Tax Planning - Capital Gains

Tax Planning - Capital Gains 

Visit here for a Guide on Capital Gains. This article is merely a means to provide maximum tax benefits by utilizing all available exemptions & lower the taxes. 

LTCG on Equity Shares/ Units of an equity oriented fund

Investing in shares is quite risky, yet it is essential for the health of the economy. Realising the importance of investment in stock market and in order to promote it, long term capital gains on listed equity shares, on which STT is paid, is exempted from tax.

Similarly, units of Equity oriented funds, which invests majority of its funds  in listed equity shares of Indian Companies, are promoted. Long term capital gains on units of equity oriented funds are exempted from tax.

Example: Units of Unit Trust of India (UTI)

Shares and units of equity oriented funds held more than 12 months are considered as Long Term.

Sold a long term capital asset/ house property here is how you can plan your taxes

There are different types of exemptions which are available in case of sale of a long term capital asset/ house property.

Visit here for a summary on these exemptions.

I sold a residential flat held by me for more than 2 years, what are the available options for saving my taxes?

There are 4 investment options. They are as follows:

54 - Invest in a residential house:

The capital gains earned needs to invested in a residential house in India in the following manner:

1. Purchase one residential house within 1 year before or 2 years after the date of transfer OR
2. Construct one residential house within a period of 3 years after the date of transfer.

 Points to remember while taking benefit of this exemption:

• The investment needs to be made before the due date of filing Income-tax return either by purchasing/ constructing a new house or by investing in Capital Gains Account Scheme (CGAS).
• The new house should not be sold for a period of 3 years from the date of purchase/ construction of new house. 

Example: Ramesh sold his flat on 31/12/2017 for Rs. 10,00,000/- which he had purchased on 31/03/2013 for Rs. 2,00,000/-.

Calculation of Capital Gains

Sale Proceeds	Rs. 10,00,000/-
Less: Indexed Cost of Acquisition (2,00,000 * 272/200)	Rs. 2,72,000/-
Capital Gains	Rs. 7,28,000/-

 

In this case, he is required to do any of the following for getting this transaction fully exempted:

• Purchase a flat between 01/01/2017 to 31/12/2019,
• Get a house constructed between 01/01/2018 to 31/12/2020.

 

If cost of new house is greater than or equal to Rs. 7,28,000/-, than amount taxable is as follows:

Capital Gains	Rs. 7,28,000/-
Less: Exempt U/s 54	Rs. 7,28,000/-
Amount Taxable	Nil

If cost of new house is less than Rs. 7,28,000/-, say Rs. 5,00,000/-, than amount taxable is as follows:

Capital Gains	Rs. 7,28,000/-
Less: Exempt U/s 54	Rs. 5,00,000/-
Amount Taxable	Rs. 2,28,000/-

 

The amount of gains cannot be used by the Ramesh, unless he has already purchased a new flat before 1 years from the date of sale of flat. If Ramesh plans to purchase/ construct a residential flat after the due date of filing his Income-tax return i.e. 31/07/2018, than he is required to invest before the due date in CGAS.

This new house cannot be sold by Ramesh before 3 years from the date of purchase. If Ramesh sells this house in the said period than he shall have to pay tax on the amount claimed as exemption since the condition of holding period of 3 years is violated.

 

54EC - Invest in bonds of NHAI/ RECL or any other notified bond:

Bonds are investments on which fixed interest is received. It is similar to FDs (only less secure). NHAI and RECL bonds are however, more secure having a good credit rating. Interest @ 5.25% p.a. is received on these bonds. These bonds mature after a period of 3 years.

The capital gains earned needs to invested in above explained bonds within 6 months from the date of transfer. 

Points to remember while taking benefit of this exemption:

• These bonds should not be transferred. These bonds should not be mortgaged for availing loan.
• One lot is of Rs. 10,000/- i.e. you need to invest minimum amount of Rs. 10,000/-. However, the maximum amount that can be invested is Rs. 50,00,000/- only.
• This exemption is available only if the asset is held for more than 3 years.
• This exemption is available for assets on which depreciation is claimed and are held for more than 3 years.

Please Note: If you have capital gains greater than Rs. 50,00,000/- & have made investment of Rs. 50,00,000/- in bonds, than you can still purchase/ construct a house property out of the balance funds & also claim exemption U/s 54 for such amount provided the conditions specified U/s 54 are fulfilled.

 

Example 1:

Let us continue above example, the only change being that Ramesh has not purchased/ constructed any new house, i.e. he is not availing exemption U/s 54.

Capital Gains is Rs. 7,28,000/-

Ramesh is required to invest this in NHAI/ RECL bonds between 01/01/2018 to 30/06/2018.

If Ramesh buys Bonds for Rs. 7,30,000/- (73 lots of Rs. 10,000/- each), than amount taxable is as follows:

Capital Gains	Rs. 7,28,000/-
Less: Exempt U/s 54EC	Rs. 7,28,000/-
Amount Taxable	Nil

If Ramesh buys bonds for Rs. 5,00,000/- only (50 lots of Rs. 10,000/- each), than amount taxable is as follows:

Capital Gains	Rs. 7,28,000/-
Less: Exempt U/s 54EC	Rs. 5,00,000/-
Amount Taxable	Rs. 2,28,000/-

These bonds cannot be sold by Ramesh before 3 years from the date of purchase. If Ramesh sells these bonds in the said period than he shall have to pay tax on the amount claimed as exemption since the condition of holding period of 3 years is violated.

Example 2:

Mukesh sells his flat located in Walkeshwar on 31/12/2017 for Rs. 4,00,00,000/-. He had purchased this flat on 01/01/2013 for Rs. 2,00,00,000/-.

Calculation of Capital Gains

Sale Proceeds	Rs. 4,00,00,000/-
Less: Indexed Cost of Acquisition	Rs. 2,72,00,000/-
2,00,00,000*272/200
Capital Gains	Rs. 1,28,00,000/-

 

Mukesh purchased 500 bonds @Rs. 10,000/- each of RECL for Rs. 50,00,000/- on 31/01/2018.

Capital Gains	Rs. 1,28,00,000/-
Less: Exempt U/s 54EC	Rs. 50,00,000/-
Balance Amount	Rs. 78,00,000/-

Mukesh purchased a residential flat for Rs. 80,00,000/- on 28/02/2018.

Balance Amount	Rs. 78,00,000/-
Less: Exempt U/s 54	Rs. 78,00,000/-
Amount Taxable	Nil

Mukesh is not liable to tax since he planned his capital gains by investing in bonds & a residential flat. 

54EE - Invest in Units of Specified Funds:

This option is not available in the current date, since no such funds are notified by the Government in this regard. We’ll update you as soon as the Government notifies with the funds to be invested in this regard. 

54GB - Investment in Equity Shares of Eligible Startup engaged in eligible business:

This is an entirely different type of investment option available. If you have an innovative startup business plan in mind than this is the one for you. Get your innovative startup registered with & certified by Inter-Ministerial Board of Certification. The amount of capital gains earned should be invested in this startup, which should further utilize these amount in purchasing Plant & Machinery for the use of this startup in its business.

Visit here for more information on Startups. Visit here for Important tips on Startups.

Investment in startup should be made before the due date of filing of Income-tax return, whereas, the startup should invest in Plant & Machinery within 1 year from the date of investment in the share capital of the startup.

Points to remember while taking benefit of this exemption:

• This exemption is also available if plot of land (used for residential purpose) is sold. 

The above discussion is summarized in the following chart:

 

I have sold an Industrial Undertaking, what are the available options for saving my taxes?

Industrial Undertaking means an industry or establishment set up for manufacture or production of any goods. 

The following are the available options for saving taxes:

54D - Investment in All Industrial Undertaking:

The gains needs to be invested in purchasing land/ building or construction of building for shifting the existing Industrial Undertaking acquired compulsorily to a different location within a period of 3 years from the date of compulsory acquisition.

Compulsory acquisition means that the land is purchased by Government in order for Infrastructural Development.

However, since in the case of compulsory acquisition, usually there is a delay in receipt of compensation. Hence, this time limit is to be calculated from the date of receipt of compensation. The time limit will be 3 years from the date of receipt of compensation. 

Points to remember while taking benefit of this exemption:

• There must be compulsory acquisition of land & building forming part of Industrial Undertaking in order to avail benefit of this exemption.
• Such Industrial Undertaking whether or not owned for for more than 2 years, should be used by you for more than 2 years as a part of Industrial Undertaking.
• This land/ building acquired in shifting the Industrial Undertaking should not be sold for a period of 3 years from the date of its purchase.
• The investment needs to be made before the due date of filing Income-tax return either by purchasing/ constructing a land/ building or by investing in Capital Gains Account Scheme (CGAS). 

Example: Sagar set up his Industrial Undertaking at Vapi. He purchased a land at Vapi for Rs. 2,00,000/- on 31/12/2013. While laying Bullet Train from Ahmedabad to Mumbai, Sagar’s Industrial Undertaking was coming in between. So the Government purchased the land beneath Sagar’s Industrial Undertaking on 31/03/2016. The Government will pay compensation to Sagar so that Sagar can set up his Industrial Undertaking elsewhere. Government paid compensation of Rs. 5,00,000/- on 31/12/2017.

This transaction will be charged to tax in the year in which compensation is received.

Calculation of Capital Gains:

Sale Proceeds	Rs. 5,00,000/-
Less: Indexed Cost of Acquisition (2,00,000*272/200)	Rs. 2,72,000/-
Capital Gains	Rs. 2,28,000/-

Sagar is required to invest these gains in purchasing a land/ building in the process of shifting his industrial undertaking between 01/01/2018 to 31/12/2020.

After receiving Compensation from the Government, Sagar purchased a land at Bhopal on 31/03/2018 for Rs. 3,00,000/-. 

Capital Gains	Rs. 2,28,000/-
Less: Exemption U/s 54D	Rs. 2,28,000/-
Amount Taxable	Nil

If cost of new land at Bhopal is less than Rs. 2,28,000/- lets say, Rs. 2,00,000/- only, than amount taxable is as follows:

Capital Gains	Rs. 2,28,000/-
Less: Exemption U/s 54D	Rs. 2,00,000/-
Amount Taxable	Rs. 28,000/-

 

54G - Investment in Specified Asset i.e. Machine, plant, land & building (Shift from Urban areas)

In this section, Industries are motivated to shift to rural areas. This will result in lower pollution in Urban areas & employment, infrastructure for rural areas. If a person chooses to shift his industrial undertaking from an Urban area to a rural area, than the gains arising from the sale of the undertaking is required to be invested in the following manner:

Within 1 year before or 3 years after the date of transfer:

1. Purchase a new plant & machinery for the purposes of business of the industrial undertaking.
2. Purchase land/ building or Construct a building for the purposes of business of the industrial undertaking.
3. Expenses incurred for shifting of the industrial undertaking. 

Points to remember while taking benefit of this exemption:

• The new assets acquired in shifting the Industrial Undertaking should not be sold for a period of 3 years from the date of its purchase.
• The investment needs to be made before the due date of filing Income-tax return either by purchasing/ constructing or by investing in Capital Gains Account Scheme (CGAS). 

 

54GA - Investment in Specified Asset i.e. Machine, plant, land & building (Shift to SEZ):

The title resembles the title used above. This is because this section is actually a replica of the above section. The only difference is as follows:

In this section, Industries are motivated to shift to SEZ. This will result in lower pollution in Urban areas & boost in exports leading to increase in foreign exchange reserves. If a person chooses to shift his industrial undertaking from an Urban area to a rural area, than the gains arising from the sale of the undertaking is required to be invested. 

Is agricultural land a capital asset?

Agricultural land is a capital asset. However, rural agricultural land is not a capital asset. 

I have sold a rural agricultural land is it taxable?

Since rural agricultural land is not a capital asset, gains arising on sale of rural agricultural land is exempt. 

I have sold my Urban agricultural land. What is the investment option for saving my taxes?

Gains from Compulsory acquisition of Semi-urban land is exempt from tax. However, CBDT has clarified that compulsory acquisition of Urban land is also exempt.

For availing this exemption, select Yes in Exempt U/s 10(37) as shown below:

 

I have sold my Urban agricultural land. What are the investment options for saving my taxes?

The following are the available options for saving taxes:

54B - Investment in Agriculture Land:

The gains needs to invested in purchasing another agricultural land within 2 years from the date of transfer. 

Points to remember while taking benefit of this exemption:

• The Land sold must have been used for agricultural purposes by an Individual or his parent or by his HUF.
• The new agricultural land should not be sold for a period of 3 years from the date of purchase/ construction of new house.

 

54EC - Invest in bonds of NHAI/ RECL or any other notified bond:

Gains on Long Term Urban Agricultural land is exempt upto Rs. 50,00,000/- if investment in NHAI/RECL bonds are made.

Visit here for information on investment in NHAI/RECL Bonds. 

I have sold other assets, what are the available options for saving my taxes?

The following are the available options for saving taxes:

54EC - Invest in bonds of NHAI/ RECL or any other notified bond:

Gains on Long Term Capital Asset including depreciable assets are exempt upto Rs. 50,00,000/- if investment in NHAI/RECL bonds are made.

Visit here for information on investment in NHAI/RECL Bonds. 

54EE - Invest in Units of Specified Funds:
Visit here for information on investment in Units of Specified Funds. 

54F - Investment in a Residential House:

The gains needs to be invested in a residential house  in India in the following manner:

1. Purchase one residential house within 1 year before or 2 years after the date of transfer OR
2. Construct one residential house within a period of 3 years after the date of transfer.

 Points to remember while taking benefit of this exemption:

• Gains arising from sale of Land held for more than 2 years can also be invested.
• The investment needs to be made before the due date of filing Income-tax return either by purchasing/ constructing a new house or by investing in Capital Gains Account Scheme (CGAS).
• The new house should not be sold for a period of 3 years from the date of purchase/ construction of new house.

What are the consequences if the asset purchased is sold before the lock-in-period?

In the above sections, we referred to the point such as the investment should not be sold for a period of 3 years from the date of investment. This period is known as lock-in-period.

If the assets are sold before lock-in-period, than upon sale of such capital asset, the amount of exemption availed shall be reduced from the cost of the asset while calculating capital gains. In short, the benefit so availed earlier will now be reversed since the lock-in-period condition is not fulfilled.

Example: In the above example, Ramesh purchased a new house for Rs. 5,00,000/- on 01/04/2018 & Availed exemption of Rs. 5,00,000/- U/s 54. He sells this house on 31/03/2019 for Rs. 10,00,000/-. In this case calculation of capital gains will be done as follows:

Sale Proceeds	Rs. 10,00,000/-
Less: Cost of Acquisition (5,00,000 - 5,00,000*)	Nil
Short Term Capital Gains	Rs. 10,00,000/-

*Represents exemption benefit availed earlier. 

As seen above, if the lock-in period is violated, than the exemption benefit availed earlier is nullified.

What is Capital Gains Account Scheme?

Capital Gains Account is like a bank account. In order to avail exemption benefit in Capital Gains, the gains must be invested. If the time limit for such investment is more than the due date of filing of Income-tax Return, then the gains needs to be invested in this account temporarily.

Visit here for more information. 

Example: Sunil sells his residential flat on 31/12/2017 for Rs. 5,00,000/-. He had purchased the same on 31/03/2013 for Rs. 2,00,000/-.

Calculation of Capital Gains

Sale Proceeds	Rs. 5,00,000/-
Less: Indexed Cost of Acquisition (2,00,000*272/200)	Rs. 2,72,000/-
Capital Gains	Rs. 2,28,000/-

Sunil wants to claim exemption U/s 54. In order to do so, he is required to purchase/ construct a residential house.

Sunil has decided to purchase a residential flat. In this case, he needs to purchase a residential house between 01/01/2018 to 31/12/2019.

The due date of filing of Income-tax return is 31/07/2018.

If Sunil decides to purchase a residential house after 31/07/2018, than he is required to deposit Rs. 2,28,000/- (amount of capital gains) in CGAS before 31/07/2018 & claim exemption U/s 54 while filing his Income-tax return.

Now he can purchase a residential house between 01/08/2018 to 31/12/2019 using the amount in CGAS.

Rates of Taxes

The rates of Tax in Capital Gains do not always follows slab rate. The following chart explains the rates of taxes:

  

Whether it is long term capital gains or short term capital gains?

Long term capital gains or short term capital gains is solely dependent on whether the asset is long term capital asset or short term capital asset which is further dependent on the Period of Holding. This is illustrated as follows:

 Click here to subscribe to our newsletter