The basic purpose of every asset investment is to profit by selling it when its value has increased. However, not all of these profits are tax-free. The Income Tax Act establishes the types of taxable capital assets as well as the applicable tax rates. When you sell a stock or other property for a profit, you must pay capital gains tax. It's also one of the most complicated taxes that you may need help understanding. It is possible to avoid paying capital gains tax, though. Before you decide to sell your shares, read this article to learn about the many tax-saving strategies that exist.
What is Capital Gains Tax?
Any profit made from capital assets like stocks, mutual funds, gold, real estate, and so on is referred to as "capital gain" under the Income Tax Act. Depending on the type of investment, these capital gains may be taxed. There are two types of Capital Gains taxes, Short Term and Long Term.
Short Term Capital Gain
The profits you make when you sell your capital assets before a year has passed since you acquired them are known as short-term capital gains (STCG). Take note that the holding term varies depending on the kind of capital asset.
| When the security transaction tax is applicable in a transaction. | A 15% short-term capital gains tax is levied. |
| When a security transaction tax is not applicable, like in properties, etc., | A short-term capital gain tax is computed based on the taxpayer's income and simply added to their ITR. |
Long-Term Capital Gains
The profits you make on the sale of your capital assets after a year are known as long-term capital gains (LTCG). The holding duration for long-term assets varies depending on the asset.
| Gain on the sale of an equity-oriented mutual fund (65 percent or more equity investments) or company shares | 10% of any payment received in excess of Rs. 1 lakh when the holding period is one year. |
| Earnings from the sale of non-equity-related assets, including property or debt mutual funds (65% or more debt investments) | 20% with indexation benefit when the holding period is 3 years |
Make sure to compute the long-term capital gains tax (LTCG) on various capital investments to benefit from the tax savings. Make sure to follow all reinvestment rules, including those about time limits, lock-in periods, and other things.
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How to avoid capital gains tax on stocks in India?
1. Investments should be made for the long term.
The lowest possible capital gains tax rate is yours if you can discover exceptional companies and retain their shares for an extended period of time. Naturally, this is a more difficult task than it appears. If your expectations for the company's future have changed, it's a good idea to think about selling sooner rather than later for a number of reasons.
2. Keep an eye on your holding periods.
Be sure to figure out the trade date when selling a security you purchased over a year ago. As long as the price of the investment is stable, it might be a good idea to wait a few days or weeks before selling to get long-term capital gains treatment.
3. Offset capital gains with capital losses or tax-loss harvesting.
If you lose money on an investment, you can lower the tax you pay on your gains from other investments by taking advantage of the loss. Tax-loss harvesting is the process of selling a loss-making asset to reap the benefits of the tax code. Investors can offset both profits and income taxes by realising or "harvesting" losses. After the shares are sold in a delivery sale transaction, they can be repurchased the following day.
Tax-loss harvesting is a useful strategy in which an investor actively sells stocks, mutual funds, exchange-traded funds, or other assets held in a taxable investment account at a loss in order to reduce their tax liability.
Short-term capital gains of Rs. 1 lac might be used as an example. You'll have to pay Rs. 15000 in taxes on this, which is 15% of the total (STCG). In addition, consider that you now own equities that have an unrealized loss of Rs. 60,000 in value. It's possible to get rid of these stocks and cut your net STCG to Rs 40,000. This means that instead of paying Rs. 9,000 in taxes, you would only pay Rs. 6,000, which is 15 percent of Rs. 40,000. This technique is known as "tax-loss harvesting," since it allows you to harvest your losses and save money on taxes.
It is necessary to replace the sold security with a similar one in order to maintain an ideal asset allocation and an expected return profile.
4. Use Section 54F
Section 54F of the Income Tax Act, 1961, exempts long-term capital gains realised on the sale of a capital asset other than a primary residence. As a result, if you sell a capital asset (such as stocks, bonds, jewellery, gold, etc.) and use the proceeds to buy or build a house, Section 54F allows you to deduct the money from the sale of the capital asset.
5. Deposit in a Capital Gains Account Scheme
If, at the time of submitting your tax return, you are unable to use all of the capital gains from a transaction, you may deposit the unused portion in a public sector bank under the CGDA Scheme. You must spend the money in this account within two years (in the event of a new property purchase) or three years (in the event you are constructing a new house).
Summary:
Your investment strategy must take tax considerations into account, even if they shouldn't be the exclusive focus of your finances. One simple strategy to increase your after-tax returns is to reduce the amount of capital gains taxes you owe. Don't worry, there are various ways to avoid capital gains tax. For example, by keeping investments for more than a year before selling them, you may reduce your tax liability.
