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Bringing down capital gains tax for individuals
September, 24th 2013

There are two ways in which a capital gains tax can be minimised or even brought down to zero. One is to fulfill conditions that allow for a lower rate and the other is to reinvest amounts where the tax can be reduced or eliminated. The investor has to look carefully and then decide on the route that they are going to take to ensure that the tax impact comes down.

This is significant because the choice of the way that they go about it will require them to undertake several steps and this will generate small points that need attention. Here is how this can be done and the difference between the approaches that will be used. Zero rate on gains One of the ways to go about reducing the tax element on capital gains is to ensure that there is a zero or a lower rate of tax on the capital gains that are earned by the investment.

This is not possible under all circumstances so it has to be seen how this can actually come about because it will require some effort as well as planning. In case of equity oriented instruments like shares and equity oriented mutual funds there is a zero rate of tax on long term capital gains so the effort here is to ensure that the gains come in after the holding period crosses the one year mark.

This will ensure that the gains fall under the specific section and this will get classified with the beneficial rate of tax. The reduction in the liability at this stage ensures that the question then of paying the amount does not arise. In other cases like debt investments there could be an effort to ensure that the lowest rate possible especially on long term gains can be seen.

This ensures that the tax liability even when the amount has to be paid then the figure is minimised to the extent possible. The benefit here comes from the fact that the gains itself have a lower rate applicable as compared to other alternatives so they save tax for the individual. Saving tax later The other way in which the benefits can be taken is through ensuring that once the capital gains are earned then there could be additional efforts to ensure that the tax there is reduced.

This will require the individual to undertake some special efforts. There are a lot of ways in which the capital gains that are taxable can be saved and hence these routes need to be considered. Some of the ways in which this can be done is by investing in another residential property within a certain time period or buying specific bonds upto Rs 50 lakh in a year. One of the points to be noted is that this will be available only for long term capital gains so the nature of the gains also occupies a significant spot in the whole action.

The important thing here is that this would be based upon some working and calculations that need to be done initially to figure out what is the amount that has to be invested to eliminate the tax. There are specific gains that have been earned and then the investments into the additional areas would lead to a reduction in the tax bill but in some cases there would be restrictions on the extent of the amount available for investments.

There could be a position wherein the entire gains are eliminated or it could be that a part of the gains are saved and the remaining ones are taxable. The exact position is important in terms of the final impact that will actually be witnessed by the investor at the end of the day.

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