Capital Gains Tax Exemption In India

A Guide to Capital Gains Tax Exemptions in India

When you sell a capital asset like property, stocks, or gold for a profit, that income is classified as a "capital gain." This gain is taxable, but the good news is that the Income Tax Act provides several powerful tools to help you legally reduce or even completely avoid this tax.

These exemptions primarily work by encouraging you to reinvest your profits into other specified assets. Whether you're selling a house or cashing in on your stock market investments, understanding these rules is key to smart financial planning.

Exemptions for Property Sales

Selling real estate often results in significant capital gains. Fortunately, there are several exemptions designed specifically for property owners.

Section 54: For Sale of a Residential House

If you're an individual or a HUF (Hindu Undivided Family) and you've made long-term capital gain from selling your house, you can claim an exemption under this section.

• How to Qualify? You must reinvest the capital gain amount into a new residential property. This purchase must happen either one year before or two years after you sell your old property. Alternatively, you can construct a new house within three years of the sale.
• Exemption Limit: The exemption is capped at the lower of the total capital gain or the cost of your new property. Following the Finance Act 2023, the maximum exemption you can claim under this section is Rs. 10 crore. There is a special one-time opportunity to invest in two properties if your capital gain is below Rs. 2 crore.

Section 54F: For Sale of any other Long-Term Asset

What if you sell something other than a house, like a plot of land, gold, or shares? Section 54F allows you to claim an exemption by investing the entire sale amount (not just the profit) into a new residential property.

• How to Qualify: The timeline for purchasing or constructing the new house is the same as in Section 54.
• Exemption Limit: If you invest the full sale amount, your entire capital gain is exempt. If you only invest a portion, the exemption is calculated proportionally:
  Exemption = (Capital Gain x Amount Reinvested) / Net Sale Consideration
• Like Section 54, the exemption under Section 54F is also capped at Rs. 10 crore.

Section 54EC: The "Bailout Bonds"

If you don't want to buy another property, you have another option. You can claim an exemption by investing your long-term capital gains from the sale of land or buildings into specific government-notified bonds.

• How to Qualify: The investment must be made within six months of the sale. These bonds are issued by entities like the Rural Electrification Corporation (REC) and the National Highways Authority of India (NHAI) and have a lock-in period.
• Exemption Limit: The maximum you can invest in these bonds in a financial year is Rs. 50 lakh.

Exemption for Equity and Mutual Funds (Section 112A)

This is a crucial exemption for stock market investors. Recent changes have updated the rules for Long-Term Capital Gains (LTCG) on listed equity shares and equity-oriented mutual funds.

For the financial year 2024-25 (Assessment Year 2025-26), the rules are as follows:

• Exemption Limit Increased: The exemption limit for LTCG under Section 112A has been increased from Rs. 1 lakh to Rs. 1.25 lakh. This means the first ₹1.25 lakh of your long-term capital gains from these assets in a financial year is completely tax-free.
• Revised Tax Rate: Any long-term gains exceeding this Rs. 1.25 lakh limit are now taxed at a rate of 12.5% (up from 10%).

This annual exemption gives rise to a popular strategy known as Tax Harvesting. To take advantage of it, investors can sell a portion of their equity or mutual fund holdings to realize long-term gains up to the Rs. 1.25 lakh tax-free limit each financial year and then immediately reinvest the proceeds. This resets the cost basis of the investment and allows investors to systematically utilize the annual exemption, which would otherwise go unused, thereby reducing their overall tax liability in the long run.

Read more about Tax Harvesting here.

What if you can't reinvest Immediately? Use the Capital Gains Account Scheme (CGAS)

Sometimes, you might not be able to find a new property or make an investment before the tax filing deadline. In such cases, you can deposit the unutilized capital gains into a special account called the Capital Gains Account Scheme (CGAS) at a designated bank.

This deposit allows you to claim the exemption for the year of the sale. However, you must use these funds for the specified investment within the legally allowed time (e.g., two or three years for property). If you fail to do so, the unutilized amount will be taxed in the year the deadline expires.

Summary of Key Exemptions

Section	Gain From Sale Of	Reinvestment In	Maximum Exemption	Eligible Taxpayer
Sec 54	Long-term residential property	One residential property	Rs. 10 crore	Individual / HUF
Sec 54F	Any long-term asset (other than a house)	One residential property	Rs. 10 crore	Individual / HUF
Sec 54EC	Long-term land or building	Specified government bonds	Rs. 50 lakh	Any taxpayer
Sec 112A	Listed equity shares & equity MFs	Not Applicable	Rs. 1.25 lakh	Any taxpayer
Sec 54B	Agricultural land	New agricultural land	Lower of gain or cost of new asset	Individual / HUF
Sec 54GB	Residential property	Equity shares of eligible startups	Proportionate to investment	Individual / HUF

Summary:

While capital gains tax is a reality for investors in India, the Income Tax Act provides multiple avenues for significant tax relief. The most impactful exemptions involve reinvesting gains from property sales into a new residential house (under Sections 54 and 54F, capped at Rs. 10 crore) or into specified government bonds (Section 54EC, capped at Rs. 50 lakh). For stock market investors, the annual long-term capital gains exemption of Rs. 1.25 lakh on equities and equity funds is a key benefit, which can be maximized through the smart strategy of Tax Harvesting. If immediate reinvestment isn't feasible, the Capital Gains Account Scheme offers a crucial buffer to secure your exemption. By strategically using these provisions, you can significantly enhance your post-tax investment returns.

Regards,

Honvest Team.