How to 0 or Minimize Tax on LTCG

 How to  0  or Minimize Tax on LTCG

 

Earlier Tax on LTCG on sale of Equity (Share) or equity related MF (a MF which invests 65% or more in Equity)  was 10% and  Tax on LTCG on sale of Property like Flat, House , Gold , Land , Plant & Machinery etc was 20%

 

However in Recent Budget on the name of simplification of Tax govt introduced uniform Tax of 12.5% and  scrapping the Indexation benefit  (We will learn what is Indexation later)  , There was lots of uproar  on scrapping of Indexation so Govt  continued Indexation Benefit but with some condition.

 

Before we know how to save Tax on LTCG we should know what is LTCG at all

Long Term Capital Gain or LTCG is gain that you receive on sale of your shares , or other fixed assets  for example let us imagine that you have purchased a Flat or land or house)  in 2000 at a price of 20 Lakh and now want to sale it for 1 crore so you have a profit of Rs. 80 lakh that is LTCG

 

Suppose you have purchased reliance Industries Shares in Jan 2023 @ Rs 1400 each and Now you want to sale it for Rs. 2000 each so you have a profit of Rs 600 per share that is LTCG

 

Suppose you have Invested  Rs. 1 Lakh in  SBI MF  Small Cap Fund  or any equity Fund  of any Fund House ) in the year 2000 and now its value is Rs. 2 Lakh so on sale your profit will be 1 Lakh , That is LTCG

 

Now let us discuss  on Taxability of LTCG

 

Till last year LTCG on sale of Equity  or Equity Mutual Fund was exempt from tax limit to the extent of Rs. 1 Lakh and beyond this it was Taxable @10%  for example if your profit was 1 Lakh on above transactions , no Tax was Payable  and if your profit was say Rs. 120000 then Tax on  Rs. 20000 (120000-100000) was payable @10% = Rs. 2000

 

Similarly LTCG os sale of Fixed Asset like Flat, house, Land was Taxed @20% with Indexation Benefit.

 

What is Indexation : Indexation is Value of Money  today invested in earlier years. In above example Flat purchased in year 2000 @ Rs. 20 Lakh , Value of 20 lakh of the year 2000 is same as Rs. 6960000 in FY 23-24 , so LTCG will be Rs. 10000000-6960000=Rs. 3040000 and Tax payable will be 20% of it Rs. 608000 +cess

 

How Indexation Value was Calculated

 

As per Chart of Indexation in FY 23-24 the value of 100 (base) is 348

So Indexation Value =348/100*(cost price )Rs 20 Lakh =3.48*20 Lakh=Rs. 6960000

 

Note :  if you have incurred substantial amount in renovation of your flat you can also add Indexation Value    of Renovation cost for the year in which renovation was done . also you can add brokerage and othe expenses incurred in sale of flat all these will reduce your LTCG

 

From FY 24-25 govt has increased Tax free LTCG  limit to Rs. 1.20 Lakh and   Tax on LTCG @12.50% without Indexation or 20% with Indexation on property

 

How to Minimize or not to pay Tax on LTCG

The Income Tax Act provides opportunities to minimize capital gains tax liabilities through Sections 54, 54F, and 54EC. Under these provisions, taxpayers can mitigate their tax burden by reinvesting their capital gains in specific avenues.

 

 

You can do it in 4  simple options :

 

1. For LTCG on sale of Equity and Equity related MF try to sale the Equity / MF to the extent that LTCG is below 1.20 Lakh

 

2. If you want to sale higher amount of Equity /MF check if you have losses in any Equity /MF and sale that also in such a way that gain will offset  Losses by careful planning

 

3. Do follow Tax Harvesting Concept , in this concept you should sale Equity / MF to the extent that LTCG is not more than 1.20 Lakh EVEN IF you do not need money , reinvest that money in purchase of another Equity or MF , do this every year , in this way you Investment will also increase and even if Market fall you have already booked profit

 

Understand this Concept with an example

 

You have invested  Rs. 5 lakh in Small cap fund ( or any equity fund) in 3 years value is Rs. 10 Lakh , if you sale it after 3 years your LTCG is 5 Lakh and you have to pay Tax on 3.80 Lakh @12.50%

Now suppose after 1 year of your Investment Value is Rs 6.20 Lakh , you sale to the extent that your LTCG is below 1.20 Lakh say you sale 1.20 Lakh and reinvest it so your investment value will be 6.20 Lakh and gain 0, after another 1 year values goes up to 7.50 Lakh , you again sale to the extent of Rs. 1.20 and reinvest so your Investment will be 7.40 Lakh and gain 0 , in similar way you keep harvesting your Gain without paying 0 tax on LTCG

 

4. If you reinvest the entire LTCG amount within six months into specified bonds like Capital Gains Bonds (CGBs), National Highways Infrastructure Development Corporation Ltd. (NHIDCL) bonds, etc., the LTCG tax liability will be Zero. You will earn Interest and Maturity Value

 

Greatest Secret of saving Tax on LTCG is invest in your Wife name if she has no income that way you can save LTCG upto 3 Lakh Tax free and Additional 1.20 Lakh in your Name.

 

Minimize or 0 Tax on sale of Property:

 

1.      Purchase a new property of same sale price or Higher Value

a.     Before 1 Year of Sale purchase a Property

b.     within 2 Years of Sale purchase a Property

c.      within  3 years to construct a residential House

 

2. If You are unable to do above within specified time limit park your Money in CGAS ( Capital Gain Account Scheme) , it is available at most Bank  , if you keep money in this account your tax will be 0

3.     If you reinvest the entire LTCG amount within six months into specified bonds like Capital Gains Bonds (CGBs), National Highways Infrastructure Development Corporation Ltd. (NHIDCL) bonds, etc., the LTCG tax liability will be Zero. You will earn Interest and Maturity Value

Happy Reading

@Ajit