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Explained: How to minimize capital gain tax on equity and MFs

“There are nearly 80 million investors out of which around 50 million unique household investors, which is 17 percent of India’s all households put together and they are directly investing in the Indian stock markets”

Business Today

India is worldwide known either through cricket, Bollywood, or its stock market.

Equity is one of the most liquid assets. If you sell your equity stocks today, in most cases you get funds credited to your bank account either on the same day or the next working day.

So, Equity Investments is on top of the mind for every Indian. Hence the Capital Gain Tax on Equity becomes extremely relevant to understand.

Often people get confused between capital gain should be taxed at @10% or @15%

How to calculate Capital Gain?

Profit calculated by reducing the cost of acquisition from the sale price from the transfer of a Capital Asset is Capital Gain.

Which year is Capital Gain taxed?

Usually, Capital Gain is taxed in the year in which the Capital Asset is sold except in some cases where conditions of exemptions claimed are not met.

Long-Term Capital Gain Tax on Equity shares or Equity Mutual Fund

If you have sold the listed Equity shares/stocks or Equity Mutual Funds after 12 months of acquiring it, then any Capital Gain arising on its transfer is Long Term Capital Gains, and Tax payable on it at 10% is Long Term Capital Gain Tax.

Short-Term Capital Gain Tax on Equity shares or Equity Mutual Fund

If you have sold the listed Equity shares/stocks or Equity Mutual Funds within 12 months of acquiring it, then any Capital Gain arising on its transfer is Short Term Capital Gains, and Tax payable on it at 15% is Short Term Capital Gain Tax.

Is indexation benefit available for Equity Stocks?

No indexation benefit in Equity is claimed.

What is STT paid Equity Shares?

Securities Transaction Tax is deducted when traded/invested in shares that are listed on the stock exchange. Short Term Capital Gain is taxed at 15%.

Now, after understanding all about Long Term Capital Gains on Equity Shares and Long Term Capital Gains on Equity Mutual Funds and Short Term Capital Gains on Equity Shares and Short Term Capital Gains on Equity Mutual Fund, what about minimizing tax liability with exemptions and set offs available?

Treatment of Long-Term Loss on Shares and Equity Funds:

The best is LTCG which is taxed only after crossing Rs.1Lac exemption.

Exemption u/s54F of Income Tax Act,1961 in India

All right, let’s break down the tax jargon with a real-life example!

Imagine you’ve sold some equity shares, and you’re eyeing a sweet profit – that’s fantastic! Now, to keep more of that profit in your pocket, we dive into the world of exemptions under section 54F of the Income Tax Act, 1961.

So, you’ve got this Long-term Capital Gain (LTCG) from your shares, and you’re thinking of investing it wisely. Here’s the deal: if you put that LTCG into a new residential house (let’s call it RH2) either by buying it a year before or within two years after selling your shares or by constructing it within three years, you get a proportionate exemption.

How much? Well, it’s a simple formula: Exempt LTCG = (Original Capital Gain / Net Sale Consideration) * Investment Amount.

But wait, there are some rules to play by. First off, don’t sell RH2 within three years; otherwise, the taxman will come knocking for the exempted gain. Also, your investment in this new house can’t exceed Rs. 10 Crores.

Now, here’s the catch – when you claim this exemption under section 54F, you should only own one residential house (let’s call it RH1). If you’ve got your eyes on a third one (RH3) within two years of RH2, or if you construct RH3 within three years, the tax exemption you enjoyed earlier will be on the taxman’s radar again.

What if RH2 isn’t ready before the income tax return’s due date? No worries! Park the money in a capital gain deposit scheme of a nationalized bank. If you don’t use it in time, a part of it might be subject to tax.

Let’s sum it up with a quick example:

Net Sale Consideration: Rs. 15 Crores
LTCG computed: Rs. 7.5 Crores
Cost of New Residential House: Rs. 10 Crores
Amount in Column 3 (or 10 Crores less): Rs. 10 Crores
Exempt LTCG: (7.5 / 15) * 10 = Rs. 5 Crores
Here you have it – tax savings made simple with the help of the following table,

Net Sale ConsiderationLTCG computedCost of New Residential HouseAmount in Column 3 or 10cr(less)Exempt LTCG
15crores7.5crores12crores10crores7.5/15*10=5crores
20crores12crores15crores10crores12/20*10=6crores
16crores12crores4crores4crores12/16*4=3crores
10crores6crores10crores10crores6/10*10=6crores
12crores6crores12crores10crores6/12*10=5crores
Exemption u/s54F

Set off of capital losses

You can’t set off Capital Loss under any other head of Income. Hence any Capital Loss will be set off either against Capital Gain in the same year or carried forward for set off.

Set off in the same year

Long Term Capital Loss can be set off against long-term capital gain.

Short Term Capital Loss can be set off against Short-term and Long-term capital gains

Carried forward for set off

If you don’t have sufficient Capital gains to set off your capital losses in the previous year for which you are filing your income tax returns, then you can carry it forward for 8 assessment years, after which losses will lapse and can’t be set off anymore.

Mandatory filing of a Return

To claim the minimum exemption of Rs.1Lac and to set off and carry forward of loss, you will have to mandatorily file your income tax returns before the due date. Any delay in filing your income tax return will lapse your right to claim set off of losses and you will end up paying tax on your entire capital gains earned.

Conclusion

Long Term Capital Gains are subject to tax only after claiming Rs.1Lac exemption, claiming exemption u/s 54F, and setting off of losses.

If you have any query regarding capital gain on equity shares or Equity Mutual Funds, send your query to [email protected]

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