Copyright indiatimes
When you sell capital assets such as property, gold, silver, stocks, mutual funds, etc., you incur capital gain on which you may need to pay income tax. Income Tax GuideIncome Tax Slabs FY 2025-26Income Tax Calculator 2025New Income Tax Bill 2025The computation of capital gains is undertaken by comparing the consideration received from the transfer of the asset against the cost of acquisition and any associated expenditure incurred solely in connection with such a transfer, says chartered accountant Karanjot Singh Khurana, Partner at Lakshmikumaran & Sridharan Attorneys.Capital gains are taxable. But do you know that you can pay zero tax even if your capital gains are Rs 10 crores from the sale of an eligible asset? In this write-up, Karanjot explains how the re-investment of capital gains can help you save income tax of many crores.Types of capital gains: Short-term capital gains (STCG), long-term capital gains (LTCG)The gains from the transfer of a capital asset are primarily divided into two categories, based on how long the asset is held by the taxpayer. Where the asset is held for a period of less than 24 months, the gains arising from the asset are taxed as short-term capital gains (STCG), and in other cases, the gain is taxed as long-term capital gains (LTCG). The benchmark of 24 months is relaxed to 12 months when the asset being subjected to tax is a security listed on a recognised stock exchange in India.Are all types of capital gains eligible for re-investment benefits?Income tax law has granted reinvestment benefits in respect of certain types of gains. These benefits have been granted as a policy upon the recognition of various socioeconomic factors such as encouragement to invest in residential properties, government bonds, etc. Generally, re-investment benefits are not available in respect of STCG and are restricted only to LTCG. In certain cases, the re-investment benefits are available only to certain categories of taxpayers and may not be available to corporates.Most common capital gains re-investment benefitsSection 54 allows individuals and HUFs to offset LTCG arising from residential property against the re-investment into another residential property.Section 54F allows individuals and HUFs to offset LTCG arising from any other asset (like shares, gold, etc.) by re-investing the consideration received from the original asset into a residential property.Section 54EC is available to all classes of taxpayers and allows the assessee to offset capital gains (up to Rs 50 lakh) from long-term capital asset against the purchase of certain government bonds.Exemptions available under Sections 54, 54F, and 54EC for reinvestment of capital gainsSectionAsset SoldAsset to Reinvest InKey conditionsSection 54Long-term capital asset being residential house by individual/HUFOne new Residential House in India.One time option to invest in two residential houses if capital gains up Rs 2 croreMust be purchased 1 year before or 2 years after the sale or constructed within 3 years.Amount of exemption capped at Rs 10 crore if reinvested in one house.Section 54FAny other long-term capital asset other than a residential house (e.g., shares, gold) by individual/HUFOne new Residential House in India.The entire net sale proceeds must be reinvested. If only part is invested, the exemption is proportionate.Amount of re-investment in new asset capped at Rs 10 crore.Section 54ECAny long-term asset being land or building or both by any assesseeSpecific Bonds (like bonds of NHAI or REC).Investment must be made within 6 months of the transfer date. The maximum investment limit is Rs 50 lakhHow capital gains from the sale of equity or gold can be re-invested to save taxSection 54F provides an option for an individual/HUF to re-invest net consideration from the transfer of long-term capital assets such as shares, gold, mutual funds, etc., into a residential property. If the entire net sale proceeds from the transfer of the original asset are re-invested, capital gains are not subjected to tax. If only a part is invested, the exemption is proportionate to the amount committed towards the residential house property.Can you re-invest capital gains in multiple properties and still claim the tax relaxation?The relaxation for both Section 54 and Section 54F is allowed only for investment in one residential house in India. However, Section 54 provides a one-time option to the individual/HUF to offset capital gains (not exceeding Rs 2 crore) from the transfer of the original residential property against the purchase of two residential properties. However, this option can be exercised only once in the lifetime of the taxpayer.How capital gain re-investment can smartly minimise future tax liabilitiesThe taxpayers may take the following factors into consideration to minimise their tax liabilities: Check holding period: The taxpayer should keep a tab on the exact holding period of the asset being transferred. While analysing the potential returns on the transfer, the taxpayer should factor in the tax cost and re-investment benefits available and decide the point of transfer accordingly.Residential properties already held by the taxpayer: Section 54F of the IT Act contains restrictions on the number of residential properties being held by the taxpayer for allowing re-investment in new residential properties. Taxpayers should keep a tab on the properties held by them for planning the re-investment benefits available to them.
