Introduction:

 The Indian economy is still expanding. For it to continue growing, constant money inflows are therefore necessary. Capital Gains Tax is an important tool since it gives investors and realtors a favorable tax treatment when they buy and sell assets, which helps drive India’s economic development. 

A tax called the capital gains tax is imposed on an investor’s profit when they sell an investment and make a profit. Payment of this amount is required for the fiscal year in which the investment is sold. Capital Gains Tax is applied to profits when a capital asset is disposed of, encompassing sales, trades, or gifts based on regional regulations. Gains from this disposal are termed capital gains, and losses are referred to as capital losses.

Types of Capital Assets 

Long-term Capital Asset : 

A person is qualified for long-term capital assets if they have possessed them for a duration of time greater than three years. This category contains assets held for longer than 36 months, such as jewelry, debt-oriented mutual funds, and other products; in this case, there is no 24-month decrease period. 

Short-term Capital Asset : 

An investment is regarded as a short-term capital asset if it is held for less than three years. But instead of being held for 36 months, real estate, which includes houses and land, only needs to be retained for 24 months. Therefore, the profit from the sale of a house or plot of land is regarded as a short-term capital gain if the seller decides to sell it after having owned it for at least 24 months. 

When determining whether to classify an asset as a long-term or short-term capital asset, it is important to consider the length of time the previous owner had ownership of the property, whether it was acquired by inheritance or gift. The date of award will determine the classification of any bonus stocks or privilege shares. 

Long-Term Capital Gains Tax  Calculation: 

Here’s a summary of the steps in calculating long-term capital gains:

• Initially, assess the full value of the asset.
• Afterward, subtract the following:
• Deduct costs associated with the transfer.
• Subtract costs related to acquisition.
• Deduct expenses for improvements.
• After the previous calculations, subtract any relevant exemptions outlined in the following sections to determine the long-term capital gains tax.
• Section 54B
• Section 54F
• Section 54EC
• Section 54

Short-Term Capital Gains Tax  Calculation:

To obtain a precise estimate of their short-term capital gains tax, individuals should follow the outlined steps below.

• Initiate the process by evaluating the full value of the property.
• Subsequently, deduct the points listed below:
• Subtract all expenses related to purchasing the property.
• Deduct capital expenditures made for property improvements.
• Subtract expenses linked to the sale or exchange of the property.
• Following the deductions, the remaining amount represents the short-term capital gain.

Reducing Capital Gains Tax: Deduction Techniques

Explore potential reductions in your capital gains tax liability by leveraging provisions outlined in specific sections of the Income Tax Act for owned assets.

Section 54 :

Profits from selling residential real estate are tax-exempt when reinvested in another residential property, subject to specific criteria being fulfilled.

• For properties in the construction phase, the transfer must take place within three years from the initial property transfer date.

• The newly acquired or constructed property is non-transferable within the initial three years after acquisition.

• Purchase real estate within two years after selling it, preferably no more than a year in advance.

• The newly acquired property must located in India.

Section 54F :

Section 54F benefits can be availed when selling assets like agricultural property or rare artworks within 10 kilometers of a city, allowing a deduction from liquidation profits for acquiring a home or residential property.

Section 54EC :

Profits from bonds issued by NHAI or REC are exempt from capital gains tax beyond Rs 50 lakh, offering a fixed 5.25% interest rate over 5 years. However, this tax-free benefit applies only if the investment results in gains from the sale of land and buildings.

Conclusion: 

Investors with taxable accounts must grasp the computation of capital gains tax, including the differentiation between long-term and short-term gains. Being informed about the diverse tax rates and structures for capital gains enhances investors’ ability to retain a larger share of their earnings.