What is Capital Gains Tax and how to avoid it?

What is Capital Gains Tax and how to avoid it?

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Capital Gains Tax
What is Capital Gains Tax and how to avoid it?

Capital gains tax is a tax that the government levies on the sale of a capital asset. In this article, we break down the capital gains tax and also discuss ways to avoid it:

What is a capital gain?

Any kind of monetary profit or gain that a person obtains on the sale of a capital asset may be termed as a capital gain.

What is a capital asset?

Capital assets may be defined as assets that require some heavy investment, like land, machinery etc.

What is a short term capital asset?

A capital asset that is held for a period of 36 months or less is a short term capital asset.

What is a long term capital asset?

A capital asset that is held longer than a period of 36 months is a long term capital asset.

What is capital gains tax?

Capital gains tax is a tax that a person is supposed to pay on the sale of a capital asset in case the selling price of the asset is higher than the purchase price of the said capital asset.

Does the difference between short term and long term capital assets matter for the purpose calculating capital gains tax?

Yes. Short term capital assets and long term capital assets attract different tax rates so the distinction between the two is important for the purpose of calculating the capital gains tax.

What is the tax rate on long term capital asset?

On the sale of a long term capital asset- the tax rate applicable is 20% in addition to surcharge and education cess.

What is the tax rate on short term capital asset?

The tax rate on short term capital assets can be divided into two categories-

    1.tax rate when securities transaction is not applicable- no direct tax rate is applicable,     instead it is added to your income tax return and you are taxed as per the income slab     that is applicable to you.

  1. tax rate when securities transaction is applicable- the tax rate applicable is 15% in addition to surcharge and education cess.

I received a property in inheritance/succession, would I be liable to pay capital gains tax?

No. A capital tax possessed by way of inheritance or succession does not amount to sale of the asset but a mere transfer of the said asset and capital gains tax will not be levied on such a capital asset.

Is there any way I can avoid paying the capital gains tax legally?

Yes, there are many exemptions available under the Income Tax Act to avoid paying capital gains tax:

Section 54- You can be exempted from paying the tax if the profit from the sale of your property is invested in another property within a specific period of time.

Section 54F- Capital gains tax will be waived off if you sale a long term asset other than a house property and purchase a new residential property within the specified time.

Section 54EC- If you invest your amount in capital gains account scheme, your capital gains tax will be waived off. The maximum amount that can be invested is 50 lakhs rupees. However, the said amount can only be redeemed after a period of three years.

Further Section IV exempts capital gains tax on capital gains from the sale of agricultural land. This is so because it is not considered a capital asset for the purpose of taxation in India.

These are the most common provisions to be exempted from paying capital gains tax in India.

Most importantly, one must remember that it is only the net capital gain that is subject to taxation under the income tax act and not the complete amount.

Author: This blog is written by  Ms. Mrinaal Datt, a passionate blogger & intern at  Aapka Consultant.

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