Senior citizens’ guide to ITR: Capital gains tax on liquidating assets for post-retirement income
Senior citizens planning to liquidate assets such as real estate, stocks, mutual funds, bonds, gold, or urban agricultural land for post-retirement income must be aware of capital gains tax implications. Capital gains tax applies to the proceeds from these investments, affecting overall retirement income.
Investments held for a minimum of one to three years, including real estate, stocks, mutual funds, and zero-coupon government bonds, fall under the Long-term capital gains (LTCG) category. LTCG tax rates vary based on the type of asset and holding period.
Equity-based assets, including equity mutual funds, incur an Short-Term Capital Gains (STCG) tax at a fixed rate of 15% if held for less than twelve months. For example, selling equity shares after nine months with a profit of Rs 50,000 incurs an STCG tax of 15%. If total taxable income (excluding STCG) remains within Rs 3 lakh for senior citizens (60-80 years) or Rs 5 lakh for super senior citizens (80+ years), the unutilized exemption can be adjusted against STCG.
Tax exemptions for senior citizens:
- The base exemption limit for capital gains tax is Rs 3 lakh for senior citizens (60-80 years) and Rs 5 lakh for super senior citizens (80 years and above).
- Individuals below 60 years and Hindu Undivided Families (HUFs) have an exemption limit of Rs 2.5 lakh per annum.
- Senior citizens can benefit from the basic exemption limit for short-term capital gains (STCG).
Tax calculation examples:
Mr. A’s Property Sale: Purchased for Rs 30 lakh in January 2018 and sold for Rs 50 lakh in January 2020. With improvements and brokerage costs, Mr. A’s short-term capital gains are Rs 15.9 lakh. Given his income and the highest tax slab (30%), he is liable for tax accordingly.
Long-term capital gains (LTCG) tax rates:
- Properties sold after 24 months incur a 20% LTCG tax post-indexation.
- Shares, equity-oriented mutual funds, and zero-coupon bonds sold after 12 months incur a 10% LTCG tax.
- Other capital assets held beyond 36 months incur a 20% LTCG tax.
Reverse mortgage loans:
Under Section 10(43) of the Income Tax Act, 1961, reverse mortgage payments are not considered income, thus exempt from tax. Banks can sell the property to recover the loan after the borrower’s demise.
By understanding these tax implications and exemptions, senior citizens can make informed decisions to maximize their post-retirement income. It is pertinent to consider the tax implications when liquidating assets for post-retirement income and diversify investments to balance potential returns and tax liabilities.