Are you planning to buy a property this year or in the near future? There is a tax-saving strategy that allows you to reinvest your capital gains without incurring long-term capital gains (LTCG) tax, provided you use the proceeds to buy property or invest in capital gains bonds. To benefit from this, it’s essential to deposit the gains from the sale of assets like shares, bonds, mutual funds, or precious jewellery into a Capital Gains Account Scheme (CGAS). This approach can potentially reduce your tax liability by 10 to 20 percent.
In a Capital Gains Account Scheme (CGAS), it’s important to note that not all gains are eligible for tax benefits. Specifically, only the long-term capital gains (LTCG) obtained from the sale of the mentioned assets can be utilized for this purpose.
Additionally, there are holding period requirements to classify your profits as long-term gains. For equity mutual funds and listed shares, a minimum holding period of 12 months is necessary before selling to qualify for LTCG treatment. If you hold foreign or unlisted shares, a longer period of at least two years is required before you can book the gains under LTCG.
Gold and diamond jewellery, as well as gains from the sale of debt mutual funds, can only be categorised as long-term investments after a three-year holding period.
What Is LTCG Tax?
Capital gains tax is imposed on any profit that an individual makes from the sale of capital assets, which include residential plots, cars, stocks, bonds, and even collectables like artwork. The two main categories are Long-Term Capital Gains Tax and Short-Term Capital Gains Tax. The Income Tax Act of India imposes taxes on transactions involving capital assets, together with any relevant cess and other surcharges on the sale.
Both moveable and immovable assets are subject to these taxes, such as residential buildings, and undeveloped land, and assets such as government securities, zero-coupon bonds, equity-oriented mutual funds, shares (both listed and equity), debentures, and units.
How To Calculate LTCG Tax?
The profit from the sale of an asset held for more than 24 months is subject to taxation under the LTCG law. The asset type and the holding duration affect the LTCG tax rate.
For instance, in India, the LTCG tax on stocks, mutual funds, and shares is 10 per cent if the earnings for the fiscal year exceed Rs 1 lakh. With an indexation advantage for other assets including gold, debt mutual funds, and real estate, the LTCG tax rate is 20 per cent.
Follow the procedures below to calculate the LTCG tax:
- Do a sell value calculation on the asset.
- Determine the Purchase Price.
- Calculate Indexed Cost.
- Calculate Long-Term Capital Gain.
- Calculate LTCG Tax.
- Comply with Exemptions and Deductions (if applicable).
- Report and Pay Taxes.
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