Here's how you can benefit from capital gain

In an interview to CNBC-TV18 personal finance expert Pankaj Mathpal of Optima Money Managers shared his insights on ‘Capital gains’.

He spoke about the importance of determining whether the asset is short-term or long-term, the adequate period for which one should hold the property and the right place to invest. "If you do not want to buy a residential property, you can invest money in capital gains bond scheme, capital gain bond like REC or NHAI bond limited, if you have to invest Rs 50 lakh in one financial year, within six months from the date of sale," he added. Below is an edited transcript of Pankaj Mathpal’s interview on CNBC-TV18. Q: What is the applicability of capital gains tax on the various assets like shares, mutual funds, property? How can people save on these taxes? A: To determine the capital gain tax, first we see whether the asset that has been sold is short-term or long-term. For equity shares, equity oriented mutual fund or any other mutual fund holding, period less than one year is short-term and above one year is long-term. For any other asset like physical gold or real estate property, holding period less than three years is short-term and above three years is long-term. Capital gains tax on equity shares where securities transaction tax (STT) has been paid means the shares have been sold through recognized stock exchange. Shares which have been transferred under buyback scheme or off market transaction and equity oriented mutual fund, have been exempted from long-term capital gain tax and short-term capital gains tax is 15 percent. Other mutual funds like debt oriented mutual funds or gold based mutual fund have short term capital gain as per your slab rate applicable at 10 percent, 20 percent or 30 percent depending on your income. Long-term capital gains tax is 10 percent on flat net profit or 20 percent with the benefit of index, whichever is low. On assets like real estate, property or physical gold, short-term capital gains has slab rate, but long-term capital gain is compulsorily 20 percent with index. Here you don’t get the benefit of calculating without index. It is 20 percent with index. Short-term capital gains tax cannot be saved but long-term capital gains tax can be saved. If you sell a residential property and invest that capital gain in another residential property, you can save tax. But you have to invest this capital gain within two years from the date of sale or within one year before date of sale and you have to invest this money before filling your Income Tax Return (ITR). If you cannot buy the property before filling your ITR, you will have to pass this money in capital gain account scheme (CGAS). If you sell any other asset like physical gold, commercial property, plot of land; you can save this tax by investing in a residential house. But this time you will have to sell full consideration, not only capital gain. Again, if you do not want to buy a residential property, you can invest money in capital gains bond scheme, capital gain bond like REC or NHAI bond limited, if you have to invest Rs 50 lakh in one financial year, within six months from the date of sale. So, these are some ways to save capital gains tax.

Q: About capital gain account scheme; you said that if you want to avoid tax on any commercial transaction, maybe a residential house, you invest in another property or you can put the unused proceeds in CGAS. Does it earn any kind of return and for how long can you park your money in this account? A: CGAS is only for parking. You can park for a maximum of three years. This is when you intend to buy a property but are not buying immediately because you get two years of time from the date of sale or three years if you want to construct the house. But if you are not buying the house before filling your ITR or due date of your ITR, you will have to pass this money in CGAS. It is like a fix deposit in a nationalized bank or State Bank of India. As public sector bank rate interest will be applicable on the fixed deposit (FD). It is similar but you cannot withdraw money in between as only this money can be used for buying a house. If you want to buy a house that money can be used but you cannot withdraw it before three years for your personal use other than buying a house. Q: If within three years, I am unable to find another house then what kind of capital gains will I be charged on that amount? Can then the money be parked in NHAI and REC kind of bonds and escape tax? Or does one need to pay the tax for three years? A: No, then you cannot park further. In that case whatever tax was saved earlier, will have to be paid now. Q: In future, from fourth year onwards, can a person put the money in NHAI, REC types or does he lose the option? A: No, because NHAI or REC bond that a person will buy may save only tax, but after three years he is suppose to buy a property. So, now he cannot withdraw money for further use. Even if he can use the money he will have to pay capital gains tax which was postponed earlier. Q: I have sold a house of Rs 40 lakh and I am using Rs 10 lakh for some personal use. How can I use the remaining Rs 30 lakh to save my tax? A: Firstly, you will have to see whether this property is long-term or short-term, in case it was bought before three years or within three years from the date of sale. So if it is a short-term property, you cannot save tax. If it is a long-term, you can save tax by investing capital gain. So, if it is very long-term and you take index benefit I am sure that your capital gain will be less than 40. Rs 40 lakh is due to sales consideration, this is not a profit or a capital gain. When you calculate capital gain it will be much less and you have to invest only in capital gain amount not the full consideration. Rs 10 lakh that has been used for other reason will not make any difference, provided you invest your capital gain amount in a new residential house or capital gain bonds. So, if you are not buying a house, invest that money in REC or NHAI bond for three years in order to save tax. The limit is Rs 50 lakh and because you are investing less than that, you have to invest within 6 months from the date of sale.