Long-Term Capital Gains Tax (LTCG)

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Capital gains refer to the profits an investor incurs when they sell or redeem their capital assets. It is important to be aware of Long-Term Capital Gain Tax on different types of capital assets.

In this article, we will cover the latest LTCG tax as per the budget 2025, tax brackets based on the holding period and the investments that are exempted from tax.

Introduction to Long Term Capital Gain Tax

The Income Tax Act of 1961's Section 45 defines LTCG as the profit from the sale of a capital asset held for a predetermined amount of time. Although it varies according to the asset type, this period usually lasts between 12 to 36 months. LTCG is taxable as "Capital Gains" and is regarded as income in the year of the asset's transfer.

One of the benefits of Long-Term Capital Gains is the benefit of indexation, however after July 23,2024, indexation benefits have been narrowed down to a few capital assets.

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Assets Covered Under Long Term Capital Gain

With the recent budget rules, long term capital gain (LTCG) tax in India applies to assets which include shares, mutual funds, property, gold, bonds, and more. Here’s a list of capital assets that qualify for LTCG.

Long-Term Capital Gain Tax on Shares

For listed equity shares, the capital gains tax on shares is based on the holding period of the securities. Here is the following LTCG tax rate on shares as per the latest provisions:

Long Term Capital Gain Tax for Property

If you plan to sell your property after 24 months, the gains will be taxed under the long-term capital gain tax for property. After July 2024, there have been several changes to how property gains are taxed, indexation benefits and exemptions.

Long Term Capital Gain Tax on Mutual Fund

The long-term capital gains tax on mutual funds are applicable to the gains from units that are held beyond specified periods. Here are the different long-term capital gain tax brackets for various types of mutual funds.

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How to Calculate Long Term Capital Gains

Calculating long-term capital gains (LTCG) is a straightforward process when you follow the right formula and understand the components involved. Here’s how you can do it:

LTCG Formula: Sale Price− (Indexed Purchase Price+ Indexed Improvements +Transfer Costs)

• Sale Price: The price that you obtain from selling the asset, including property, shares, or mutual funds.
• Purchase Price: The initial price paid to acquire the asset.
• Improvements: Any capital improvements or upgrades to the asset during the holding period.
• Transfer Costs: Direct expenses associated with the sale, such as brokerage, legal fees, stamp duty, and advertising.

Indexation: Adjusting for Inflation

For some investments such as real property or unlisted equity shares, indexation is employed to account for the cost of acquisition and value addition for inflation.

This is achieved by employing the Cost Inflation Index (CII) released by the Income Tax Department. The indexed cost is calculated as:

Indexed Cost=Original Cost × (CII of Purchase Year / CII of Sale Year)

This change makes you liable to pay tax only on actual gains, not the part lost due to inflation.

Example:

If you purchased a property in 2010 for INR 10,00,000 (CII in 2010: 167) and sold it in 2025 for INR30,00,000 (CII in 2025: 363). You incurred INR2,00,000 in improvements in 2015 (CII in 2015: 254), and transfer charges were INR 1,00,000.

• Indexed Purchase Price = INR 10,00,000 × (363 / 167) = INR 21,74,850
• Indexed Improvements = INR 2,00,000 × (363 / 254) = INR 2,85,039
• Total Deductions = INR 21,74,850 + INR 2,85,039 + INR 1,00,000 = INR 24,59,889
• LTCG = INR 30,00,000 – INR 24,59,889 = INR 5,40,111

Exemptions and Deductions on LTCG

Under the Income Tax Act, investors can claim several exemptions as well as deductions to reduce their tax liability on long term capital gains tax. Some of the key provisions for deductions include:

Additional Points

• Agricultural Land: Gains from sale of certain agricultural land may be exempt under Section 54B if reinvested in other agricultural land.
• Set-Off and Carry Forward: For a maximum of eight assessment years, LTCG losses may be carried forward and offset against other LTCG.
• Exemption Limit: For listed equity shares and equity mutual funds, LTCG up to INR 1.25 lakh per year is tax-free from July 23, 2024.
• Revocation: If the new asset is sold within 3 years (for property), the exemption claimed is reversed and taxed as LTCG in the year of sale.

What is Capital Gains Account Scheme?

The Capital Gains Account Scheme (CGAS) is a scheme introduced by the Government of India. This scheme states that if you sell a capital asset for long term gains but cannot reinvest the gains for long term capital gain tax exemption before filing for income tax return, you can deposit the unutilized profits in a Capital Gains Account.

Investors can opt between a savings account or term deposit account for CGAS. It is important to note that withdrawals from this account can only be done for reinvestment purposes.

Filing LTCG in Income Tax Returns

Filing your long-term capital gains (LTCG) tax correctly is crucial for smooth processing, avoiding notices, and expediting refunds. Recent changes have made the process more streamlined for small investors.

• ITR-1:
  Use for reporting LTCG from listed equity shares or equity mutual funds under Section 112A, provided total LTCG does not exceed INR 1.25 lakh in the year and there are no carried forward losses or other complicating factors. This makes filing easier for small investors.
• ITR-2 or ITR-3:
  Required if:
• LTCG on listed equities/equity funds exceeds INR 1.25 lakh,
• You have LTCG from property, unlisted shares, or other capital assets,
• You have short-term capital gains, carried forward losses, or more complex income situations.
• Reporting Requirements:
• Include dates of acquisition and sale, sale values, cost of acquisition, deductions, and exemption proofs (like reinvestment under Sections 54, 54F, 54EC).
• Report gains separately for transactions before and after July 23, 2024, due to changes in LTCG tax rules.
• For buyback of shares (from October 1, 2024), report proceeds as 'Income from Other Sources' in the ITR.
• Documentation:Keep sale/purchase agreements, broker statements, bank proofs, and exemption certificates ready for verification.

Impact of Budget Changes on LTCG

No changes have been made to the long-term capital gains (LTCG) tax rate or the holding period requirements for FY 2025-26. The uniform 12.5% LTCG tax rate and the revised 12/24-month holding periods remain in effect.

• Section 87A Rebate: LTCG (and other capital gains taxed at special rates) are excluded from Section 87A rebate eligibility. Even if your total income is below ₹12 lakh, LTCG tax is still payable on gains from shares, mutual funds, or other assets.
• Long-Term Capital Loss Set-Off Rule: From FY 2025-26, long-term capital losses can be used to offset gains only once. Repeated set-off of the same loss across multiple years is no longer permitted, affecting capital gains tax planning.
• NRI LTCG Tax Relief: Non-resident Indians (NRIs) selling unlisted shares may now adjust the sale price for currency fluctuations, reducing their capital gain tax for NRI liability on such transactions.

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Conclusion

Long term capital gains tax can reduce your investment profits if not managed well. By understanding holding periods, leveraging exemptions like Section 54 or 54EC, and choosing tax rates wisely, you can save money. Budget 2025 keeps most rules steady, making it a great time to plan. For tailored advice, explore DBS Treasures Wealth Management Services to optimize your investments.