Long Term Capital Gain Tax

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.
  • LTCG is generally taxed at 20% unless the gains are from the sale of ELSS securities with gains exceeding INR 1 Lakh.
  • Securities and instruments covered under section 112A are taxed at 10%.

When investing in Mutual Fund, you often hear the term ‘capital gains’. You also hear about capital gains in the context of sales of assets like property, gold, and other high-value investments. Essentially, you have to pay a tax when you redeem most of your investments and earn profits. One such tax is known as the long-term capital gains tax or LTCG tax. Let us understand the meaning of capital gains and LTCG tax in this article.

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Capital Gains and Long Term Capital Gains Tax

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.

Long-term Capital Gains Tax Rates

Long-term Capital Gains are generally taxed at 20%, not inclusive of cess. However, for the following cases, LTCG is taxed at 10%:

  • Long-term Capital Gains earned from the sale of listed securities exceeding INR 1 Lakh, per section 112A.
  • Long-term Capital Gains earned from the sale of:
    • Securities, i.e., stocks, bonds, debentures, government securities, etc., listed on the stock exchanges of India
    • Units of mutual funds or United Trust of India (UTI)
    • Zero-coupon Bonds

Under section 112A of the Finance Act, 2018, gains from the sale of equity shares or units of equity funds and equity-oriented funds will be taxed at 10% when the sale exceeds INR 1 Lakh. UTI and mutual funds not covered under section 112A are taxed at 20% plus cess.

LTCG Tax – Example

Assume you purchased 100 shares of XYZ company in 2016, at INR 1500 per share, listed on the Bombay Stock Exchange. You sell these shares in 2020 at INR 2500 per share. Since the holding period exceeds 12 months, you must pay long-term capital gains tax under section 112A.

Here:

  • Purchase Cost = INR 1500 x 100 = INR 1,50,000
  • FMV Cost = INR 1900 x 100 = INR 1,90,000
  • Sale = INR 2500 x 100 = INR 2,50,000

Therefore, long term gains = INR 2,50,000 – INR 1,90,000 = INR 60,000

Since the gains do not exceed INR 1 Lakh, you are not liable to pay taxes will pay nil tax.

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

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