Exemptions on long-term capital gains

Capital gains made on sale of various capital assets such as residential or commercial property, land, listed securities, units of Unit Trust of India, units of equity-oriented mutual fund, zero coupon bond, archaeological collections, jewellery, drawings, paintings, sculptures or any other work of art are subject to capital gains tax. If the capital asset is held for less than 36 months (12 months in the case of listed securities, units of Units Trust of India and equity-oriented mutual funds), the gains will be classified as short term capital gains (STCG), while if it is held for more than 36 months (or 12 months, as the case may be), the gains will be classified as long term capital gains (LTCG).

Although LTCG is taxed at a concessional rate of 20% plus 3% cess on the tax, it can devour a large chunk of the profitmade on sale of the capital asset. Hence, if a person makes a profit of, say,Rs15 lakh on sale of a residential property after 3 years, the LTCG tax at 20% would amount to Rs3 lakh, plus 3% cess of Rs9,000. However, there are tax exemptions available on gain made on sale of a capital asset if the gain made or the entire consideration is invested in acquisition of certain assets. Hence, if a person makes a long term capital gain on sale of a residential property, he can claim exemption ifhe invests the entire gain (and not the whole consideration) in purchasing or constructing a new house, provided the transferor does not own any other residential house other than the new house.

The new house should be purchased one year before or two years after the date of sale of the residential property. If the gains are invested in construction of a new house, the construction should be completed within three years from the date of transfer of the capital asset. In this case, the amount of exemption would be limited to the cost of the new house or the capital gain, whichever is lower.

In the case of LTCG made on sale of capital asset other than a residential property, tax exemption will be available if the entire consideration (not only the gains) is invested in buying or constructing a new residential house within the time period as stated above, provided the transferor does not own any house other than the new one.

Such exemption on LTCG is also available if the gains made are invested in the bonds of National Highways Authority of India and Rural Electrification Corporation of India within six months from the date of sale of the capital asset. However, in this case, the maximum tax exemption that can be claimed in a year is limited to Rs 50 lakh.