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Buy capital gains bonds to avoid LTCG tax

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Your brother can avoid paying this capital gains tax by investing the entire net sales proceeds in a residential property and by meeting the requirements as laid down under Section 54F of the Income Tax Act. He may also invest in capital gains bonds to avoid paying tax on the long-term capital gains

I’m a US citizen living in the US. My brother, who lives in India, will inherit my US brokerage account as a gift. I would appreciate it if you could help me learn the tax consequences for my brother and how that tax impact can be reduced. Is there a difference if assets in my brokerage account were listed US securities or mutual funds? My understanding is that my brother will have to pay long-term capital gains tax at the rate of 20% and the gains would be computed from my tax basis when I purchased the stocks many years ago.

—Name withheld on request

In case a person residing in India inherits capital assets based on a Will or upon receiving a gift from specified relatives, there is no tax levied due to the event of inheritance or gift. However, when the inheritor sells such capital assets, tax is levied.

Your brother will have to pay capital gains tax on the gains from the sale of US securities or mutual funds whenever he decides to sell them.

Such assets shall be considered as long term when held for more than two years and short term when held for a period less than two years.

On long-term capital gains, a 20% tax (additional cess and surcharge as applicable) shall be levied. Short-term capital gains shall be taxed according to the tax slabs applicable to your brother based on his total taxable income.

The period for which these assets were held by you shall be considered for calculating the holding period of the new owner, i.e. your brother.

Your brother can avoid paying this capital gains tax by investing the entire net sales proceeds in a residential property and by meeting the requirements as laid down under Section 54F of the Income Tax Act. He may also invest in capital gains bonds to avoid paying tax on the long-term capital gains.

Archit Gupta is founder and CEO, ClearTax.

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