Most of you will come across this term when we make a huge return of investment from a property sale. It is a very common scenario in India to invest in properties as part of the investment. But the returns of investments attract capital gain tax. There are few legal ways where you can save tax on your capital gain, be it STCG or LTCG
This is the most common method we follow. Invest the capital gain to buy a new property or construct a house ( maximum 2 houses ). You can do it one year before or within two years after you make the sale.
Yes it is legal according to section 54 of income tax act.
There is one more condition, the capital gain must not exceed 2 crores in order to claim this exemption.
For this, you can invest the capital gain in bonds issued by the government but there are restrictions. Like you can only invest up to 50 lakhs and only bonds issued by the National Highway Authority of India (NHAI) and Rural Electrification Corporation.
This is also legal according to section 54 EC of IT act.
If you ask me, I would say it is better to reinvest in property because the interest rate on returns from this bond is less like 6% and there is a lock-in period of 5 years. It is kind of unattractive.
In this condition, to save tax on capital gain you have to invest the entire sale proceed not just the capital gain to buy a property, construction, or bonds.
