Long Term Capital Gain Tax

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An Introductory Guide on Long Term Capitals Gains Tax Rates

Key Takeaways

• Capital Gains are earnings from the sale of capital assets.
• Tax levied on capital gains are capital gains tax.
• Long Term Capital Gains apply on investments redeemed after 1 or three years, depending on the type of investment.
• Long-term capital gains realised on or after 23 July 2024 are taxed at 12.5% across all asset classes.
• For equity shares, equity-oriented mutual funds and business-trust units covered by Section 112A, the first INR 1.25 lakh of gains in a financial year is exempt; any excess is also taxed at 12.5%.

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What is Long Term Capital Gain Tax?

Long Term Capital Gain Tax (LTCG) is the tax levied on profits earned from selling a capital asset held for more than a specific period, usually more than 12 or 24 months depending on the asset type. Assets such as property, shares, and mutual funds fall under this category. The long-term capital gain tax rate may vary depending on the nature of the asset and applicable exemptions.

Understanding Capital Assets for LTCG Taxation

Capital assets include real estate, listed shares, bonds, and mutual funds. For instance, <b>long term capital gain tax on property applies when you sell a residential or commercial property after holding it for more than 24 months. Similarly, gains from listed shares and equity-oriented mutual funds become taxable after a holding period of 12 months.

The profit that you earn by selling capital assets is referred to as Capital Gains. This profit is categorized as income and is therefore taxed accordingly. Capital gains can be short-term or long-term, and the tax levied is short-term capital gains tax or long-term capital gains tax, respectively.

Real estate, company stocks, debentures, government securities, bonds, Mutual Fund units, etc., are examples of capital assets. Depending on the type, these assets attract long-term capital gains tax when held for a year or 3 years.

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Long-term Capital Gains Tax Rates

Long-term capital gains are taxed at a flat rate of 12.5%. This single rate applies across all asset classes, including property, listed and unlisted shares, bonds, debentures, mutual funds, exchange-traded funds, gold, and other capital assets.

Section 112A (Equity and Equity-Oriented Funds)

For equity-related investments such as listed shares, equity mutual funds, and units of business trusts, the first INR 1.25 lakh of long-term gains in a financial year is exempt from tax. Any amount above this exemption is taxed at 12.5%. Indexation is not available for these assets.

LTCG Tax – Example

Suppose you bought 100 shares of a listed company at INR 1,500 each and sold them at INR 2,500 each.

Here, the gain of INR 60,000 falls within the INR 1.25 lakh exemption limit. No tax is payable.

If your total equity gains in the year amount to INR 2,00,000:

• Exempt portion: INR 1,25,000
• Taxable gain: INR 75,000
• Tax at 12.5% = INR 9,375

LTCG Tax on Shares

Profits from selling listed equity shares held for more than 12 months are subject to long term capital gain tax on shares. Gains up to INR 1.25 lakh in a financial year are exempt. Any amount above this is taxed at a flat 12.5% without indexation.

Example: Suppose you bought listed company shares worth INR 2,00,000 and sold them after 18 months for INR 3,50,000. The gain is INR 1,50,000. Since the first INR 1,25,000 is exempt, only INR 25,000 is taxable. At 12.5%, the tax liability is INR 3,125.

LTCG Tax on Mutual Funds

Gains from equity-oriented mutual funds held for more than 12 months are subject to long term capital gain tax on mutual funds. The first INR 1.25 lakh of such gains in a year is exempt, and any amount above this limit is taxed at 12.5% without indexation. Debt and other mutual funds are now taxed at the same rate.

Example: Suppose you invested INR 2,00,000 in an equity mutual fund and sold the units after 18 months for INR 3,50,000. The gain is INR 1,50,000. After the INR 1,25,000 exemption, INR 25,000 is taxable at 12.5%, leading to a liability of INR 3,125.

LTCG Tax on Property (with Example)

If you sell a residential or commercial property after holding it for more than 36 months, you need to pay long term capital gain tax on property. The gain is taxed at a flat 12.5% without indexation.

Example: You bought a property for INR 40,00,000 and sold it later for INR 75,00,000. The taxable gain is INR 35,00,000. At a 12.5% rate, the tax payable is INR 4,37,500.

How to Calculate Long-Term Capital Gains Tax

To calculate liability, you need three key details: the sale price, the purchase price, and how long you held the asset. If it qualifies as long term, the rules for long term capital gain tax apply.

Step 1: Find the indexed cost of acquisition – Adjust the purchase price using the Cost Inflation Index (CII).

Step 2: Subtract the indexed cost from the sale price – The difference is your long-term capital gain.

Step 3: Apply the long-term capital gain tax rate – For most assets, this is 20% with indexation. For listed shares and equity mutual funds, it is 12.5% on gains above INR 1 lakh without indexation.

Step 4: Check exemptions – You may reduce tax by reinvesting gains in assets allowed under the Income Tax Act.

To make this easier, you can use a long-term capital gain tax calculator. It provides quick estimates by adjusting for inflation, the type of asset, and the relevant tax rate.

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Factors Influencing LTCG Calculation

The computation of long-term capital gain tax depends on several key factors:

• Type of Asset – Different categories of assets, such as immovable property, listed shares, or mutual funds, are subject to distinct taxation rules and holding period requirements.
• Holding Period – To qualify as a long-term capital asset, listed shares and equity mutual funds must be held for more than 12 months, whereas property requires a holding period exceeding 24 months.
• Indexed Cost of Acquisition – For certain assets, particularly property, the original purchase price is adjusted using the Cost Inflation Index (CII). This adjustment reduces the taxable portion of the gain.
• Long Term Capital Gain Tax Rate – The applicable rate varies. Gains from property are generally taxed at 20% with indexation, while gains from listed shares and equity mutual funds are taxed at 10% on amounts exceeding INR 1 lakh without indexation.
• Exemptions and Deductions – Provisions under the Income Tax Act, such as Sections 54, 54EC, and 54F, allow reinvestment of capital gains into specified avenues, thereby reducing or deferring the tax liability.

Exemptions on Long-Term Capital Gains Tax

The Income Tax Act allows certain long-term capital gain tax exemption that can lower or defer your liability on long term capital gain tax. These exemptions apply when you reinvest the gains in specified ways.

Section 54: Residential Property

If you sell a residential property and reinvest the capital gains in another residential property within the prescribed time, you can claim exemption. The new property must be purchased within two years or constructed within three years from the date of transfer.

Section 54EC: Bonds

You can claim exemption by investing the capital gains in specified bonds, such as those issued by the National Highways Authority of India (NHAI) or the Rural Electrification Corporation (REC). The investment must be made within six months of the sale, and the bonds have a lock-in period of five years.

Capital Gains Account Scheme

If you are unable to reinvest the gains before the due date for filing your income tax return, you may deposit the amount in a Capital Gains Account Scheme (CGAS). This deposit keeps the exemption valid until you are ready to use the funds for the permitted purpose.

Conclusion

Your gains from selling capital assets are considered as income. Like any other income in India, you are liable to pay tax on capital gains as well, and long-term capital gains tax is no exception to the rule. Depending on the type of sale, the long-term capital gains tax rates will differ. However, you must check the tax benefits available to you before filing your returns.

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Frequently Asked Questions - Long-Term Capital Gains

1. How to Save Tax on Long-Term Capital Gains

   You can save tax by reinvesting gains under provisions like Section 54 (residential property), Section 54EC (bonds), or by using the Capital Gains Account Scheme.

2. When to Pay LTCG Tax?

   LTCG tax must be paid before filing your income tax return for the relevant financial year, usually as part of advance tax or self-assessment tax.

3. Is there any exemption for senior citizens on LTCG?

   No separate exemption exists for senior citizens. They are subject to the same long term capital gain tax rules as other taxpayers.

*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.