Do you get capital gains exemption by reinvesting share sale proceeds?

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When you purchase and sell listed shares, the profit you make is taxed under capital gains. If you held the shares for less than one year, the gains are short-term and subject to taxation at 15 percent. If you held them for over a year, they can be termed as long-term capital gains (LTCG) and are taxed at 10 percent if the profit exceeds ₹1 lakh in a financial year.

When exemptions exist

Though capital gains on stocks are generally taxable, a few exceptions are permissible if you reinvest the proceeds under certain conditions of the Income Tax Act. For example, according to Section 54F, if you reinvest all the sale proceeds of stocks in a residential home, you can claim exemption on the capital gains aspect. But the property must be purchased within two years (or constructed within three years), and you may not have more than one other residence on the investment date.

Conditions and restrictions

Exemption is granted only if you reinvest the entire proceeds. If it is reinvested partially, the exemption will be in the same proportion. Also, if within three years you sell the new property, the advantage of exemption will be neutralized, and the capital gain will be taxed again. Importantly, exemptions for investing in financial products like mutual funds or bonds are not available except in special provisions elsewhere, for instance, 54EC for notified bonds.

Why planning is necessary

Investors often lose sight of the fact that exemptions are tied to definite reinvestments and rigorous time limits. Not meeting deadlines or reinvesting part of the proceeds can slice or abolish the tax benefit. For long-term planning, pre-sale consideration of these rules can reduce tax outlay and maximize net yield.

FAQs

1. Can gains on share sales be reinvested in a fresh batch of shares or mutual funds to escape paying tax?

No, re-investment in financial instruments like shares or mutual funds does not qualify for exemption. Exemption is only given for a certain class of assets, i.e., residential property or certain bonds.

2. Can exemption be given on short-term capital gains on sale of shares?

No, exemption under Section 54F is only for long-term capital gains. Short-term capital gains on sale of shares must be taxed at the rate of 15 percent.

3. What if I don't spend the proceeds before the tax-filing date?

In case you haven't invested yet while filing your ITR, you can transfer the unused sum to a Capital Gains Account Scheme (CGAS). You can claim exemption, provided the money is utilized within the stipulated two- or three-year time period.