A capital gain is achieved when you sell an asset at a price higher than you bought it for. The government charges a tax on capital gains. There are various methods by which you can reduce capital gains tax in India
Strategies to reduce Capital Gains Tax in India
Here are some of the strategies you can implement to reduce capital gains tax in India:
Using this method, you can gain long-term profits on your assets to the extent of Rs.1 lakh and reinvest the same at a value that is called the new cost of acquisition. The taxpayer can repeat this process every year to make most of the Rs.1 lakh exemption for LTCG (long-term capital gains) and save up to Rs.10000 of tax. You get this exemption from long-term gains on equity-based mutual funds and stocks. However, investors should be careful to reinvest immediately after the gain is achieved. There are also a few things to keep in mind during tax harvesting. It may not be possible to reinvest at the same amount as mutual funds. You may have to bear some additional costs like security transaction tax, stamp duty, brokerage, etc.
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Harvesting Tax losses- Setting to gains with losses
It is another method of tax reduction where you can set off both short-term and long-term capital losses, the former against both short-term and long-term gains, while the latter can be set against long-term gains only. You can offset one asset’s losses against another if they are under the same capital gains’ head by decreasing tax on gains from the other assets. If one of your assets has yielded capital losses, check if any other investment position has suffered losses too. You can offset against capital gains if you are willing to part with the positions. It allows you to offset up to Rs.3000 of ordinary income per year.
Both short-term and long-term losses can be forwarded over the next eight years. You must fill the income tax timely within the due date otherwise, the tax losses may lapse and can’t be carried forward.
Long Term View
Capital gains are called long-term when the assets have been possessed for over a year. Once they have qualified as long-term gains, you can receive lower tax rates. Long-term capital gains tax in India rates vary with your filing status and your capital gains over the year. High-income taxpayers might have to pay the Net Investment Income Tax(NIIT) on the long-term gains, which puts a 3.8% tax on all your investment incomes, including the capital gains.
If your capital gains are for the long term, then you can get some cut in your income tax as well.
Using exemptions from Capital Gains
There are some benefits offered by the tax laws in our country to help you decrease capital gains tax in India. You can achieve long-term gains from equity investments using the terms of capital gain bonds present in 54EC bonds. You can also invest in property to save long-term capital gains on equities. 54F of the IT Act also offers exemptions on assets for LTCG when you want to invest in new residential house property. The property must be bought one year before the transfer or two years of the date of transfer. You can’t avoid the expense from income tax, but there are provisions under the income tax laws that allow you to reduce the tax liability.
Use Inflation to Reduce Tax Liability
Costs of assets can be adjusted by the indexation factors in the inflation, a very good method to reduce capital gains tax in India as our country has seen inflation in recent years. Inflation is a situation that worries everyone. However, it may come as a blessing to some investors as it brings down the tax rates on their long-term capital gains to almost zero. Investors say that the inflation index causes capital gains from debt-oriented mutual funds to be almost tax-free with high inflation. The acquisition price is raised up, and the capital gains fall to barely one percent. Yes, there will be a continuous increase in the capital gains component and tax liability over the years under the SWIP, but it will remain competitive compared to other fixed-income options.
Invest Gains in Specified Venues to Save Tax
Section 54 says that you will not be taxed if you reinvest your capital gains to buy another house. You get a time period of three years for both transitions. Section 54F offers provisions to set off capital gains from other investments as well. A taxpayer can also avoid capital gains tax in India by investing in special bonds issued by the NHAI or REC under Section 54EC.
These are some of the strategies which will help you reduce capital gains tax. Click https://www.turtlemint.com/tax/capital-gain-tax-in-india/ to know more about reducing capital gains tax in India. This issue affects both the wealthy and middle class, and they can all profit from these above-mentioned strategies. However, you should be careful of the complexities involved in some of the strategies and tackle them properly. It might be handy if you consult an advisor too.