Filing your Income Tax Return (ITR) can feel overwhelming, especially when dealing with capital gains. However, by understanding the relevant rules and types of capital gains, you can file your return accurately and take advantage of tax-saving opportunities. This guide will assist you in correctly reporting capital gains and exploring tax planning strategies in accordance with the Income Tax Act.
What Are Capital Gains?
Capital gains are the profits made from selling various assets, including:
- Real estate (land, houses, etc.)
- Stocks or mutual funds
- Gold, jewelry, and other valuables
- Bonds or financial instruments
Capital gains are categorized based on the holding period of the asset:
Short-Term Capital Gains (STCG):
A) Holding Period
- Equity shares or Equity-Oriented Mutual Funds or units of Business Trust: Held for less than 12 months.
- Other Assets: Held for less than 24 months.
B) Taxability
As per the Finance Act, 2024, effective from July 23, 2024, the tax rates on short-term capital gains have been revised:
- Listed Equity shares or Equity-Oriented Mutual Funds or units of Business Trust: Tax rate increased from 15% to 20%.
- Other assets: STCG is added to your total income and taxed according to your income tax slab.
Long-Term Capital Gains (LTCG):
A) Holding Period
- Equity shares or Equity-Oriented Mutual Funds or units of Business Trust: Held for more than 12 months.
- Other Assets: Held for more than 24 months.
B) Taxability
The Finance Act, 2024, effective from July 23, 2024, has introduced tax relief for individuals on long-term investments and removed the indexation benefit:
- Listed Equity shares or Equity-Oriented Mutual Funds or Units of Business Trust: Exemption limit increased from ₹1 lakh to ₹1.25 lakh, with the tax rate rising from 10% to 12.5%.
- Other assets: Tax rate reduced from 20% to 12.5%.
Additionally, real estate owners can opt to pay a 20% tax with the benefit of indexation if they purchased the property before the amendment date.
Step-by-Step Process
- Identify the Type of Capital Gain: Classify your gain as short-term or long-term based on the asset’s holding period.
- Compute Gains or Losses: Calculate using the formula: Selling Price – (Cost of Acquisition, including brokerage or transfer fees + Cost of Improvement + Sale-Related Expenses).
- Report Capital Gains in the Correct ITR Form:
- ITR-2: For individuals with capital gains but no business or professional income.
- ITR-3: For individuals with capital gains and business or professional income.
Utilize Exemptions to Lower Capital Gains Tax
Several exemptions can help reduce capital gains tax, including:
- Section 54: If you sell your residential property and invest the proceeds from long-term capital gains in another residential property within a specified timeframe, the lesser of the capital gain or the amount invested will be exempted (maximum deduction of ₹10 Cr).
- Example: If your capital gain is ₹15 Cr and the cost of the new house is ₹15 Cr, then ₹10 Cr will be exempted.
- Section 54F: Similar conditions apply, but the capital gain must come from the sale of assets other than residential property.
- Section 54EC: If you invest long-term capital gains from the sale of immovable property in specific bonds (e.g., NHAI, REC) within six months, you can claim an exemption up to ₹50 lakh.
Carry Forward Your Losses
If you incur a loss from the sale of a capital asset, you can offset these losses against capital gains in the same year. Long-term capital losses can be set off against long-term gains, while short-term losses can be set off against both long-term and short-term gains. If not fully utilized, losses can be carried forward for up to eight years to offset future capital gains.
Complete Schedule CG
Use Schedule CG to report capital gains from the sale of capital assets such as shares, bonds, land, buildings, precious metals, or Virtual Digital Assets (VDAs) like cryptocurrencies. Required details include:
- Type of asset (short-term or long-term)
- Sale consideration
- Cost of acquisition
- Date of acquisition
- Date of transfer
- Computation of capital gains
Note: Gains from the redemption of Gold Bonds and Unit Linked Insurance Plans (ULIPs) before the lock-in period must also be reported under Schedule CG.
Complete and Verify Your Income Tax Return (ITR)
Common Mistakes to Avoid:
- Incorrect Classification: Make sure to accurately classify your gains as either short-term or long-term based on the duration of the holding period.
- Misreporting Inherited Assets: When selling inherited assets, use the holding period of the previous owner to determine long-term capital gains.
- Exceeding Exemption Limits: Accurately report any gains that exceed ₹10 crore, as these are subject to taxation under Sections 54 and 54F.
- Omitting Small Gains: Report all capital gains, regardless of size, to prevent penalties.
- Ignoring Losses: Offset capital losses against gains to maximize tax savings. If your losses surpass your gains, carry them forward to future years.
- Confusing Sale Proceeds with Actual Gains: Ensure that the amounts you report reflect actual gains after deducting the cost of acquisition and related expenses, rather than just the sale proceeds.
- Relying on Estimates: Avoid using estimated values for purchase costs or sale prices; always use actual documented figures.
- Neglecting Changes in Tax Law: Stay updated on the latest tax regulations, as changes can result in misreporting and missed deduction opportunities.
- Not Consulting a Tax Advisor: For complex transactions or substantial gains, seeking professional advice is crucial to avoid costly errors.
Conclusion:
Accurately reporting capital gains in your ITR is not merely about compliance; it’s a strategic approach to managing your finances. By understanding how to categorize your assets, calculate your gains or losses, and utilize available exemptions, you can effectively reduce your tax liability.
Staying informed about current tax regulations will empower you to make more informed financial decisions. A qualified financial advisor can assist you in accurately reporting your capital gains. To optimize your tax strategy, download the 1 Finance app and schedule a consultation with a qualified financial advisor for a smooth and efficient tax planning experience.
