The upcoming Budget 2025 has investors on the edge as market expectations are rising with demands for a change in long-term capital gains tax. Among other demands, investors are seeking a further increase in the current exemption limit of Rs 1.25 lakh.
What Is Capital Gains Tax?
Capital gains tax refers to the tax applicable on the profit one makes by selling an asset. These assets could be stocks, bonds, or real estate. The tax amount is based on the period for which one holds the asset before its sale.
If one sells an asset after holding it for a year or less, the profit on it is considered a short-term capital gain and is taxed as per regular income tax slabs in most cases, barring some where the tax could be 20%.
If an asset is held for more than a year, the profit is considered a long-term capital gain and is taxed at 12.5%. Long-term capital gains exceeding Rs 1.25 lakh attract LTCG tax.
How To Minimise Capital Gains Taxes?
Hold Investments
Typically, the long-term capital gains attract a lower tax rate than the short-term capital gains tax. Hence, holding an investment for more than a year could turn the profit derived into long-term capital gain, which could imply lower tax.
Offsetting Gains With Losses
One can sell investments whose value has dropped to offset the profit made on other investments. The losses you make on your poorly performing assets can offset taxable gains, which in turn reduces your total tax liability.
Use Exemption Limit for Equity
Long-term capital gains up to Rs 1.25 lakh per year are exempted from LTCG tax for equity. One can sell the assets in installments across many years, as not exceeding the limit can help avoid taxes.
Tax-Advantaged Accounts
Investors can use tax-advantaged accounts like the National Pension System (NPS) or Public Provident Fund (PPF) that offer tax benefits.
Residential Property Benefit
Section 54 offers an exemption on LTCG for residential properties. Investors can reinvest the profits made with the sale of a residential property to buy another one to claim the benefit under Section 54.
54EC Bonds
Similarly, one can reinvest in '54EC bonds' (NHAI, REC bonds) within a period of six months to benefit from the exemption given in Section 54EC.
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