Capital gains tax is a type of tax levied on the profits earned from the sale of assets like such as stocks, bonds, real estate, and other forms of investment.
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Managing capital gains tax effectively can help you to save on taxes and optimise your returns significantly.
In recent years, the government has made some big changes, like increasing tax exemptions and lowering tax rates. Now’s the time to explore smart ways to reduce your tax burden.
Key Takeaways
- Tax-Loss Harvesting
Offset gains by selling loss-making investments to reduce taxable capital gains. - Carry Forward Losses
Carry forward losses for up to 8 years to offset future gains. - Capital Gains Account Scheme (CGAS)
Park your gains in a special account to defer tax while you plan to reinvest in property. - Invest in Section 54EC Bonds
Invest in government bonds to claim tax exemptions on real estate gains up to ₹50 lakh. - Reinvest in Residential Property (Section 54)
Reinvest gains from property sales into a new property to get full tax exemption.
This blog covers how to save capital gain tax with simple strategies!
Tax-Loss Harvesting:
While searching for how to save capital gain tax, one of the most practical strategies for minimising capital gains tax is tax-loss harvesting.
This means selling your investments that have made loss for offsetting the capital gains from other investments. Simply put, by selling investments at a loss, you can lower the amount of your capital gains that get taxed.
Example: Imagine you made a gain of ₹2 lakh on one investment but made a loss of ₹1 lakh on another. By selling the loss-making investment, you can offset the gain and reduce your taxable income from capital gains to ₹1 lakh. This simple strategy can help you lower your tax liability without having to give up on your overall investment strategy.
Carry Forward Losses:
If your capital losses is more than your capital gains in a particular year, the Income Tax Act allows you to carry forward the unused losses for up to eight years.
These losses can then be used to offset capital gains in future years, providing significant tax relief.
Example: Let’s say you made a loss of ₹3 lakh this year but have only ₹1 lakh in gains. The remaining ₹2 lakh can be carried forward to future years, allowing you to offset future gains and reduce your taxable amount for years to come. This strategy can be highly beneficial if you expect more gains in subsequent years but face a loss in the current year, especially if you’re searching for ways how to save capital gains tax.
Capital Gains Account Scheme (CGAS):
Investors looking to reinvest their capital gains but needing more time can benefit from the Capital Gains Account Scheme (CGAS).
This scheme lets you park your gains in a special account, giving you extra time to reinvest while postponing the tax liability.
The key benefit of CGAS is that it offers a legal way to hold off on paying capital gains tax until you purchase or construct a new residential property. If you’re planning to reinvest in real estate but haven’t found the right property yet, this option provides you the flexibility you need without incurring immediate taxes.
Invest in Section 54EC Bonds:
Another way to save on capital gains tax, especially on gains from real estate, is to invest in Section 54EC bonds. These bonds are issued by government entities such as the National Highways Authority of India (NHAI), Power Finance Corporation, and Rural Electrification Corporation (REC).
By investing in these bonds within six months of selling a property, you can claim tax exemption on long-term capital gains (LTCG) up to ₹50 lakh.
These bonds come with a five-year lock-in period, and the invested amount remains tax-free during that time. While the returns may be lower than other investment options, the tax savings make these bonds a secure and attractive option for conservative investors.
Reinvest in Residential Property (Section 54):
For those who have made gains on the sale of a residential property, Section 54 of the Income Tax Act offers a way to reinvest and save on capital gains tax.
By reinvesting the proceeds into another residential property, you can claim a complete exemption from tax on the gains.
To avail this benefit, the new property must be purchased within one year before the sale or two years after. Alternatively, if you’re constructing a property, it must be completed within three years of the sale.
This provision is particularly beneficial for individuals and Hindu Undivided Families (HUFs) looking to move up the property ladder or expand their real estate portfolio while minimising their tax burden.
Capital gains tax can be a significant financial burden for investors, but with careful planning and the right strategies, it’s possible to reduce or even eliminate this tax liability.
Whether it’s through tax-loss harvesting, carrying forward losses, or investing in specific bonds, there are numerous ways to save on capital gains tax and maximise your investment returns.
Always consult with a qualified financial advisor to ensure that you are making the most of these strategies while complying with the tax laws in India.
