Every investor considers capital gains tax as they sell real estate, stocks, or other assets. You did know, though, there are strategies to avoid paying taxes on this profit? One such advantage is the 7-year capital gains tax exemption, a less-known but practical choice for particular circumstances. Let us dissect it simply here.
Capital Gains Tax: Definition
Capital gain is the profit from selling an asset—such as stocks or real estate—for more than you paid for it. Under what the government taxes this gain under?
- Short Term Capital Gains (STCG)
- LTCG, long-term capital gains
Now, under some circumstances, you can save tax on this gain—and one of them involves a 7-year lock-in period.
The 7 Year Capital Gains Tax Exemption: What Is It?
Investing in particular bonds mostly connects this advantage to Section 54EC of the Income Tax Act. It states, should you sell a long-term capital asset—such as a building or piece of land:
- And put the capital gain toward designated bonds, such as NHAI or REC,
- Your capital gain then is tax-free.
The lock-in term used formerly was three years. From FY 2018-19, however, the lock-in period has now been extended to five years. In some specific exemption schemes (like under startup investments), 7 years may apply. Thus, the 7-year capital gains tax exemption usually relates to:
- Tax-exempt bonds or investment vehicles.
- Some startup capital gain exemptions programs.
Section 80-IAC, also known as Section 54GB, offers exemptions for up to 7 years should capital gains be reinvested in startups or qualified businesses.
Important Requirements to Reap This Advantage
- The original asset has to be a long-term asset—held for two years or more (for property).
- Investing has to be done six months following the sale.
- Max investment permitted in 54EC bonds: ₹50 lakh annually.
- Depending on the plan, you cannot sell or move the fresh investment for five to seven years.
Example
Assume you made ₹30 lakh as capital gain from selling a piece of land. Rather than paying ₹6 lakh (20% LTCG tax):
- You spend the ₹30 lakh in qualified startups or 54EC bonds.
- And hang onto the money for five to seven years.
- ✅ The ₹6 lakh capital gains tax is not due to pay.
Thought Notes: Final Thoughts
If you are selling real estate or investing in qualified business ventures, the 7-year capital gains tax exemption is a fantastic approach to legally save tax. Choose the appropriate plan, always review the fine print, and make investments within the allocated time frame. See a tax professional if unsure to maximize it.
