LTCG Tax: Effective strategies to minimize long-term capital gains tax

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Have you sold land, house or jewellery recently and are worried that your recent long-term capital gains will accrue tax? To minimize the impact of long-term capital gains (LTCG) tax on investments like securities and property, here’s how you can employ several strategies:

Utilize the Rs. 1 Lakh Exemption:

Each financial year, up to Rs. 1 lakh of LTCG is exempt from tax. By strategically timing the sale of investments, you can spread redemptions over two financial years, maximizing the use of this exemption in both years. This helps reduce the taxable portion of your gains, effectively lowering your tax liability.

Invest in Tax-Friendly Securities:

Consider investing in tax-efficient instruments such as equity-linked savings schemes (ELSS), equity-oriented hybrid funds, or tax-saving fixed deposits. ELSS, for instance, comes with a three-year lock-in period and qualifies for LTCG tax, allowing for potential tax savings. These tax-efficient instruments can help optimize your portfolio returns by reducing the overall tax impact.

Set Off Capital Losses:

One of the effective ways to minimize your LTCG tax liability is by setting off your capital losses against capital gains. Both short-term and long-term capital losses can be offset against long-term capital gains. By doing this, you reduce the taxable amount of your gains, which in turn lowers the tax you owe. This strategy is particularly useful for investors who have incurred losses in other parts of their portfolio.

Leverage Indexation Benefit:

When calculating LTCG, you can use the indexation benefit, which adjusts the purchase price of an asset for inflation. This adjustment lowers the amount of taxable gain, effectively reducing your tax liability. Indexation is especially beneficial for assets held over the long term, where inflation can significantly impact the purchasing power of money.

Apply the Grandfathering Clause:

The grandfathering clause, introduced when the LTCG tax on equity shares and equity mutual funds was reintroduced in 2018, allows investors to consider the market value of their investments as of January 31, 2018, as the acquisition cost. This means that gains accrued before this date are not subject to tax, which can considerably lower the taxable amount of LTCG and reduce the tax burden.

By using these strategies, investors can optimize their investment returns while effectively managing and reducing their LTCG tax liabilities. These approaches not only provide tax benefits but also align with prudent financial planning and investment management.