale of long-term assets would be entitled to long-term capital gain exemption. Individuals will avail such exemptions, given they reinvest their proceeds into specific assets of either Rural Electrification Corporation or NHAI. Such capital exemptions can be availed if –
- Individuals reinvest the proceeds into specified assets before the end of 6 months from the day the asset was sold.
- Capital gains should not be more than the investment amount. If only a portion of gains were reinvested, an exemption under capital gain would be applicable only on the amount that was reinvested.
- Specified assets must be held for at least 36 months.
Section 54EE – Proceeds earned through a transfer of investments.
Capital gains accrued through the transfer of long-term capital assets would apply to avail an exemption under capital gain, given –
- Individuals should reinvest their proceeds within six months of transfer.
- If individuals sell their new securities before 36 months, the exemption that was previously offered would be subtracted from its cost to calculate capital gains.
- A loan is taken out against new securities before 36 months; it would be treated as capital gains.
- Such investments should not exceed Rs. 50 Lakh in both the current and the following financial year.
- Section 54 – Proceeds earned through the sale of a residential housing property
Capital gains accrued through the sale of a housing property used for residential purpose comes under capital gains exemption, given –
- The Assesse in question is an individual or a Hindu Undivided Family (H.U.F).
- The residential property was held for over 36 months.
- A new property was purchased 12 months before or 24 months after the property in question was sold.
- A new property has been constructed within 36 months of the sale of the housing property in question.
- Proceeds generated are less than that of the cost of the new property.
If capital gains are less than the cost of the new property; the difference in sum would be deemed liable for taxation. A 20% rate of tax would be levied on the difference, and it would be treated as a long-term capital gain for the year the old residential property was sold.
If the new property is sold before 36 months from the date of construction or purchase the cost would be deducted from the previously accrued capital gain exemption amount. The difference between the reduced cost and the sale price of the new property would be treated as a short-term capital gain for the year the new housing property was sold.
- Section 54F – Proceeds earned through the sale of capital assets besides a residential housing property.
Capital gains accrued through the sale of an asset other than property used as a residence would be entitled to capital gains exemption, given the proceeds were reinvested in a residential property. Such exemptions can be claimed, given –
- Assesse/s in question is an individual or a Hindu Undivided Family (H.U.F).
- The new property was purchased 12 months before or 24 months after the capital asset in question was sold or,
- A new property was constructed or bought within 36 months from the date the capital asset in question was sold.
- The sale value of the asset in question (exclusive of the cost of transfer) does not exceed the cost of the new housing property.
- In the event of not investing the sale proceeds before the stipulated time, individuals need to open a Capital Gains Scheme account. They can access the amount at the time they intend to start construction or decide to purchase a house.
- Individuals should not own more than one residential property on the date of sale of the asset in question. Also, they should not purchase within 24 months or decide to construct another residential housing property within 36 months from the same date.
Capital gain tax helps to reduce one’s future tax rate eventually and also facilitates better returns through investments. All of which eliminates double taxation.
However, having a brief idea about the capital gains exemption in 2019 would prove beneficial for individuals who are trying to reduce the burden of their tax liability.