Capital Gains Tax : All you need to know

Investing in a residential property is one of the most popular investments, mainly because you get to own a home.

Others may invest to profit from the property when they sell it later. Knowing that a residential property is considered a capital asset for income tax purposes.

As a result, any gain or loss incurred from the sale of a residential property may be subject to taxation under the Capital Gains. Here, you can look into Capital Gains Tax:

What is Capital Gain Tax?

Capital gain is any profit from selling a 'capital asset.' The profit received goes into the income category. As a result, a tax must be paid on any income received.

The tax paid is known as capital gains tax, which can be long or short-term. The tax charged on long-term and short-term gains begins at 10% and 15%, respectively.

Types of Capital Gains Taxation

There are two types of Capital Gains Taxation. Let's see its type:

Short-term Capital Gain Tax

Any asset held for fewer than 36 months is classified as a short-term asset. Immovable properties have a duration of 24 months. The profits from selling such an item would be classified as short-term capital gains and taxed appropriately.

Long-term Capital Gain Tax

Any asset held for more than 36 months is considered a long-term asset. Long-term capital assets include preference shares, equities, UTI units, securities, equity-based mutual funds, and zero-coupon bonds held for more than a year.

How do you calculate capital gains?

Capital gains are calculated differently depending on how long the asset has been kept. Below are some of the main points that individuals should know when calculating capital gains.

• Cost of improvement: Any expenses incurred by the seller due to renovations or additions made to the property. However, any changes made before April 1, 2001, cannot be included.
• Acquisition cost: The price paid by the seller to purchase the property.
• Full Value Consideration: It refers to the amount of money the seller will get due to the property transfer. Capital gains are charged from the year the transaction was completed, even if the money was not received in that year.

Capital Gains Tax Strategies to Reduce the Tax Burden

Every taxpaying individual wants to lower the burden of capital gains tax since it reduces a significant amount of their capital earnings. Individuals can lower their tax liability by implementing the following strategies.

Holding Assets Longer

One of the simplest ways to lower your tax burden is to keep your assets longer. Individuals can significantly minimize their tax liability by keeping holdings for over a year before selling. The fact that long-term capital gains are taxed at a lower rate than short-term capital gains will benefit them.

Reinvest Proceeds

Individuals can lower their liability for capital gains tax on property by reinvesting the proceeds in a new asset within a certain time frame. However, to maximize their benefits while minimizing their tax burden, individuals must be aware of the terms and circumstances of such a strategic investment option. They can further reduce their tax burden on capital gains by reinvesting them in constructing a new property or investing them in capital gain bonds.

Invest in Capital Gain Account Scheme

Individuals may put their earnings in a capital gains account to decrease capital gains tax. This method might be used to reduce their tax liability when they fail to invest in a new residential property within the specified time frame.

Final Thoughts

Capital gains taxes are charged on profits earned from selling assets such as stocks or real estate. The tax is calculated using the difference between the asset's sale price and acquisition price, and it is subject to various rates depending on the holding period and the taxpayer's income level.