5 Exemptions on Long-Term Capital Gains Tax On Shares Every Investor Must Know

Long term Capital gain is the profit that is achieved from the disposal of a long term capital asset like a house property after holding it for more than three years.  And when it comes to shares, the holding period should be more than 1 year for it to be called long-term capital gain. Taxation on Long Term Capital Gains income is considered under the definition of income tax. Thus a person has to pay tax on LTCG on shares in the year the transfer of the capital asset occurs. 

Exemptions on Long-Term Capital Gains Tax

  1. Exemption limit in Annual Income

If the annual income of a person is below the exemption limit, the person does not have to pay tax on LTCG on shares. The tax exemption limit for the year 2019-20 is- 

  • Residents of India aged 80 years or above with an annual income less than Rs 5 lakhs are exempted. 
  • Residential Indians between 60-80 years of age are exempted from tax if their annual income is Rs 3 lakhs. 
  • Residential Indians whose annual income is below Rs 2.5 lakhs are exempted from tax. 
  • Hindu individual families do not have to pay tax if their annual income is below Rs 2.5 lakhs. 
  • For non-residential Indians, the exemption limit is Rs 2.5 lakhs irrespective of age. 
  1. Exemption under Section 54

The exemption under Section 54 becomes applicable when the person reinvests the capital gain from the sale of house property to buy or construct two other house properties. This exemption will be allowed only once in the life of the taxpayer and only when the capital gain is below Rs 2 crores. If the purchase price of the new property exceeds the capital gain, the exemption is limited to the total capital gains on sale. The conditions for section 54 are:

  • The taxpayer can buy the new property either 1 year prior to the sale or 2 years post the sale. 
  • If the gains are invested in the construction of a property, the construction should be completed 3 years after the date of sale. 
  • If the person sells the new property within 3 years of the sale of the original property, then the exemption is not applicable. 

3. Exemption under Section 54F

Section 54F provides exemption on capital gains from the sale of capital assets other than a house property. The taxpayer cannot only invest the capital gains for buying a new property. He has to invest in the complete sale consideration. The conditions are the same as in Section 54. Note that if you invest only a portion of the capital gains, the person will receive an exemption on tax in the proportion of invested amount to the sale price. This is another way for a person to avoid tax on LTCG on shares. 

4. Exemption under Section 54EC

You can avoid tax on LTCG on shares under Section 54EC by reinvesting capital gains into specific bonds. These bonds are-

  • In bonds issued by the National Highway Authority of India(NHAI) or Rural Electrification Corporation (REC) for up to Rs. 50 lakhs. 
  • The taxpayer can redeem the money he invested into the bonds after 3 years but cannot sell them before 3 years. From FY 2018-19, the time period has been extended from 3 years to 5 years. 
  • A person has to invest in these bonds before the tax-filing deadline to claim the exemption.

5. Capital Gains Account Scheme

Sometimes, finding an appropriate seller, arranging funds and completing the paperwork is time-consuming. If the capital gains are not invested within the date of filing of return of the FY in which the property is sold, the taxpayer can deposit the gain in a PSU bank or other banks as mentioned under the Capital Gains Account Scheme, 1988. The person is then allowed to claim exemption on this deposit. Note that if the money is not invested, the deposit will be termed as short-term capital gains in the respective year. 

A person can also gain exemption on the sale of agricultural land, provided by Section 54B. These exemptions allow the taxpayer to avoid tax on LTCG on shares and should be kept in mind.