How to avoid capital gains tax?

Updated: Monday, February 11, 2013, 11:34 [IST]

If you buy a property and sell it before three years at a profit, you are liable to pay short term capital gains. On the hand, if you sell the asset after three years, long term capital gains would apply. In the case of shares there is no long term capital gains tax and if you sell your shares after one year, no capital gains tax would apply.

Capital gains tax rate

Rate for short term capital gains - as per income tax slab.
Rate for long term capital gains - 20 per cent.

How to avoid capital gains tax

One cannot avoid short term capital gains tax and that is payable under any circumstances. On the other hand, the best way to avoid long term capital gains tax from the sale of a property is to simply buy another property.

However, if you want to get the exemption, the purchase of the new residential house should be within a period of one year prior to or two years after transfer of the original house.

Alternatively, if you do not wish to buy another house, then the best way is to invest the proceeds in 54 EC Bonds.

Say you purchased a house in 2008 for Rs 18 lakhs and sold the same in 2013 at Rs 30 lakhs. Then the profits - that is Rs 12 lakhs, must be invested in 54EC Bonds. These bonds are issued by the National Highways Authority of India or the Rural Electrification Corporation. These bonds fetch an interest rate of 6 per cent, with the interest paid semi-annually.

If you cannot invest in another property within the stipulated timeframe it is better to invest the profits from sale into these bonds, rather than pay capital gains. This is despite the fact that the coupon rates on these bonds are very low.

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