Earning in a legitimate way is subjected to some form of tax. Whatever profit percentage we get from the sale of a Capital Resumption is called ‘Capital Gain’. As per the Act, 1961, this profit is classified as 3 of income. This capital can be your house, property, jewellery, car, shares, bonds etc. The profit gained by selling any such asset after buying it is called capital gain. The tax which is levied on the profit made on the sale of any capital is called Capital Gains Tax.
Capital gains tax is levied in different ways on different types of capital. It is divided into two categories long-term and short-term. This long-term period could be 3 years, 2 years and 1 year, depending on the type of asset. If you are reselling any asset before such time period, you will pay short term capital gains tax.
To calculate STCG tax, it is added to your total income like other incomes. Then out of the total income, the amount of your taxable income has to be paid according to the tax slab. In the case of equity shares of the company and units of equity mutual funds, 15% fixed tax is applicable on STCG arising on selling them within 1 year. On the other hand, 20 percent tax is payable on long-term capital gains. In some special cases, it can even be 10 percent. In cases where we use indexation to calculate capital gains, tax is applicable at 20 per cent. After knowing about these taxes let’s see how we can save these taxes.
Tax harvesting can be used to keep your profits within the discount range. Sell some of your investments only if the profits are within the ceiling then you won’t be liable to pay tax. Instead of booking the whole profit at once, you can do this in tranches. However, keep in mind that some investments like mutual funds have an exit load for which you need to pay a little fee every time you sell that. Therefore, you should assess its impact on your total income before redemption.
Read more: How Do We Save Corporate Tax In India?
- Set-off losses against profits
Investments are not always profitable, we also make losses on certain investments. Set-off these losses from the capital gains for the same financial year i.e. adjust that loss with profits. Any remaining losses can be carried forward for the next 8 years. In this way, your net profit will be lowered and you will ultimately pay a lower tax amount.
- Use Grandfathering provision
In 2018, the government had introduced a 10% long term capital gains tax on profits above Rs 1 lakh from the sale of shares. However, to protect the profits made on retrospective investments the Grandfathering Clause was introduced. If you have invested in equities before February 1, 2018, you can take advantage of the Grandfathering clause in the Income Tax Act. Accordingly, only profits earned from January 31, 2018, till the date of your redemption will be taxable.
- Use capital gains exemptions
The Income Tax Act allows the taxpayer to claim exemption on capital gains. Under section 54EC, taxpayers can invest in capital gains bonds to claim exemption from long-term capital gains arising from investment in immovable property such as land or building. It is important to note here that these bonds have a lock-in period of 5 years, and offer an interest rate of around 5%. Therefore, an investor should evaluate whether such low return long term investments are suiting you or not.