Tax Planning tool for Capital Gains.

Tax Planning tool


Tax Planning tool for Capital Gains..


Capital Gain tax is levied on sale of capital assets. There are two types of capital gains Long Term and Short Term. The classification of the same is different for different kinds of asset. For example, capital gains is Short term if listed securities on which Securities Transaction Tax (STT) is paid has a period of holding of less than  12 months, while for unlisted securities it is Short term if the period of holding is of less than 36 months. Long Term Capital Gain (LTCG) is levied at a flat rate of 20% with indexation while Short Term Capital Gain (STCG) is taxable at normal slab rates.

The major problem with this Capital Gain Tax is that the basic deduction of Chapter VI – A is not available against it. However, the benefit of adjustment against basic exemption limit is available if individual/HUF tax payers don’t have any other regular income or even if they have it is below the basic exemption limit.

Further, there are few exemptions against LTCG under various sections like 54, 54B, 54D, 54EC, 54F, 54G, 54GA, 54GB and 54H. The basic thought behind these exemptions is that if the sale proceeds/capital gain is invested in any other asset then they will enjoy the exemption for rollover of assets. Here, we cannot think to fool the government, just by investing and then withdrawing back the money by selling. There are various lock-in periods for all these investments.

As far as section 54 is concerned, it may be noted that it is for availing tax benefit on LTCG arising from a residential property. The entire capital gains will be exempted where the amount of investment in new property is equal or greater than the capital gains earned. One of the larger benefits of this section is that one can hold a number of properties as on the date of transfer and still claim exemption on the gains. The mode of investing the Capital Gains shall be:

  1. By purchasing another House Property:

Purchase of the house property can be done either within One year before or Two years after the date of Transfer of asset.

  1. By Construction:

A new residential property may be constructed for availing the benefit of exemptions. The construction shall be completed within 3 years from the date of transfer.

It may be carefully noted that the condition is “Construction within 3 years” from the date of transfer. If construction is completed before transfer of asset the person will not be eligible for claiming exemption under section 54.

It may be further noted that Section 54 requires Completion in 3 years. The date of commencement of construction is immaterial. So, even if the construction is commenced and partial/major investment is done in it prior to transfer of asset the exemption of section 54 will be available if ultimate construction is completed after transfer of capital asset.

We can absolutely say that section 54 clearly distinguish between “Purchase” and “Construction”. Often a question arises is whether the period of 3 years will be applicable if the person enters into Agreement to Sale with the builder for purchase of flat which is under construction.

The answer says though such transaction is termed as purchase the rule of substance over form shall apply i.e. it shall be treated as construction in real sense. The benefit of period of three years will be available in such cases.