Save on Taxes by Reinvesting Your Capital Gains
If you have sold your property or planning to sell your property, you may already know that you will attract taxes on this income. The profits gained by selling a property or other capital assets such as stocks or bonds is referred to as capital gains and this income attracts taxes. If you have held a capital asset for more than three years, it is considered long term capital gain (LTCG) and attracts about 20 per cent tax. You may calculate capital gains by selling property in very simple terms as follows:
Capital gain = Selling price – indexed purchase price
Where indexed purchase price takes into account the cost inflation index (CII) and year of property purchase
However, if you reinvest this income into other capital assets within a certain period, you can save a significant amount on taxes. Currently, you have up to three years to reinvest these capital gains. This will provide you a significant time to reinvest your capital gains in a smart manner. Following are some tips to help you reinvest your capital gains.
Reinvest in property
The present union finance minister has stressed on investing capital gains in a residential house to avail the benefits. Under the existing tax provisions, tax for long term capital gains is exempt under Section 54/54F if it is invested in either purchasing or constructing a property. The investor however has to purchase a built house within two years or construct a house within three years of selling the property. It has also been made clear that the purchase/construction must be in India and not abroad.
Invest in capital bonds
If you don’t want to invest in another property, you have an alternate way out. Section 54EC of the income tax act allows you to claim exemption by reinvesting your capital gains in bonds. These bonds are called capital gain bonds and are usually issued by the National Highway Authority of India (NHAI) and Rural Electrification Corporation (REC). The investor however has to invest the capital gains within six months from the date of sale or before the filing of returns, whichever is earlier. The cap on investment in these bonds is Rs 50 lakh and will be applicable in relation to the assessment year of 2015-16 and the years to follow.
Invest in specific bank accounts
If the above options don’t appeal to you, you may invest in certain types of bank accounts called the Capital Gains Account Scheme (CGAS). You can easily open a CGAS account with any public sector bank if your capital gains hasn’t been completely utilized for a property purchase or construction. This however has to be done before the deadline of filing returns. The deposited money has to be used only to invest in another property within the prescribed time frame. Else, you will be taxed on the unutilized amount.
These are some of the recommended ways of reinvesting your capital gains. You may also consult your financial advisor to know more ways of saving on taxes on your capital gains.
