Tax Saving Tips: How to save income tax over earnings from mutual funds and share market?
Sections 54 and 54F provide exemptions for individuals investing in a new house using proceeds from the sale of residential or other properties. Leveraging these provisions can lead to substantial tax savings for individuals engaged in various forms of investments.
FollowIn the pursuit of wealth creation, a significant portion of the population in the country engages in various forms of investments such as shares, mutual funds, gold, or property. As the fruits of these investments ripen, it is crucial to consider the implications of income tax. Whether the income is derived from the stock market, mutual funds, or other avenues, it is essential to understand the potential tax-saving measures available.
Leverage residential property for tax savings
One notable provision in the income tax law offers individuals the opportunity to leverage their residential property for tax savings. According to Section 54 of the income tax law, if an individual utilizes the proceeds from the sale of a residential property to acquire a new house, they become eligible for tax exemption. Additionally, Section 54F extends this benefit to the purchase of a new house using funds obtained from the sale of assets like shares, mutual funds, gold, land, or commercial property.
Understanding Section 54F
However, it is imperative to fulfil specific conditions to claim tax exemption under Section 54F. Firstly, the income generated from the sale of the property should qualify as Long Term Capital Gain (LTCG). Secondly, to avail of tax exemption, the entire amount received from the sale, not just the profit, must be invested in the new house.
Determining whether the profit from the sale of an asset qualifies as long-term capital gain depends on the holding period—how long the asset was held before being sold. Different properties have distinct criteria for LTCG. For instance, selling shares or equity mutual funds after holding them for at least 12 months categorizes the profit as long-term capital gain.
Section 54F facilitates tax savings
This strategic approach to holding shares or equity mutual funds for a minimum of 12 months opens avenues for tax savings. Section 54F facilitates tax savings by allowing individuals to invest in a new house. It is crucial to note that the entire amount received from the sale, not just the profit, must be utilized to buy or construct the new house.
To secure tax exemption, the acquisition of a new house must occur within two years from the date of transferring the old asset, such as selling mutual fund units. In the case of construction, the house should be completed within three years. Selling the house within three years of purchase or construction jeopardizes the exemption, leading to tax liabilities.
In essence, understanding and strategically navigating these provisions can empower investors to maximize tax savings while engaging in property investments. It is vital to adhere to the stipulated conditions and timelines to fully capitalize on the available tax benefits and secure financial well-being.
