How to Save Tax on Long-term Capital Gains?

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What is Capital Gains Tax?

Capital Gain Tax in India is the tax imposed by the government on the profit earned from the sale of certain assets, such as stocks, bonds, real estate, or other investments. This tax applies to both individuals and businesses.

When you sell an asset for more than you paid for it, you have a capital gain. Conversely, if you sell an asset for less than you paid for it, you have a capital loss. Capital gains tax is typically only applied to capital gains, not to the total amount received from the sale.

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What is Long-Term Capital Gain?

Any earning you make is considered a Long-Term Capital Gain when you sell an investment or other asset you've held for a certain period. The required holding period to categorize an asset as a long-term capital asset varies based on its nature.

Listed equity shares and equity-oriented mutual funds qualify if held for more than 12 months, while unlisted equity shares and immovable properties such as land, buildings, or houses require a holding period of over 24 months.

The tax rates applicable to LTCG differ based on the nature of the asset.

A 12.5% tax is imposed on gains exceeding Rs.1.25 lakh during the FY. for listed equity shares and equity-oriented mutual funds. On the other hand, LTCG from other assets is also taxable @ 12.5% This categorization and associated tax structure aim to provide a slight approach to taxing long-term capital gains across diverse asset classes.

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Key Changes introduced in ITR forms for (AY) 2025–26

• Inclusion of Long-Term Capital Gains (LTCG) in ITR-1 and ITR-4
  Previously, taxpayers with any LTCG were required to file more complex forms like ITR-2 or ITR-3. Now, individuals with LTCG up to ₹1.25 lakh from listed equity shares or equity mutual funds under Section 112A can file using the simpler ITR-1 (Sahaj) or ITR-4 (Sugam) forms, provided there are no carried forward losses.
• Segregation of Capital Gains Based on Transaction Date
  The updated ITR forms now require taxpayers to report capital gains separately for transactions executed before and after July 23, 2024. This change aligns with the revised capital gains tax rules introduced in the Union Budget 2024, which, among other things, reduced the LTCG tax on real estate to 12.5% without indexation from the previous 20% with indexation.
• Reporting of Buyback Proceeds as Deemed Dividends
  From October 1, 2024, proceeds received from the buyback of shares by domestic listed companies are to be treated as deemed dividends. The updated ITR forms require these proceeds to be reported under 'Income from Other Sources.' Additionally, the capital gains schedule should reflect zero sale proceeds, allowing the cost of acquisition to be claimed as a capital loss, which can be carried forward for up to eight assessment years.
• Enhanced Capital Gains Reporting in ITR-7
  For trusts, NGOs, and other institutions filing ITR-7, there is now a requirement to disclose capital gains separately for transactions before and after July 23, 2024. This change ensures accurate tax calculations in light of the revised capital gains tax rules.
• Increased Threshold for Asset and Liability Reporting
  In the ITR-2 form, the threshold for mandatory reporting of assets and liabilities has been raised to ₹1 crore. This adjustment aims to reduce the compliance burden for taxpayers with assets below this threshold.

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Restrictions under Section 54

To qualify for the benefits under this section, the following conditions must be met:

• Nature of Asset – The asset must be classified as a long-term capital asset.
• Type of Asset Sold – The asset being sold should be a residential house, and its income should be chargeable under Income from House Property.
• Timeline for Purchase or Construction:
  • The seller must purchase a residential house either one year before or two years after the date of sale/transfer.
  • If the seller chooses to construct a new house, the construction must be completed within three years from the date of sale/transfer.
  • In cases of compulsory acquisition, the timeline for purchase or construction will be determined from the date of receipt of compensation (whether original or additional).
• Location of the New Property – The new residential house must be in India. A property purchased or constructed abroad will not qualify for the exemption.
• Capital Gains Exemption Limit (Effective from April 1, 2023) – The capital gains tax exemption under Sections 54 and 54F is now capped at ₹10 crore. Previously, there was no such limit.

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Restrictions/Conditions under Section 54F

To qualify for the Income Tax Exemption under Section 54F, taxpayers must meet the following conditions:

1. Eligible Taxpayers

• The exemption is available only to individuals and Hindu Undivided Families (HUFs).
• Other entities such as companies, partnerships, or LLPs are not eligible for this exemption.

2. Source of Capital Gains

• The capital gains must arise from the sale of any long term any capital asset other than a residential house.

3. Investment Timeline
To claim the exemption, the net sale proceeds from the original asset must be reinvested in a new residential property within the specified timeframe:

• Purchase: The new property must be purchased either one year before or two years after the sale of the original asset.
• Construction: If constructing a new house, it must be completed within three years from the date of sale of the original asset.

4. Ownership Limitation

• On the date of the sale of the original asset, the taxpayer must not own more than one residential house, apart from the one being acquired for exemption.

5. Restriction on Additional Purchases

• After selling the original asset, the taxpayer must not:
  • Purchase another residential house within two years, or
  • Commence construction of another house within three years from the date of sale.

6. Consequences of Non-Compliance

• If any of the above conditions are violated, the exemption will be revoked.
• The capital gains will become taxable in the year in which the taxpayer purchases or constructs another residential property, violating the criteria.

7. Investment of Net Sale Amount

• To claim a full exemption, the taxpayer must invest the entire net sale proceeds in the new residential property.
• Partial investment will lead to proportionate disallowance of the exemption.

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How to Save Tax on LTCG from Property Sale: Sections 54, 54F & CGAS

Selling a property can generate significant long-term capital gains (LTCG), subjecting you to tax liability. However, the Indian Income Tax Act offers provisions to reduce or defer this tax burden, primarily through Sections 54 and 54EC. If you are wondering how to avoid capital gains tax, here are some important exemptions that you can claim.

Exemption Under Section 54:

Section 54 of the Income Tax Act in India pertains to Long-Term Capital Gains (LTCG) arising from the sale of a residential property, offering provisions for LTCG tax exemption if the proceeds are reinvested in another residential property. The new residential property must be:

• Purchased: either 1 year before or 2 years after the sale of asset Or
• Constructed: within 3 years of sale of old asset

Additionally, the new property must be located within the country. The maximum exemption allowable under Section 54 is equivalent to the Long-Term Capital Gains incurred, providing a regulatory framework to encourage the timely and domestic reinvestment of proceeds from the sale of residential properties.

For example, Ms. Sharma sells her apartment for ₹80 lakhs, generating an LTCG of ₹30 lakhs. She buys a new flat for ₹40 lakhs within two years. LTCG exempt = ₹30 lakhs (maximum).

Exemption Under Section 54F:

Section 54F of the Income Tax Act in India mirrors the provisions of Section 54, providing exemptions for Long-Term Capital Gains (LTCG). However, unlike Section 54, Section 54F extends its applicability beyond gains specifically derived from property sales, encompassing any LTCG. To avail of this exemption, the taxpayer must reinvest the proceeds in a residential property, adhering to the same conditions as outlined in Section 54. The new residential property must be:

• Purchased: either 1 year before or 2 years after the sale of asset Or
• Constructed: within 3 years of sale of old asset

Essentially, Section 54F offers a broader scope for tax relief, encouraging the reinvestment of LTCG from various sources into residential properties.

For example, Mr. Patel sells shares for ₹50 lakhs, generating a LTCG of ₹15 lakhs. He buys a new house for ₹20 lakhs within one year. LTCG exempt = ₹6 lakhs. Remaining ₹9 lakhs are taxable at 12.5% rate.

Note: If reinvestment takes longer than the specified period, the exemption is reversed and taxed as income in the year of completion.

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How to Save LTCG Tax Under Section 54EC

Section 54EC of the Income Tax Act, 1961, offers a valuable option to exempt long-term capital gains (LTCG) earned from the sale of immovable capital asset (including land or building or both) To claim this exemption, you need to invest the entire capital gain in specific notified government bonds within six months of the asset sale.

Conditions and exemptions:

• Eligible assets: Immovable property including land and building or both.
• Investment period: The entire sale proceeds must be invested in specified bonds within six months of the asset sale.
• Lock-in period: The bonds must be held until maturity, typically five years. Early redemption attracts a penalty and negates the tax exemption.
• Tax exemption limit: Maximum exemption under this section is Rs. 50 lakhs.
  Example: Upon selling for a piece of land Rs. 10 lakhs, Mr. Sharma realizes a long-term capital gain (LTCG) of Rs. 5 lakhs. To benefit from a tax exemption, he promptly reinvests the entire capital gain of Rs. 5 lakhs into NHAI bonds within six months of the asset sale.
  As a result, Mr. Sharma's entire LTCG of Rs. 5 lakhs becomes eligible for full exemption from taxation. This strategic investment not only preserves his capital but also leads to significant tax savings, amounting to Rs. 50,000, assuming a 10% tax rate on the capital gain. The timely reinvestment in NHAI bonds thus serves as a tax-efficient strategy, aligning with the provisions outlined for capital gains exemption under the prevailing tax regulations.
• Eligible Bonds: Currently, the following bonds are eligible for Section 54EC exemption:
  • Rural Electrification Corporation Limited or REC bonds
  • National Highway Authority of India or NHAI bonds
  • Power Finance Corporation Limited or PFC bonds
  • Indian Railway Finance Corporation Limited or IRFC bonds

Note: Always refer to the latest list of eligible bonds published by the government before investing.

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Saving Tax on LTCG from Equity Investments with Section 112A

Section 112A of the Income Tax Act 1961, governs how long-term capital gains (LTCG) from the sale of listed equity shares and units of equity-oriented mutual funds are taxed. While exemptions offer significant tax savings, understanding the conditions and calculations is crucial.

Exemptions under Section 112A:

Rs. 1.25 lakhs of LTCG in a financial year is exempt from tax. This incentivizes long-term equity investments. And, if the long-term capital gains from the sale of equity shares during the year exceed Rs. 1.25 lakhs, it will be taxed at 12.5%.

Upon the sale of equity shares, an investor accrues a Long-Term Capital Gain (LTCG) amounting to Rs. 1.5 lakh. However, as per section 112A, gains upto Rs.1.25 lakhs are exempt from tax. The remaining amount, i.e., Rs. 25,000, will be taxed at 12.5%. Therefore, the capital gains tax of Rs. 3125 will have to be paid.

If you are still wondering how to save long term capital gain LTCG tax, you should know that apart from those mentioned above, there are numerous hacks to save taxes. However, finding the best ways to save taxes in your financial situation can be complicated, especially for laymen. Therefore, it is advisable to get help from tax experts who can help you find the best tax-saving methods for your individual needs.

Want to save more tax? Get in touch with our experts and keep more of your long-term capital gains. Book an Online CA Now!

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