What Are Capital Gains Taxes?

Capital Asset is an item that you own for personal/investment purpose. It can be building, land, bonds, stocks, gold etc. When you sell these capital assets, and if you make profit (gain), then you have to pay tax on the profit. As per Income Tax laws, this gain comes under category of ‘income’. This tax is known as capital gains tax.

There are two types of capital gains tax.

Short-term capital gains tax, if you owned that asset for less than n months, before selling it.
Long-term capital gains tax, if you owned that asset for more than n months before selling it.

“n months” vary based on type of capital assets. For example, in case of stocks, “12 months” is the cut off. In case of real estate, “24 months” is the cut off.

Who need to pay Capital Gains Tax? The seller or the buyer?

Sometimes one may not be aware of the responsibility of paying taxes as a seller or buyer. This is purely due to lack of awareness in this area. These are never taught in schools. Also, even big corporations interpret the Income Tax laws differently and end up in litigations. So let’s see this with an example of how the capital gains tax is paid to the government.

• Suppose I own a shopping mall building worth Rs.1 crore and
• I sell it to you for Rs.2 crores, and thus I made the profit (Gains) of Rs. 1 crore and say, I have to pay Rs.10 lakh to the government as capital gains tax. Now the convention is that I (the seller) don’t actually pay Rs.10 lakh by myself
• Instead of that, you just give me only Rs.1 crore 90 lakhs. And keep aside 10 lakh rupees for tax.
• Then, you (the buyer) will pay the 10-lakh rupee to the Government on my behalf. (Thus, you purchased the mall for Rs.2 crore).

What is Capital Gain on Real Estate?

If you make profit by selling a plot or land or building, then you make capital gains. Capital Gains tax is levied on such gains. Based on the duration, they attract different tax rates.

The rates levied are 20% for Long Term Capital Gains (LTCG) with indexation and Short Term Capital Gains (STCG) depending on an individual’s tax bracket.

How to Save on Tax on Capital Gains from Real Estate?

There are several spots in the system which allow you to make savings on capital gain tax easily. Here are some of the ways it can be done:

1. When you sell a real estate property post 2 years of acquisition, the tax calculation includes indexation. The purchasing or acquisition price of the real estate asset is actually recalculated based on this indexation, which considers factors such as inflation for its calculation with the use of the Cost Inflation Index. The advantage here is that the tax on a long-term capital gain may be only taxed only at a lower rate after indexation. This helps to reduce the amount of tax payable considerably against the short-term capital gain tax.
2. There are also tax saving instruments such as capital gain bonds 54EC bonds (To know more https://bse2nse.com/taxation/10752-h...-sec-54ec.html). The gain that one makes from the sale of the real estate can be hence invested. They generally have a lock-in period of around 3 years. Also, the maximum limit for an individual to invest in these bonds is up to Rs 50 lakhs.
3. Government, in order to encourage re-investment of the capital gains made, has provided relief from capital gains tax if the gains are invested within stipulated time in certain specified assets. There may be scenarios where the tax payer is unable to re-invest before filing income tax returns. In such cases, capital gains can be parked in an exclusive account referred to as the Capital Gain Account Scheme (CGAS) until they are reinvested. This also helps save tax.
4. Provisions of section 54F of the Income Tax Act provides exemption towards long term capital gain (other than a residential house) when the amount is invested in purchasing or constructing a new residential house property.

Due to various provisions available, it is always better to seek professional help to know options to save capital gains tax in right way.