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Income taxes on capital gains

05 Jan 2023

Agricultural land in India's rural areas is not regarded as a capital asset. As a result, there are no capital gains on its sale. Before we look at how your capital gains will be taxed, check sure your asset is classified as a capital asset by Income Tax.

  • Is it better to invest in a short-term or long-term capital asset?

When kept for 36 months or less, land is considered a short-term capital asset. A long-term capital asset is one that has been kept for longer than 36 months. As a result, tax consequences differ depending on how long you possess an item.

  • How can you figure out how much money you've made in capital gains?

To calculate the Short Term Capital Gains, subtract the cost of acquisition, direct selling expenses, and cost of improvements from the total Sale Price of the asset, as well as any exemptions allowed under section 54.

The main distinction is that one may subtract Indexed Cost of Acquisition/Indexed Cost of Improvements from the selling price of Long Term Capital Assets. CII is used to index the data. Because the purchase price is adjusted for inflation, this raises your cost base.

  • What are the Rates of Taxation?

STCG is included in your taxable income and taxed at the relevant rate based on your tax bracket.

- Exemptions from your Gains that Save Tax Section 54F LTCG are taxed at a rate of 20%.

- If you use your whole selling profits to purchase a home, you may be able to avoid paying any tax on your gains if you meet all of the following criteria.

- Purchase a home within a year of the transfer date or within two years of the transfer date.

- Build one dwelling within three years after the transfer date.

- You don't sell this residence within three years of buying it or building it.

- This new residence, whether acquired or built, must be located in India.

- On the date of transfer, you should not possess more than one residential dwelling.

- You do not acquire or build any residential dwelling within two years of such date or within three years of such date.

- You won't have to pay any tax on your profits if you meet these requirements and spend the whole selling proceeds to buy a new home. If you invest a part of the sale profits, the exemption will be proportional to the amount invested to the selling price or exemption, i.e. cost of new home x capital gains/net consideration.

  • By putting money into a Capital Gains Account (CGA)

- Finding a qualified seller, securing the necessary cash, and completing the necessary documentation for a new house may be a long and arduous process.

- If you are unable to invest your capital gains until the due date for submitting your income tax return (typically July 31st) for the financial year in which you sold your property, you may deposit them in a PSU bank or other banks under the Capital Gains Account Scheme, 1988. You don't have to pay tax on it if you claim it as an exemption from your capital gains on your tax return.

- However, you must invest the money you've put within the bank's timeframe; if you don't, your deposit will be taxed as capital gains

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