The tax is a complicated system that requires careful scrutiny and comprehension to be able to stay clear of tax troubles in the future and be on the right side of the law. There are certain components that need to be made clear in the accounts books so that one can save on tax and increase earnings.
A house, land, real estate, trademarks, patents, leasehold rights, building, machinery, and jewellery are the examples of capital assets. While short-term assets are held for a period of less than 36 months, long-term assets are held for more than 36 months. Each of these assets is subject to gains.
The most important aspect of investment is to understand the amount of tax to be paid on capital gains. While long-term capital gains are held for a longer period of time and involve less tax, the short gains are as the name suggests are for shorter periods of time and involve more tax liability.
In the event of a land received as a gift or under a will, one should pay close attention to the gift giver’s adjustment basis which includes the price of the land and other improvements made by the gift giver or the previous owner. There is no profit or loss on the land since it is a transfer and not a sale. The Income Tax Act exempts assets received as a will or as an inheritance.
In the case of the sale of the land, if there is a profit on the land or the sale is for a higher amount than the cost price of the land, then the gift recipient has to pay capital gains tax on the gain amount. However, if there is a loss where the cost price of the gifted land is more than the amount it is sold for, it has to be offset by long-term capital gains.
The whole capital gains are exempt under Section 54 of the Income Tax Act if proceeds of a sale are used to build a new house or purchase a new home within a period of 3 years. If only half of the sale considerations are used to buy a new house, then only half of the capital gains would be exempt from tax.
There are no benefits to be claimed by the previous owner under Section 54 if the new property/house bought is in the new owner’s name.
What is a right time to go for Capital Gains Account Scheme?
The requisite documents, apposite seller and arranging funds among others are issues that involve tedious processes that even the Income Tax law addresses these concerns. As per the Capital Gains Account Scheme, 1988, the capital gains can be deposited in a Public Sector Undertaking (PSU) bank or other banks if the gains are not invested within the stipulated period of filing of returns in the same financial year as the sale of a property. The deposit then becomes an exemption for which there is no need to pay tax. But if the money is still no invested within the year, the deposit will be treated as a short-term capital gain.