Investments yielding returns over an extended period, specifically a minimum of one to three years, are categorised as long-term capital gains (LTCG). This classification encompasses returns from various investment vehicles such as real estate, stocks, mutual funds and zero-coupon government bonds.
Senior citizens intending to liquidate assets such as real estate, stocks, mutual funds, bonds, gold, or urban agricultural land to generate post-retirement income should be aware that capital gains tax will apply to the proceeds. When formulating a retirement plan with substantial investments in these or similar instruments, it is crucial to account for the associated tax implications when calculating potential returns.
The base exemption limit for capital gains tax has been elevated to Rs 3 lakh for senior citizens and Rs 5 lakh for super senior citizens. Consequently, individuals aged 60 years or above with an annual income of up to Rs 3 lakh, as well as those aged 80 years or older with a yearly income of up to Rs 5 lakh, will be exempt from capital gains tax. This provision does not apply to individuals under the age of 60 or Hindu Undivided Families (HUFs), who retain an exemption limit of Rs 2.5 lakh per annum.
Tax exemptions in case of short-term capital gain
Manikandan S, Tax expert, ClearTax, said senior citizens can benefit from the basic exemption limit for short-term capital gain.
> Equity-based assets, including equity mutual funds, incur a Short-Term Capital Gains (STCG) tax at a fixed rate of 15% if retained for less than twelve months.
For instance, if an investor divest their equity shares after a holding period of nine months and realise a profit amounting to Rs 50,000, the applicable STCG tax would be levied at the rate of 15% on this gain.
> If total taxable income (excluding short-term capital gains) stays within Rs 2,50,000 for resident individuals below 60 years, HUF and NRI, then unutilised exemption can be adjusted against short-term capital gain.
> If total taxable income (excluding short term capital gains) stays within Rs 3,00,000 for senior citizens (60-80 years), then unutilised exemption can be adjusted against short-term capital gain.
> Under the new regime, the basic exemption limit for senior citizens is Rs 3,00,000, and there are lower slab rates.
> If total taxable income (excluding short term capital gains) stays within Rs 5,00,000 for super senior citizens (older than 80 years), then unutilised exemption can be adjusted against short term capital gain
Reverse mortgage loans
Senior citizens can benefit from reverse mortgage loans. As per Section 10(43) of the Income Tax Act, 1961, reverse mortgage payments are not considered income.
“As a result, any individual who has taken a loan under reverse mortgage will not be required to pay any taxes. The bank has the right to sell the property to recover the loan amount after the demise of the borrower. The amount of loan (either in instalments or lumpsum) received by the Senior citizen under the transaction of reverse mortgage would be exempt from tax,” said Manikandan S.
How short-term capital gain tax is calculated
Tax on Short-Term Capital Gain shall be calculated based on the person’s income tax slab rates. The short term capital gain will be included in the total income of the person, and tax will be computed as per the income tax slab, Manikandan said.
For example, Mr J who had purchased a property in October 2018 for Rs 30 lakh, sold it in January 2020 at Rs.50 Lakh. As per his income, Mr J falls in the highest tax slab of 30%. Mr J spent around Rs 4 lakh on house improvement during the period of holding the property. And also paid a brokerage of 0.2 per cent of the sale value, at the time of selling the house.
The property is sold within 2 years of the purchase, which will be considered as a short term capital gain and will be taxed as short-term capital gains tax. Also Mr J earns income from a salary of Rs 6 lakh in a financial year.
In this case, as shown below, Mr J’s short-term capital gains will be Rs 15.9 lakh and he is liable to pay tax as calculated below.
Particulars | Amount (in Rs.) | Amount (in Rs.) |
Gross Salary | 6,00,000 |
|
Less: Standard Deduction | (50,000) |
|
Income from Salary |
| 5,50,000 |
Income from Capital Gains |
|
|
Sale price of the house | 50,00,000 |
|
Less: Transfer expenses (Brokerage) | (10,000) |
|
Net Sale Consideration | 49,90,000 |
|
Less: Purchase cost | (30,00,000) |
|
Less: House improvement costs | (4,00,000) |
|
Short Term Capital Gain | 15,90,000 | 15,90,000 |
Gross Total Income |
| 21,90,000 |
Chapter VI-A Deductions |
| Nil |
Taxable Income |
| 21,90,000 |
Income Tax as per the old regime (including cess at 4%) |
| 4,72,680 |
Income Tax as per the new regime(including cess at 4%) |
| 3,55,680 |
Savings if opted for New regime |
| 1,17,000 |
Long-Term Capital Gains
The Long-Term Capital Gains (LTCG) tax applies under the following conditions: For properties sold after a holding period of 24 months, a tax rate of 20 percent will be imposed post-indexation.
In the case of shares, equity-oriented mutual funds, and zero-coupon bonds disposed of after 12 months, an LTCG tax rate of 10 percent will apply. Furthermore, for all other capital assets held beyond 36 months, a 20 percent LTCG tax will be applicable.