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A Guide To Easily Understand Capital Gains Tax

Capital Gain. Since these are not recurring events, the taxation for this gain is treated differently. Here we try to help you understand how capital gains are calculated and how taxation works.

Capital gains can be of two types. One is Short Term Capital Gain (STCG) and other is Long Term Capital Gain (LTCG).

  • If you sell the property within 3 years of purchasing, it will be subject to STCG and you have to pay tax according to your income-tax slabs.
  • If you sell the property after holding it for more than 3 years (Reduced to 2 years from FY 2017-18 onwards), then it became a Long Term asset and LTCG will apply.

Earlier, you could calculate capital gains tax without indexation. However, in the Union Budget FY 2014-15, this taxation was removed. Now, you will need to pay LTCG at the rate of 20% with indexation.

Currently, if a property is sold within three years of buying (acquiring) it, any profit from the transaction is treated as a short-term capital gain in the hands of the individual. This is added to the total income of the owner and taxed according to the slab rate applicable to him.

If you sell a property after three years, the profit is treated as long-term capital gains and taxed at 20% after indexation.

On LTCG, you can claim tax exemption under certain conditions.To get the exemption, you need to purchase the new residential house within a period of one year prior to or two years after transfer of the original house. As far as under-construction house goes, the construction needs to be completed within three years from the date of transfer of the original house. You can get an exemption for an amount equal to the cost of a new house, or the amount of capital gains, whichever is lower.

There is a good chance that you may not get a new house of your choice within the stipulated time period. In that case, the Capital Gains Account Scheme (CGAS) can come to your aid.

You can deposit the capital gains amount in a CGAS before the due date of filing tax returns (31 July) to save LTCG tax. But treat CGAS as a parking place, where you can deposit money until you find a house that suits you, but of course within a time limit.

Where can you open it? You can open a CGAS account at an authorized government-owned bank.

Do remember, tax planning plays an important role in personal financial planning, hence ensure that your financial actions are in line with your financial goals.

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