Capital gains tax often comes as an unpleasant surprise during tax filing. But with timely planning, there are perfectly legal ways to reduce your tax liability.
“The Income Tax Act provides several exemptions and strategies that help taxpayers minimize their tax liability while remaining fully compliant with the law,” says CA Ruchika Bhagat, MD, Neeraj Bhagat & Co.
Here are look at the different routes how you can legally save tax on capital gains:
Claiming exemptions under specific sections: One of the most common methods is claiming exemptions under specific sections. If you earn long-term capital gains from the sale of a residential property, you may claim exemption by purchasing or constructing another residential house within the prescribed time limit. Similarly, you can also invest the capital gains in specified government-notified bonds, subject to the applicable investment limit and lock-in period, to claim tax benefits.
Capital loss carry forward: Another effective strategy is capital loss set-off and carry forward. Short-term and long-term capital losses can be adjusted against eligible capital gains as per the Income Tax Act. If losses cannot be fully utilized in the same financial year, they may generally be carried forward for up to eight assessment years, provided the income tax return is filed within the due date.
Consider the holding period: Taxpayers should also carefully consider the holding period before selling an asset. In many cases, holding an asset long enough to qualify as a long-term capital asset results in a lower tax rate and access to exemptions that are not available for short-term gains.
Keeping proper records: Maintaining accurate purchase records, improvement expenses, brokerage charges, and other eligible transfer costs is equally important. These expenses can often be deducted while computing capital gains, thereby reducing the taxable amount.
Timing of a sale: Planning the timing of a sale can also make a difference. If multiple assets are being sold, spreading transactions across financial years may help manage the overall tax burden depending on your financial situation.
The key is to plan before selling the asset rather than after the gain has arisen. “Since capital gains taxation varies depending on the type of asset, the holding period, and the applicable tax provisions, professional advice is recommended. With timely planning and proper documentation, taxpayers can legally optimize their capital gains tax while ensuring full compliance with Indian tax laws,” Bhagat concludes