InvestorQ : Is there any provision in the Income Tax Act by which I can avoid paying capital gains tax?
Ria Roy made post

Is there any provision in the Income Tax Act by which I can avoid paying capital gains tax?

Mahil Khan answered.
2 years ago

There is something called section 54 of the Income Tax Act, which is entirely about saving tax on capital gains by reinvesting the proceeds of gains in specific assets. Please note that this benefit under section 54 is only available for long term capital gains (LTCG) and not for short term capital gains (STCG). Using these section provisions, you can actually save your entire tax on capital gains when you sell your property by reinvesting the proceeds of the sale into specified investments with a specific lock-in period. Here is what you need to know about paying zero tax on your capital gains when you sell your property…

Firstly, there is a provision under Section 54F of the Income Tax Act which stipulates that if the proceeds of the sale of property are reinvested in another property either 1 year before the sale or 2 years after the sale, then the entire capital gains of your current property sale will be exempt from capital gains tax. Of course this is only for LTCG. It is essential for you to hold the new property for a period of 3 years from the date of acquisition failing which your original benefit of capital tax exemption will be forfeited by the IT department.

But this can give rise to a unique problem. What do with the money that has accrued as capital gains till the time you are fully invested in another asset? What to do with the money during this two year period that the IT department has given me to reinvest in a new property? The answer is that you need to park the money in a designated Capital Gains Account Scheme (CGAS) with any authorized scheduled bank. Such investment will have to be made before July 31st of the year when the sale was made since that is the stipulated date for filing tax returns and this CGAS investment has to be shown specifically shown in your returns. . This is a normal interest earning account with a bank but will be under CGAS lien and cannot be used for any other purpose.

In addition, there is also the special facility that is available under Section 54EC wherein select infrastructure support and financing institutions like the REC, IRFC, IREDA and NHAI are authorized to issue Capital Gains bonds. Such bond proceeds are to be used solely to finance infrastructure investments only. You will have to reinvest your entire proceeds of the sale of property in such bonds to get the exemption; it is not just the capital gains portion. Such reinvestment, to be eligible for tax exemption, under Section 54EC bonds will have to be made within 6 months or by July 31st of the year of sale; whichever is earlier. It need to be remembered that in case of 54EC and Section 54F, the entire proceeds of the sale have to be reinvested and not just the capital gains.

In the past, such benefits were also available as a special case in case of select mutual funds with lock in periods of 3 years and 7 years respectively. These additional benefits were available under Section 54EA wherein such capital gains could be reinvested in mutual funds with a lock-in. However, that section has since been scrapped although there are persistent demands to bring it back. The bottom line for investors with capital gains is that you can actually plan your capital gains a little more smartly, the next time you make capital gains out of a property sale.