The sale of capital assets may lead to capital gain, which may attract tax under the Income Tax Act. To save tax on these capital gains, a few capital gains exemptions/deductions are available. Thus, one needs to plan benefits, considering all the relief available under the law.
Budget 2024 Latest Updates
Budget 2024 has passed the following amendments effective from FY 2024-25 -
- For classifying assets into long-term and short-term, there will only be two holding periods: 12 months and 24 months. The 36-month holding period has been removed.
- The holding period for all listed securities is 12 months. All listed securities with a holding period exceeding 12 months are considered Long-Term. The holding period for all other assets is 24 months.
- Unlisted bonds and debentures are brought in line with the taxation on debt mutual funds and market-linked debentures. They will attract tax on capital gains at applicable slab rates. (i.e., they will be treated as short-term irrespective of the period of holding.)
- The taxation of Short-Term Capital Gain for listed equity shares, a unit of an equity-oriented fund, and a unit of a business trust has been increased to 20% from 15%. Other financial and non-financial assets which are held for short term shall continue to attract the tax at slab rates.
- For the benefit of the lower and middle-income classes, the limit on the exemption of Long-Term Capital Gains on the transfer of equity shares or equity-oriented units or units of Business Trust has increased from Rs.1 Lakh to Rs.1.25 lakh per year. However, the rate at which it is taxed has increased from 10% to 12.5%. The exemption limit to Rs.1.25 lakhs has been increased for the whole of the year, whereas the tax rate changed on 23rd July 2024.
- The tax on other assets is reduced from 20% to 12.5% with effect from 23rd July 2024. On the other hand, the indexation benefit that previously was available on the sale of long-term assets has now been eliminated. However, the Government has given taxpayers an option to compute taxes on real estate transactions purchased before 23rd July 2024 either at 12.5% without indexation or at 20% with indexation.
The calculation of capital gains is done in the following manner:
The idea behind allowing deductions is that the number of capital gains, as calculated above, is invested in a new capital asset within a prescribed time period. The deduction is available in respect of such investment made into a new capital asset subject to certain conditions.
What are Short-Term Capital Gains?
Short term capital gain determination is dependent upon the period of holding of that assets. And Determination of Short term or long term is important because of the tax rates. You can refer to the below table which shows the nature of assets and tax rates for the same.
Particular | Upto 22nd July 2024 | From 23rd July 2024 | ||
Period of Holdings | Tax Rates | Period of Holdings | Tax Rates | |
1. Listed Equity shares or Equity MF | Less than 1 year | 15% | Less than 1 year | 20% |
2. Land or building, Unlisted Equity shares | Less than 2 years | Slab rates | Less than 2 years | Slab rates |
3. Other capital assets | Less than 3 years | Slab rates | Less than 2 years | Slab rates |
4. Specified Mutual Funds (Debt mutual funds)* | NA | Slab rates | NA | Slab rates |
What are Long-Term Capital Gains?
Long term capital gain determination is dependent upon the period of holding of that assets. And the determination of short-term or long-term is important because of the tax rates. You can refer to the below table which shows the nature of assets and tax rates for the same.
Particular | Upto 22nd July 2024 | From 23rd July 2024 | ||
Period of Holdings | Tax Rates | Period of Holdings | Tax Rates | |
1. Listed Equity shares or Equity MF | More than 1 year | 10% (On exceeding Rs 100,000 gains) | More than 1 year | 12.5% (On exceeding Rs 1,25,000 gains) |
2. Land or building, Unlisted Equity shares | More than 2 years | 20% tax rate with Indexation benefits | More than 2 years | 12.5% tax rate without Indexation benefits** |
3. Other capital assets | more than 3 years | 20% tax rate with Indexation benefits | more than 2 years | 12.5% tax rate without Indexation benefits* |
*Any specified mutual funds with less than 35% exposure in Indian listed equity will fall into this category. These specified mutual funds will be taxable as short-term capital gain irrespective of the holding period.
** The tax on other assets is reduced from 20% to 12.5% with effect from 23rd July 2024. On the other hand, the indexation benefit that previously was available on the sale of long-term assets has now been eliminated. However, the Government has given taxpayers an option to compute taxes on real estate transactions purchased before 23rd July 2024 either at 12.5% without indexation or at 20% with indexation.
In this regard, we will look at the section-wise deductions available under the Act and the various conditions that need to be fulfilled to claim or be eligible for the same.
Exemptions Available for Capital Gains
Questions like who can get such deductions, what amount of deductions, what assets need to be sold, what assets need to be purchased, and in how much time are answered below:
Section | Asset sold | Applicability | |
54 | Profit on sale of property used for residence | Assessee | Individual / HUF |
Type of asset transferred | Residential House Property | ||
Type of transfer | LTCG | ||
New asset purchased | One Residential House From AY 2021-22, If CG is less than or equal to 2 crores - Two residential houses can be purchased. | ||
Time Limit for investment in new asset | Purchase - Within 1 year before or 2 years after transfer Construction - Within 3 years from transfer | ||
Exemption Amount | Long-Term Capital Gain OR Cost of a new asset, whichever lesser (Maximum exemption is limited to Rs. 10 Crores) | ||
CGAS* available | Yes - deposit by return filing due date | ||
Additional Conditions | 1. If a new asset is sold within 3 years, the amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon 2. If the amount in CGAS is not utilised within the prescribed time limit, such unutilized amount will be taxable as capital gains | ||
54B | Capital gain on transfer of land used for agricultural purposes | Assessee | Individual / HUF |
Type of asset transferred | Land used for agricultural purposes by the individual / his parent / HUF, as the case may be for 2 years prior to transfer | ||
Type of transfer | LTCG / STCG | ||
New asset purchased | Agricultural land | ||
Time Limit for investment in new asset | Within 2 years from the date of transfer | ||
Exemption Amount | Long-Term Capital Gain OR Cost of the new asset (land), whichever lesser | ||
CGAS* available | Yes - deposit by return filing due date | ||
Additional Conditions | 1. If a new asset is sold within 3 years, the amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon 2. If the amount in CGAS is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains | ||
54D | Compulsory acquisition of land and buildings used in an industrial undertaking | Assessee | Any assessee |
Type of asset transferred | Land or building forming part of an industrial undertaking used for the same in the past 2 years prior to the transfer | ||
Type of transfer | LTCG | ||
New asset purchased | Land or building for shifting or re-establishing the industrial undertaking | ||
Time Limit for investment in new asset | Within 3 years from the date of transfer | ||
Exemption Amount | Long Term Capital Gain OR Cost of the new asset (land/building) whichever lesser | ||
CGAS* available | Yes - deposit by return filing due date | ||
Additional Conditions | 1. If a new asset is sold within 3 years, the amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon 2. If the amount in CGAS is not utilized within the prescribed time limit, such unutilized amount will be taxable as capital gains | ||
54EC | Investment in certain bonds | Assessee | Any assessee |
Type of asset transferred | Land or building or both | ||
Type of transfer | LTCG | ||
New asset purchased | NHAI bonds or RECL bonds, redeemable after 5 years, which are issued on or after 1.4.2018 | ||
Time Limit for investment in new asset | Within 6 months from the date of the transfer | ||
Exemption Amount | Cost of new asset x Capital Gain / Net consideration (maximum up to capital gain) | ||
CGAS* available | No | ||
Additional Conditions | 1. If a new asset is sold within 5 years (3 years before F.Y. 2018-19), the amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon 2. If a loan is taken on the security of the new specified asset within 5 years, the same will be treated as capital gains 3. Investment in specified bonds should not exceed Rs.50 lakh during the current and succeeding fiscal year | ||
54EE | Investment in units of a specified fund | Assessee | Any assessee |
Type of asset transferred | Long-term capital asset | ||
Type of transfer | LTCG | ||
New asset purchased | Units notified by the Central Government | ||
Time Limit for investment in new asset | Within 6 months from the transfer | ||
Exemption Amount | Cost of new asset x Capital Gain / Net consideration (maximum up to capital gain) | ||
CGAS* available | No | ||
Additional Conditions | 1. If a new asset is sold within 3 years, the amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon 2. If a loan is taken on the security of the new specified asset within 3 years, the same will be treated as capital gains 3. Investment in specified units should not exceed Rs.50 lakh during the current and succeeding fiscal year | ||
54F | Investment in residential house | Assessee | Individual / HUF |
Type of asset transferred | Any long-term capital asset other than a residential house | ||
Type of transfer | LTCG | ||
New asset purchased | Residential house property | ||
Time Limit for investment in new asset | Purchase - Within 1 year before or 2 years after transfer Construction - Within 3 years from transfer | ||
Exemption Amount | Cost of new asset x Capital Gain / Net consideration (maximum up to capital gain) (Maximum exemption is limited to Rs. 10 Crores) | ||
CGAS* available | Yes - deposit by return filing due date | ||
Additional Conditions | 1. If a new asset is sold within 3 years, the amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon 2. If the amount in CGAS is not utilised within the prescribed time limit, such unutilised amount will be taxable as capital gains 3. The Individual/HUF cannot own more than 2 house properties (i.e., existing House property and new house property). If another house property is purchased, the amount of exemption allowed earlier will be chargeable as capital gains | ||
54G, & 54GA | 54G: Shifting of industrial undertaking from an urban area to a rural area. | Assessee | Any assessee |
54GA: Shifting of industrial undertaking from an urban area to SEZ | Type of asset transferred | Capital assets are plant, machinery, land, buildings or rights in land or buildings that are used in an industrial undertaking situated in an urban area | |
Type of transfer | STCG / LTCG | ||
New asset purchased | Shifting of industrial undertaking to an area other than an urban area to rural or SEZ area involving: 1. Purchase of new plant/machinery 2. Acquisition of land or construction of a building 3. Shifted old asset and transferred undertaking to a new area 4. Incurred specified expenses
| ||
Time Limit for investment in new asset | 1 year before and 3 years after the date of transfer | ||
Exemption Amount | Long-Term Capital Gain OR Cost of new asset, whichever lesser | ||
CGAS* available | Yes - deposit by return filing due date | ||
Additional Conditions | 1. If a new asset is sold within 3 years, the amount earlier exempted under this section will be reduced from its COA to calculate capital gains thereon 2. If the amount in CGAS is not utilised within the prescribed time limit, such unutilised amount will be taxable as capital gains | ||
*CGAS stands for Capital Gains Accounts Scheme i.e., a type of account opened with a bank or specified institution that essentially acts as a means to park the capital gains until it can be used for its prescribed purpose.
Note:
HUF – Hindu Undivided Family
LTCG – Long-term capital gain
COA – Cost of Acquisition
NHAI – National Highway Authority of India
REC – Rural Electrification Corporation
STCG – Short-term capital gain
SEZ – Special Economic Zone
Related Articles
Capital Gains Tax India – Definition ,Types, Exemptions & Tax saving