Wherever there are gains, there can be taxes on those gains. And, wherever there are taxes, there can be exemptions. Tax exemptions are like discounts on your tax liability. And, who doesn’t like a discount? But, what does it mean for investments to be tax exempt? 

Let’s understand tax exemptions on various types of capital gains and how to get them.

What is a tax exemption?

Different types of incomes have different applicable tax exemptions. Your nature of income can be professional, agricultural, pension, allowance or from other sources. This income from other sources can be the capital gains added to your income. 

Even if it doesn’t add to your income, you might have to pay a certain tax rate for your long-term capital gains. However, there is a way to reduce this tax liability by making tax-exempt investments under sections 54, 54B, 54EC and 54F. These exemptions apply to the capital gains from investments. 

Let’s understand these exemptions separately. But, let’s first learn about the long-term capital gains on different types of assets. 

Refer to the table below to learn about tax rates on different securities in India.

What are tax exemptions on an immovable property? 

If you sell your real estate asset after 24 months of purchase, your applicable taxes on gains can be more than 20 per cent with the applicable surcharge and cess. This tax rate can also apply if redemption of the property concerned has been inherited by you or received as a gift from family members. 

You can reduce your long-term capital gains tax burden on your real estate asset by making certain investments in tax-exempt instruments under Sections 54, 54B and 54EC. 

These exemptions per the income tax act are as follows: 

1. Tax exemption under section 54

You can claim tax exemption under this section for capital gains not exceeding ₹2crore. To claim this, you can use your capital gains to purchase another property (up to two numbers). This can be considered as reinvestment of your real estate capital gains. You can avail of this tax exemption only once in your lifetime. 

The tax exemption here is applicable only on the capital gains and not the sale proceeds. Here are the conditions you need to comply with for this exemption: 

1. Your new property purchase should be completed within either of the two periods. These are one year before the sale of the concerned property and two years after its sale. 
2. You can also consider the cost of construction of a new property as tax exemption on your concerned real estate capital gains. However, this construction needs to be completed within three years of the sale of your property in consideration. 
3. You cannot sell these new properties before their purchase or construction. In doing so, your tax exemption will be retracted. 

2. Tax exemption under section 54B 

You can also avail of tax exemption on your real estate capital gain by reinvesting it in capital gains bonds. Institutions like NHAI and REC issue these bonds. Here are a few conditions you need to comply with for this exemption: 

1. You can only reinvest in an amount up to ₹50 Lakhs in capital gain bonds for exemption. 
2. For tax exemption, you must stay invested in these bonds for five years (till maturity). 
3. You can invest in these bonds within six months of the concerned property sale or before the tax filing date in which capital gains were incurred (whichever is earlier). 

3. Tax exemption under section 54EC

You can also reinvest your capital gains through real estate in buying agricultural land. You can show this as reinvestment if you complete the purchase within two years of property transfer. Here are a few conditions to comply with: 

1. The capital gains reinvested should be from land used for agricultural produce. 
2. The new agricultural land cannot be sold within three years of purchase. 

As for immovable property, you can claim tax exemptions for capital gains from other securities like equities and mutual funds. 

What are tax exemptions on other securities? 

Say you invested ₹1 Lakh in an equity mutual fund through a lump sum in 2016. The total value of the units purchased is ₹1.5 Lakhs in 2020. You have invested in the fund for more than 12 months. Therefore, you have made long-term capital gains on its redemption. Here, your capital gains are the selling price of a security less the indexed cost of deductibles. These aspects can reduce your total tax liability. 

But can you further reduce this amount? You can do this with exemptions as per section 10 (38) and section 54F. Let us look at each of them in detail. 

1. Tax exemption under section 10(38)

If you have invested in equities of a listed company or equity-based mutual funds, you can avail of this exemption. Long-term capital gains arising from these investments can be tax exempt in the event of a transfer. Here are the conditions you need to comply with: 

1. The transfer of equity or equity mutual funds should have occurred not before 1st October 2004. 
2. Your investment tenure should be more than 12 months. In the case of SIP investment in an equity mutual fund, this period would apply to each SIP individually. 
3. The transaction should be liable for a securities transaction tax (STT). 

2. Tax exemption under section 54F

These tax exemptions are only applicable for long-term capital gains through mutual funds. These exemptions are much similar to section 54 for real estate assets. Let's learn about the conditions for compliance. 

1. You can reinvest your capital gains to purchase a new immovable asset. 
2. You must complete your asset purchase before a year or within two years from the date of redemption. 
3. You can also gain tax benefits by reinvesting your gains to construct a new real estate property. 
4. You should complete this construction within three years from the redemption date. 

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To conclude 

Tax exemptions can give you a sigh of relief on your tax liabilities. However, it is important to plan your tax exemption investments way before time to get these benefits. For example, investing in a new property or construction can be tough to decide and implement in a short period. You can lose out on these tax exemption opportunities if not made in time. For effective tax planning, foresight and taking professional advice can be better. 

Frequently Asked Questions

1. What are the types of exemptions?

Tax exemptions on income depend on your nature of income. They can be different for income through professional, business, agricultural, allowances and other sources. Where the investments or income from other sources are concerned, you can avail of tax benefits under section 10(38), sections 54, 54B, 54EC and 54F. You can benefit from these exemptions if you have invested in real estate, equities or mutual funds. Also, your investments in them should incur a long-term capital gains tax. 

2. Should I claim tax exemption? 

You can claim a tax exemption on long-term capital gains tax through investments in real estate, equities and mutual funds. To avail of these exemptions, you can make reinvestment arrangements within a specific time frame. This period is different for different types of assets and exemptions. These reinvestments can help you get tax exemptions under section 10(38), sections 54, 54B, 54EC and 54F. You can only avail them up to a certain amount that differs for different securities.