Long term Capital gains tax exemptions

Long term Capital gains tax exemptions

A capital asset includes any property or security owned by an individual, regardless of its connection to his/her business. Securities which adhere to rules under the SEBI Act of 1992 classify as capital assets in India.

 The profits an individual makes from sale or transfer of a capital asset is termed Capital Gains and they attract a capital gains tax.

 Long Term Capital Assets vs Short Term Capital Assets:

Short term capital assets – Any asset owned by an individual (taxpayer) for less than 3 years since the date of transfer/ownership is referred to as a short term capital asset. This duration should be less than 12 months in case of shares.

 

Long term capital assets – Any asset owned by an individual (taxpayer) for more than 3 years since the date of transfer to his/her name is treated as a long term capital asset. This duration is taken as 12 months or more in case of shares.

 Short Term and Long Term Capital Gain:

Capital gain earned by an individual in lieu of transfer of a short term capital asset is termed as short term capital gain.

 

Capital gain earned by an individual in lieu of transfer of a long term capital asset is termed as long term capital gain.


Time Period of Short term and Long term Capital Gains:

 Short term capital gains – This refers to gains arising out of sale/transfer of assets within three years of ownership (in case of gold, property, etc) and 1 year of ownership in case of shares.

 Long term capital gains – This refers to gains arising out of sale/transfer of assets after owning them for three years (in case of gold, property, etc) and more than 1 year in case of shares or mutual funds.

 

Exemption of Long-Term Capital Gains on Shares:

 Under the provisions of Section 10(38) of the Income Tax Act, any income arising from the transfer of a long-term capital asset, being equity shares as also units of equity oriented mutual funds would be exempted from the purview of long-term capital gains. This exemption is available only in respect of transactions relating to the sale of equity shares or units of equity oriented mutual funds entered into on or after 1.10.2004, and which are subject to securities transaction tax. Thus, if a person sells shares of a listed company directly to a friend without routing the transaction through a stock broker and stock exchange, then the benefit of tax-exemption of long-term capital gain would not be available on the sale of such equity shares.

 Exemption of Long-Term Capital Gain of a Residential House:

 One of the important exemptions regarding long-term capital gains relates to a residential house property as per Section 54 of the IT Act. Thus, it is provided that if an assessee, being an individual or a Hindu Undivided Family transfers, his or its residential house, or part thereof, and makes a long-term capital gain and the entire long-term capital gain is invested in the purchase of a residential house property within one year in anticipation of the transfer or within two years of the transfer of his first residential house, or if the new residential house property is constructed within three years of the transfer of the first house and the entire long-term capital gain only is invested in the acquisition of such residential house property, then the entire long-term capital gain in respect of the transfer of the first residential house property would be fully exempt from tax. Where only part of the taxable long-term capital gain is so utilized, then proportionate exemption would be available. There are certain procedural conditions regarding the utilisation of the amount to be kept in a capital gains scheme account in a bank if the money is not fully utilised within the time limit.

 Exemption of Long-Term Capital Gains Regarding Any Other Asset:

 Another very important exemption which can be enjoyed by an individual or a Hindu Undivided Family is in respect of long-term capital gains in respect of any capital asset, other than a residential house property, under Section 54F of the IT Act. Thus, it is provided that where the assessee had a long-term capital gain on the transfer of any other capital asset, such as shares, a plot of land, commercial house property, jewellery, etc., then he can secure complete income tax exemption on the long-term capital gain in respect of the sale of the capital asset if the entire net sale proceeds thereof are invested in the acquisition of a residential house either by purchase or by construction within the same period of one, two or three years as in the above case. This exemption is available only when the assessee does not own more than one residential house as on date of the transfer of the capital asset concerned. Lockin period for the new residential house is three years during which it should not be sold or transferred, otherwise the entire long-term capital gain would become taxable.

 Exemption on Long-Term Capital Gain on Investment in Capital Gain Bonds:

 Under the provisions of Section 54EC, a complete exemption is available in respect of the long-term capital gain from any asset provided the net capital gain is invested in six months after the date of transfer of the capital asset in any of the two types of bonds issued by the Rural Electrification Corporation Ltd. or the National Highway Authority of India tip to a maximum sum of ` 50 lakh.

 Conclusion:

If there is a loss under the head “Capital Gains”, then the loss is to be computed as loss in respect of short-term capital asset and loss in respect of long-term capital asset, respectively. It has to be remembered clearly that short-term capital loss can be set off or adjusted against long-term capital gain.