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How To Save Taxes On " Capital Gain "

Tax planning assumes a special role in the sale of capital assets. An income tax payer who knows the various provisions of Income Tax Law which go to reduce the incidence of income tax in relation to capital gains on the sale or otherwise transfer of a capital asset, would stand to benefit immensely.
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For the purposes of bringing to tax any gain under the head “capital gain”, the item transferred must be a capital asset. Hence its defmition becomes very important. As per Section 2(14) of the IT Act, 1961 it is defined as property of any kind held by an assessee whether or not connected with his business or profession, but not including:

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Broadly speaking, where a capital asset is held for a period of more than 3 years but more than 12 months in case of shares, units, securities traded on a stock exchange - any profit resulting from the transfer of the capital asset is regarded as long-term capital gain.

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As per Section 2(47) “transfer” in relation to a capital asset includes:

(i)      sale, exchange or relinquishment of the asset, or

(ii)     the extinguishment of any tight therein, or

(iii)    the compulsory acquisition thereof under any law, or


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Not every kind of transfer of a capital asset subjects the gains therefrom to capital gains tax. This is because there are certain kinds of transfers which are not regarded as covered under the charging Section 45 and consequently any capital gains made by an assessee as a result of transfer of a capital asset in those cases would be wholly exempt from tax.

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Several changes were made by the Finance Act, 1992 in the scheme of exemption and taxation of capital gains. However, there is no change in the scheme of the IT Act relating to the exemption in respect of long-term capital gain in house property.

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Another income tax exemption which can be enjoyed by an investor on investment in residential house property can be secured under Section 54F. Thus, where an investor has a long-term capital gain on the transfer of any capital asset (other than a residential house) like shares, a plot of land, commercial assets, commercial house property, jewdllery, etc.,

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Where the capital gains, both short-term and long-term, arise from the transfer of a capital asset, being land which, in the two years immediately preceding the date on which the transfer took place, was being used by the assessee or

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Under the provisions of Section 54D there is an exemption provided in the case of a person owning an industrial undertaking, whether land or building used by him for the purposes of business or the industrial undertaking is compulsorily acquired.

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The rates of long-term capital gains are contained in Section 112. Broadly speaking, the rate of income tax payable on long-term capital gains after taking into account both the indexed cost of improvement and indexed cost of acquisition under Section 48 would be

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Due to the application of Cost Inflation Index, there could be a loss under the head capital gains. The loss is explained in Illustration No. 2 and is allowed to be carried forward for set off against capital gains in future for a period of 8 years.

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Due to the new method of calculating the taxable long-term capital gains, there will be a change in the amount to be invested for getting complete exemption from income tax under Section 54.

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As per Section 54EC exemption in respect of long-term capital gains in the hands of any assessee is available on inveshment in certain bonds. Thus, this section would allow exemption from income tax in respect of long-term capital gains,

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Any income arising to a taxpayer on account of sale of long term capital asset being securities will be completely outside the purview of tax liability especially when the transaction of sale of such securities is entered into a recognised stock exchange in India.

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The Finance Act, 2002 had, with effect from the AY 2002, inserted a new Section 50C in the Income Tax Act, 1961, to make a special p2rovision for determining the full value of consideration in cases of transfer of immovable property.

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16 : Capital Gains On Compulsorily Acquired Agricultural Land

As per Section 10(37) of the Finance (No.2) Act, 2004 the capital gains arising on transfer of agricultural land (used for agricultural purposes by self or parent in the past 2 years) on compulsory acquisition would be outside the ambit of income Tax.

17 : Capital Gains On ESOP

Whenever the employee receiving shares, etc., as per the scheme of ESOP he is not required to make payment of any tax at the time of receipt of such shares, bonds or warrants. However, when the employee sells these shares, warrants or bonds, etc. received under ESOP plan, then at that point of time he would be called upon to pay capital gains. This capital gian could be either a short-term gain or a long-term gain depending on the period of holding such shares.

18 : Relief From Long-Term Capital Gains Tax On Transfer Of Residential Property If Invested In A Manufacturing Small Or Medium Enterprise

As per Section 54 GB if an individual or a Hindu Undivided Family on sale of a residential property invests the sale consideration in the equity of a new start-up SME company in the manufacturing sector and the said amount is utilized by the company for the purchase of new plant or machinery, then there would be no tax liability in respect of long-term capital gains. This is really a very good provision and would help the individuals to utilize the house property capital gains in certain productive business activity.

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