Managing your capital gains tax liability

The previous article details how one can apply indexation to eliminate/minimize the effect of inflation on your capital gains income. Apart from this, here are a few other ways of saving on your capital gains tax liability.

Rules for setting off losses against gains while calculating taxable income

  • Short term capital loss or STCL can be set off against both long term and short term capital gains i.e LTCG and STCG.
  • LTCL-long term capital loss can be offset only against long term capital gain-LTCG
  • Apart from capital gains, STCL and LTCL cannot be set off against any other source of income like salary or interest income.
  • Capital losses, both LTCL and STCL can be carried forward for 8 years from the year incurred for set off.

Exemption on LTCG in real estate transactions

  • If a new house is purchased within one year before or two years after the sale of the old house, an amount equal to the price of new house limited to a maximum of the LTCG is eligible for exemption. For eg.- If the old house is sold for a crore and the new house is bought for 60 lakhs, LTCG is applicable only on the balance 40 lakhs. If one wants to construct a new house, the construction has to be completed within 3 years from the sale of the original house.
  • If one is unable to purchase a new house within the last date of filing returns for that year, but intends to do so in the near future in the specified time period of 2 years, he or she can park the capital gains amount in the CGAS-capital gains account scheme offered by a few selected banks.- 28 designated nationalized banks .However, if one fails to buy or construct the house within the specified time period, tax will be payable on the entire LTCG .For eg.- Mr. A purchased incurred long term capital gains of Rs 30 lakhs through the sale of his house in September 2012.He plans to buy a new house sometime in October-November 2013. He has to deposit this amount of LTCG in a CGAS before 31st July 2013, the last date of filing returns for the financial year.
  • If one does not want to buy another property, he or she can invest the entire LTCG amount in 54EC bonds issued by PSUs like REC and NHAI. The interest earned on these bonds is taxable and these have to be held for a minimum of 3 years.



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