How Can You Reduce Taxes on Your Investment Gains?

If you’ve made long-term capital gains during the financial year and want to reduce your tax burden, there are smart ways to plan ahead. The most common tax-saving investments include equity shares and mutual funds, which usually give better returns than traditional fixed deposits.

Since the 2018 Budget, long-term capital gains (LTCG) above ₹1 lakh are taxed at 10% (on shares, stocks, and mutual funds) if sold after March 31, 2018. This means planning your investments wisely can make a big difference in how much tax you pay.

What is Capital Gains Tax?

Capital gains simply mean the profit you make when you sell an asset for more than you paid for it. Assets can include property, land, vehicles, jewellery, shares, and stocks.

There are two types:

• Short-Term Capital Gains (STCG): Profit from assets sold within a short holding period. For example:
  • Up to 12 months for listed shares, mutual funds, and UTI units.
  • Up to 24 months for unlisted shares and real estate.
  • Up to 36 months for other assets (if sold before July 24, 2024).
• Long-Term Capital Gains (LTCG): Profit from assets held beyond the above periods. From FY 24–25, only 12 months (for listed securities) and 24 months (for other assets) will apply.

Also Read: How to Create a Budget that Works for You?

Long-Term Capital Gains Tax Exemptions

The Income Tax Act provides several exemptions that can help you legally save tax on long-term gains if you reinvest your profits in approved assets. Let’s go through the main ones.

1. Section 54 – Sell One House, Buy Another

If you sell a residential property and reinvest the proceeds into another residential property, you can avoid paying LTCG tax.

Conditions:

• Buy a new house one year before or within two years after selling the old one.
• If you’re building, finish construction within three years.
• Exemption is allowed up to the cost of the new property (or the capital gain amount, whichever is lower).
• Applies only if the property is in India.
• You cannot sell the new house within three years, or the exemption is reversed.
• From Finance Act 2023: maximum exemption is ₹10 crores.
• Once-in-a-lifetime option: If your gain is up to ₹2 crores, you can claim exemption on two houses instead of one.

📌 Example:
You bought a house for ₹20 lakhs and sold it for ₹42 lakhs, making a profit of ₹22 lakhs. Normally, you’d pay 20% LTCG tax. But if you reinvest at least ₹22 lakhs into a new home, you won’t have to pay the tax.

Also Read: Which REITs are Yielding High Returns?

2. Section 54F – Sell Assets (Other Than a House) and Buy a House

This applies when you sell any other long-term asset (like land, stocks, or jewellery) and reinvest the sale proceeds in a new residential property.

Conditions:

• Buy within 2 years or build within 3 years of the sale.
• To claim full exemption, invest the entire sale proceeds (not just the profit).
• Exemption is allowed only for one house.
• You can’t own more than one other residential house (besides the new one).
• Maximum limit: Sale proceeds above ₹10 crores won’t qualify.
• New house must not be sold within 3 years.

📌 Example:
You sell shares worth ₹23 lakhs that you bought for ₹15 lakhs. Your gain is ₹8 lakhs. If you invest the full ₹23 lakhs in a new house, the entire capital gain becomes tax-free. If you invest only part of it, the exemption is given proportionately.

3. Section 54EC – Invest in Government Bonds

If you don’t want to reinvest in property, you can still save tax by investing your capital gains in notified government bonds (such as REC or NHAI).

Key Points:

• Invest within 6 months of selling your asset.
• Maximum investment limit: ₹50 lakhs.
• Bonds have a lock-in of 5 years. If you sell or take a loan against them within 5 years, the exemption is withdrawn.
• Current interest rate: around 5.25% per year (taxable).

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4. Capital Gains Account Scheme (CGAS)

If you’re not ready to buy a new property before the due date of your Income Tax Return (ITR), you can park your gains in a CGAS account with a public sector bank.

• Use the money within 2 years (to buy) or 3 years (to build) a house.
• If unused within the time limit, the earlier exemption will be cancelled, and you’ll have to pay tax later.