Selling an asset and earning a profit on its capital is one way of making smart earnings. Conversely, this excitement gets overturned by the ever-present question of tax. This may seem like a tricky situation now but, if you know how to file your taxes, saving on capital gains will become a handful task.
The Income Tax Act 1961 helps you with certain specific sections by allowing you to file for capital gains tax (CGT) deductions. Let’s begin with the basics of this tax and how you can save through them.
What is Capital Gains Tax (CGT)?
A tax levied on the profit earned by selling an asset that has increased in value is known as capital gains tax or CGT. This tax applies to various assets, including:
- Stocks and shares
- Mutual funds
- Real estate
- Gold and other precious metals
- Collectibles like antiques and artwork
The amount of tax you pay on capital gains depends on two key factors: the holding period and your income tax bracket. Gains on selling the asset within the same year of purchase are taxed at the regular rate. This can be quite hefty, depending on your bracket. On the contrary, holding an asset for more than one year benefits you in the form of lower tax rates. For 2023-24, long-term capital gains exceeding Rs. 1 lakh will be taxed at 10% u/s 112A.
Different Ways to Save on Capital Gains Tax
The profit earned on capital gains is highly affected by taxes, but considering the following few strategies can help you understand how to save tax on capital gains:
- Opting for Indexation
When you calculate your long-term capital gains tax, you have an option to adjust the purchasing price of your assets. This method is called indexation and can significantly lower your taxable capital gains.
- Investing in Tax-Saving Instruments
Investment options like Equity Linked Savings Schemes, Public Provident Funds, National Savings Certificates, and much more are tax savers. Buying them can help you lower your capital gains tax rate.
- Utilising Capital Gains Exemption
Under Section 54 of the Income Tax Act, you can save on capital gains tax by repurposing the profit of an existing property’s sale. It is done by investing the gains in another property.
- Offsetting Gains with Losses
If you’ve incurred losses from the sale of certain assets, you can set them off against your capital gains. Offsetting your capital gains with capital losses also helps in saving on taxes.
- Seeking Professional Advice
You can also get help with understanding how to file your capital gains tax. Apart from professional advice, there are online tools like tax planners. They are easily accessible, and you can leverage them to make a tax-efficient investment strategy.
Key Takeaways for Savvy Investors
Capital gains tax covers a big chunk of your profits, but with proper understanding and planning, you can manage it effectively. The important thing to remember here is that the tax rate applies to you and explore intelligent saving strategies. This way, you can retain more of your earned profits and enjoy your investment success without any unnecessary tax concerns.
You can also learn more about them through Canara HSBC Life Insurance. It is an insurance company that offers different long-term capital gains plans like ELSS. By exploring their Tax University section, you can gain more insights about capital gains tax and how to save on them. Moreover, you can leverage their online calculators which can streamline your financial plans.
Visit Canara HSBC Life Insurance’s official website and buy a long-term asset to enjoy its profit and tax benefits today!
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