Capital gain exemptions – what are they applicable on and how are they applied?

by Guest Blogger on November 8, 2012

in Tax

This article is written by Aashish Ramchand, a Chartered Accountant by profession. Aashish is the co-founder of makemyreturns.com. He also has completed his CFA Level I (American) and is very passionate about writing articles on taxes and tax advisory. He can be reached at connect@makemyreturns.com

Capital Gains on assets are a result of a higher sale consideration than the cost of acquisition of the assets.

Short term capital gains are taxable at 15% in case of shares and equity oriented mutual funds and at 30% (maximum marginal rate) in case of other taxable assets.

On the other hand, long term capital gains on shares and equity oriented mutual funds are exempt from tax and are taxable at 20% in case of other assets such as flat, building, gold, art etc.

The Income tax act has come out with certain exemptions from taxable long term capital gains.

Section 54:- Under this section, an Individual or an HUF (Hindu Undivided Family) can get an exemption on the capital gains earned on residential house property. As per this section, the individual is required to purchase another residential house property within 1 year prior to the sale or within 2 years from the sale of the erstwhile residential house. In case of construction, the new residential house property must be constructed within 3 years from the sale of the original house property.

Section 54F:- As per this section, an individual or an HUF can get capital gains exemptions from assets other than residential house property (exemption for residential house property is covered under section 54). To claim the exemption, an individual or HUF needs to invest the sale proceeds of the old capital asset in another residential property. The timelines remain the same as covered in section 54 i.e. 1 year prior to or within 2 years from, the sale of the capital asset (other than the residential house property). In case of construction of the residential house property, the time limit is 3 years.

Section 54EC:- In this section, any person (not only individual and HUF’s) can get exemption from long term capital gains even if the capital gains are not invested in a residential house property. To gain exemption from capital gains, an individual or an HUF can invest the capital gains amount in NHAI (i.e. National Highway authority of India) or REC (Rural Electrification Corporation) bonds of the Government. The investment limit in these bonds in capped at Rs. 50 lakhs. The time limit to invest in these bonds is 6 months from the date of sale of the original capital asset.

Section 54B:- As per this section, an individual or HUF can get exemption from long term capital gains earned on sale of agriculture land. This pertains to sale of only urban agricultural land as sale of rural agriculture lands are completely exempt from tax. To claim the exemption, the assessee needs to invest the capital gains earned in another urban agricultural land. The time limit for investment is 2 years from the date of sale of the original urban agricultural land.

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{ 14 comments… read them below or add one }

S Rangan November 9, 2012 at 7:17 pm

Excellent reminders! Thanks a lot.

It’d also be very helpful to include the time durations that an investment in each of the classes need to held, beyond which it will be considered a long term holding, from a tax perspective.

Equities — 1y
Equity mutual funds — 1y
Balanced funds (at least 65% assets in equities) — 1y
Debt / income funds — ???
Gold – Physical — 3y?
Gold – ETF – 1y?
Gold- e-gold – ?
Real estate – ?

Please keep up the great interface at makemyreturns.com

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Manshu November 11, 2012 at 4:17 am

Here is a link that shows the capital gains implication along with time period for various type of assets.
http://www.onemint.com/2011/04/11/capital-gains-and-dividend-taxes-on-shares-and-mutual-funds/

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bemoneyaware November 14, 2012 at 12:02 pm

A good primer on Capital gain exemption. If one is interested on knowing about capital gains on selling the house one can refer to our article On selling a house . Quoting from our article
Computation of capital gains depends upon following things:

The nature of capital asset that is transferred ex: Mutual Fund, Stocks, Property, Gold
Time for which asset was owned based on the type of asset. Ex: If Shares, Equity Mutual Funds are for which Securities Transaction Tax(STT) has been paid, are transferred after being held for an year it class as Long Term Capital Gain. If Period of holding is less than 1 year it classifies as Short Term Capital Gain.
Cost of acquisition, Cost of improvements, Expenditure incurred exclusively in connection with the transfer.
Exemptions allowed under the income Tax Act.

Capital Gains for Real Estate or Property

For Real Estate the computation of capital gains are as follows:

If a property is sold within three years of buying it, it is treated as a short-term capital gain. This is added to the total income and taxed according to the slab rate.
If a property is sold after three years from the date of purchase, the profit is treated as a long-term capital gain and is taxed at 20% after indexation .

While you can avail of various tax exemptions in case of long-term capital gains, no such benefit is provided for short-term ones.

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Santu sarkar November 20, 2012 at 8:15 am

how to save short term capital gain from share in assessment year 2013-14

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Manshu November 20, 2012 at 8:19 am

That you can’t save except for offsetting against capital losses.

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TCB December 17, 2012 at 7:53 am

I have sold a flat on 26/06/2012 after owning it for more than 5 years. I wanted to invest the gain in Capital Gain Bonds of REC or NHAI to save Long Term Capital Gain Tax. But the prospectus of these bonds says that the bonds would be alloted only on the last day of each month. If I pay the money before 26/12/2012 (completion of 6 months from the date of sale of my flat), but the bonds are alloted on 31/12/2012, will I be able to save LTCG Tax ?

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Sanket Joshi December 23, 2012 at 6:11 pm

Hi,

Can you please advice on my query.
we purchased a flat on my elder brother and mothers name. we sold that flat after 4 years and purchased a new flat on MY name.
Is my brother / mother liable for long term capital gain tax. If yes then how to avoid that.

Thanks.

Regards,

Sanket

Reply

BMA December 24, 2012 at 11:46 am

s you mother and brother sold house after 4 years you have what is called as long term capital gains(or loss).
2. You need to calculate Capital gain/loss using indexation.For that you need to find indexed value of the property when bought and sold.

3. Long term capital gains/loss = Indexed Value at Sale – Indexed value at purchase
4. If Indexed Value at Sale is more than Indexed value at purchase you have long term capital gains. You can claim tax exemption under Section 54 on the long-term capital gain on the sale of a house.

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SANJEEV BHATIA April 8, 2013 at 7:26 pm

I HAVE SOLD A RESIDENTIAL HOUSE AFTER FIVE YEARS AND THE WHOLE AMOUNT INVESTED IN THE PURCHASE OF AGRICULTURE LAND.
CAN THE LONG TERM CAPITAL GAIN IS EXEMPTED AGAINST THE PURCHASE OF AGRICULTURE LAND

Reply

Manshu April 9, 2013 at 5:30 am

No, there is no provision to do that, it’s only possible when you sell urban agricultural land and buy another agricultural land.

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Sanjeev Nigam April 15, 2013 at 3:28 pm

I have sold one house for Rs. 7,00,000/- during the F.Y. 2012-13. After deducting indexed cost Rs. 4,00,000/- The Capital Gain comes to Rs. 300000/-. I have no other income during the F.Y. 2012-13. I have purchased bonds for Rs. 50000/- from NHAI u/s 54 EC. What will be my tax liability. Is it necessary to invest all the capital gain i.e. 300000/- to reduce tax liability to Nil. Pl. suggest.

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shobhit April 18, 2013 at 11:14 pm

kindly tell the tax implication on selling residential land & purchasing multiple agriculture lands

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Manshu April 19, 2013 at 5:49 am

You will incur capital gains on sale of residential land, and as far as I know buying agricultural lands will not help save this tax. When you sell a residential house and buy another residential house, you save taxes but not on the type of transaction you refer to.

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harbhajan singh June 15, 2013 at 10:37 am

Hi
I had some urban agricultural land [ ancestral agri land handed down to me by my maternal grand father NANA JI in 70"s ].I wanted to gift it to my wife.But she wanted to purchase it as a buyer.Registery of the same was done and the change of ownership [ intakal ] duly registered by the concerned patwari.Amount mentioned is 20 lac for 11 kanal and 7 marlas.Registry was done in january 2013.
I would like to know my capital gain tax if any and how to invest it further in tax saving scheme

Reply

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