Maximize Your Long-Term Capital Gains by Planning Your Investment Before the Extended Deadline of March 31, 2023

On January 6, 2023, the CBDT released a circular granting an extension of the time limit to claim tax exemption under sections 54 to 54GB of the IT Act, 1961. This extension provides individuals who were required to invest in a specified asset between April 1, 2021, and February 28, 2022, with extra 13 months, until March 31, 2023, to make their investments and save on their taxes. The intent of this article is to provide a deeper understanding of the provisions of the CBDT circular and how it can aid in saving more.

If an individual sold a long-term capital asset such as property or shares on May 28, 2021, he now has until March 31, 2023, to invest in one of the prescribed assets to avoid paying taxes on the Long  Term Capital Gains. This is an extension of the original deadline.

How to save tax on Long Term Capital Gain (LTCG)?

Individuals can save LTCG tax under Sections 54, 54EC and 54F of the IT Act, 1961. The following paragraphs explain how an individual can save LTCG tax using the three IT Sections mentioned above:

Saving LTCG tax under Section 54

An individual can purchase a residential house to save LTCG tax under section 54 of the Income-tax Act. To be eligible for the tax exemption, the LTCG must have originated from selling a residential property. The exemption can be availed in any of the following circumstances: 

•    If the house is bought within two years from the date of sale

•    If the house is bought one year prior to the sale of the asset 

•    If the house is constructed within three years from the date of sale

Read: Multiple resources for your investment needs

Saving LTCG tax under Section 54EC

An alternative option for an individual wishing to save LTCG tax is to invest in 54EC capital gains bonds (for example REC bonds, PFC bonds, NHAI bonds, IRFC bonds, etc). The individual must invest the LTCG amount in these bonds within 6 months of selling the long-term capital asset. These bonds have a lock-in of 5 years. The individual will earn interest which is taxable. The upper limit for investment is Rs 50 lakhs for an individual.

Read: Tax strategies for 2023 

Saving LTCG tax under Section 54F

Another option available to individuals to save LTCG tax is through Section 54F. This Section allows an individual who has earned LTCG from any asset, other than a residential house to invest in a residential house to save tax on the LTCG. The tax exemption can be availed in any of the following circumstances: 

•    If the house is bought within two years from the date of sale

•    If the house is bought one year prior to the sale of the asset 

•    If the house is constructed within three years from the date of sale

Read: To know more about tax 

Taxing of LTCG under the IT Act, 1961

There are different LTCG taxation rules for different assets such as property, shares, fixed deposits, etc. The amount of tax to be paid on a capital gain is determined by the length of time the asset was held, the type of asset, and the individual's tax status.

In conclusion, the CBDT's recent circular granting an extension of the time limit to claim tax exemption under sections 54 to 54GB of the IT Act, 1961, provides individuals with an opportunity to save on their taxes by investing in specified assets. The extension of the deadline from February 28, 2022, to March 31, 2023, allows individuals who sold a long-term capital asset such as property or shares, to invest in one of the prescribed assets until March 31, 2023, to avoid paying taxes on the Long-Term Capital Gains.

Watch a video on the topic