Capital Gains and Tax Exemption as per Income Tax Act, 1961 Technical Terms Section 2(14) of Income Tax Act, 1961 defines Capital Asset as - Property of any kind held by the assessee whether or not connected with his business or profession but does not include;
a) Stock-in-trade, consumable stores or raw-materials held for the purpose of business or profession.
b) Personal effects like movable property including wearing apparel and furniture held for personal use by the assessee or any member of his family dependent on him, but excludes:-
1. Jewellery
2. Archaeological Collections
3. Drawings
4. Paintings
5. Sculptures or
6. Any work of art
Here, "jewellery includes"
(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel;
(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.
c) Agricultural land in India other than the following: Land situated in any area within the jurisdiction of municipality, municipal corporation, notified area committee, town area committee, town committee, or a cantonment board which has a population of not less than ten thousand according to the figures published before the first day of the previous year based on the last preceding census ; or (b) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanization of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette.
d) 6 1/2 per cent Gold Bonds, 1977, 7 per cent Gold Bonds, 1980, National Defence Gold Bonds, 1980 and Special Bearer Bonds, 1991 issued by the Central Government.
e) Gold Deposit Bonds under Gold Deposit Scheme, 1999 notified by the Central Govt. (v) Special Bearer Bonds, 1991, issued by the Central Government vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government
Here, "property" includes and shall deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever; Capital Gains are the gains arising from the transfer of a capital asset.
Two types of capital gains are there-Short Term Capital Gains and Long Term Capital Gains. Tax on such gains arising from transfer of capital assets is called capital gains tax. Short term Capital Gains are those Capital Gains arising from the transfer of short term capital assets (Capital asset held for less than 36 months, in case of shares and mutual funds period is less than 12 months).Tax Rate-as per rate of income tax. But, in case of shares and mutual funds, the rate is 15%.
Long term Capital Gains are Capital Gains arising from the transfer of long term capital assets ( Capital Assets held for more than 36 months, in case of shares and mutual funds period is more than 12 months.). Tax Rate-@20%. But, in case of shares and mutual funds, the rate is Nil. Tax avoidance is legal way of reducing tax liability. Capital Gains tax can be reduced or saved by a number of ways as discussed below,
Section 54 - Save capital gain tax arising from transfer of residential property. If the assessee, being individual or HUF purchases or constructs a residential house, Capital Gains arising from the transfer of long term capital asset, being residential property, by the assessee is exempt.
Conditions:
1. Assessee should be an Individual or HUF.
2. Purchase of property should be within a period of one year before or two years after the date of transfer.
3. Construction of property should be within a period of 3 years from the date of transfer.
4. Income from residential house sold should be chargeable under the head Income from House Property.
5. The new property should not be sold within 3 years from the date of transfer.
6. If the amount of Capital Gain invested so is equal to or less than the cost of new property, entire amount is exempt.
7. If the amount of Capital Gain invested so is more than the cost of new property, amount exempt is equal to cost of the new house. Capital Gains Account Scheme Capital gains arising from sale of long term capital asset can be invested in a special bank account called Capital Gains Account scheme before due date of filing income tax return.
The amount so invested is exempt from tax. That amount should be utilized for the purpose of construction (within 3 years from date of transfer) or purchase (within 2 years from date of transfer) of residential property.
Section 54 EC-Investment in Specified Bonds Long Term Capital Gains arising from sale of capital asset shall be exempt if it is invested in specified bonds u/s 54EC. Conditions for claiming exemption:
1. The amount should be invested within 6 months from the date of transfer.
2. Exemption is to the extent of amount invested in bonds subject to a maximum of 50 lakhs.
3. The bonds are issued by REC and NHAI.
Section 54 F - Exemption in case of transfer of long term capital asset other than residential house Long term Capital Gain arising from sale of capital assets other than residential house shall be exempt if
1. the amount of capital gain is used for purchase of residential house within 1 year before or 2 years after date of transfer or
2. for construction of residential house within 3 year from the date of transfer.
3. This benefit is available to individuals and HUF.
4. Assessee should not own more than one house property on date of transfer.
5. If the amount of Capital Gain invested is less than actual Capital Gains, proportionate exemption shall be allowed.
Source: Indian Income Tax Act, 1961.
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