What Is Long-Term Capital Gains Tax – Its Rates and How To Save On LTCG Tax?
There are two types of capital gains tax as per provisions of the IT Act, 1961. One is the Short-Term Capital Gains (STCG) tax, and the other is the Long-Term Capital Gains (LTCG) tax. LTCG tax is the tax that the government levies on the profit earned by selling off capital assets like shares or house property that has been in possession for a long duration. If you are planning to sell a capital asset that you have possessed for more than a year, then you must pay Long-Term Capital Gains tax. Read on to know the list of assets considered for LTCG tax, its rate and calculation, and more. Read on!
What Falls under Long-Term Capital Gains?
Long-Term Capital Gains refer to profits earned by persons when they sell any capital asset after holding it for a period of 1 year/2 years/3 years. So, one can earn LTCG from the following capital assets:
1. Property
The amount you earn by selling off a property held by you for over 24 months is your Long-Term Capital Gain. Before March 31, 2017, one had to hold an immovable capital asset (house property, building, and land) for a period of more than 36 months to earn Long-Term Capital Gains.
2. Stocks
If an investor sells equity shares after holding them for more than 12 months, the realised gains are referred to as Long-Term Capital Gains. However, the equity shares must be listed on the stock exchange.
3. Mutual funds
If your investment in an equity-oriented mutual fund scheme is over one year old and now you plan to transfer it, the return you gain from its sale will be your LTCG. However, the government also provides an exemption of Rs.1 lakh in a year. So, if your amount exceeds this limit, LTCG is taxable at the rate of 10% without any indexation benefit.
On the other hand, in the case of debt-oriented funds, an LTCG tax of 20% is applicable on the realised returns post indexation benefit.
Besides listed stocks and equity-oriented mutual fund units, the following are considered long-term capital assets if the holding period is over 1 year:
- Debentures, bonds, and other financial securities listed on stock exchanges
- UTI units, no matter if they are quoted or unquoted
- Zero-coupon bonds
This table represents the minimum holding period to earn LTCG from different capital assets:
| Asset type | LTCG duration |
| Immovable assets like real estate | > 2 years |
| Moveable assets like gold | > 3 years |
| Listed securities | > 1- year |
| Debt-based mutual fund units | > 3 years |
| Equity-based mutual fund units | > 1-year |
Long-Term Capital Gains Tax Rates
Rates of LTCG for different asset classes are as follows:
1. Equity asset classes
The rate of Long-Term Capital Gains Tax for profits earned from equity mutual funds is 10% without indexation benefits. However, profits of up to Rs. 1,00,000 are exempt from any kind of taxation.
Now, the sale of listed equity shares also attracts a tax of 10% on gains under LTCG provisions. For listed equity shares as well, there is an exemption of up to Rs.1,00,000.
However, for any gains or profits from the sale of unlisted shares, the rate of LTCG tax is 20% after considering indexation benefits.
2. Debt assets
In the case of debt instruments like bonds and mutual funds, the rate of taxation of LTCG is 20% after considering indexation benefits.
3. Real estate
LTCG received from the sale of real estate assets is taxed at the rate of 20% with indexation. The same rate is applicable for gold and other metals as well.
How to Calculate Long-Term Capital Gains Tax?
After earning Long-Term Capital Gains, one must find the applicable tax rate to calculate the tax liability. The computation process is effortless when you have found the correct LTCG tax rate.
However, for this purpose, you may need three things, i.e., the cost inflation index, your selling price and the initial cost at which you made your investment. Remember, for finding the inflation index, you can refer to a government publication that informs about changes in asset price according to inflation.
LTCG Tax Formula:
- First, calculate the indexed cost of acquisition, which is Purchase price x (CII of the year of purchase / CII of the year of sale)
- Next, calculate the actual gain, which is your Sale price – The indexed cost of acquisition.
How to Save on Long-Term Capital Gain Tax?
If you want to save tax on your Long-Term Capital Gains, you can consider the following tips:
1. Invest in residential property
One of the best ways to save tax on your Long-Term Capital Gains is by investing in residential property. You will be able to claim tax exemption under Sections 54 and 54F.
According to Section 54, a HUF and an individual would get an exemption on their Long-Term Capital Gains if they construct or buy a new residential property. However, the only condition is that the person must either purchase it one year before or two years after selling off the previous property. Also, if the assessee plans to construct a new residential property, the construction must be complete within three years after the sale.
On the other hand, Section 54F says that if an individual or HUF uses the amount to buy or construct a house after selling their capital asset (excluding residential property), their total gain will get exempted.
2. Invest in bonds
By investing the entire amount gained in bonds issued by REC and NHAI, one can save their tax by availing of exemption under Section 54EC. The list of bonds that one can buy is provided on the official site of the Income Tax Department of India.
3. Invest in Capital Gains Account Scheme
Another way of saving on tax is to avail of the Capital Gains Account Scheme. Under this scheme, investors enjoy exemption without purchasing a residential property. However, one can withdraw the amount from this account to purchase plots and houses.
If the withdrawal has taken place for any other purpose, one should use it before three years. In case one doesn’t utilise the amount within three years, their total profit will be subject to Long-Term Capital Gains tax as per the applicable rates.
Also Read: Taxation In Mutual Funds
Difference Between Short-Term Capital and Long-Term Gains Tax
Here are some differences between the two taxes on capital gains:
- Equity asset class excep unlisted shares: In the case of equity assets, Short-Term Capital Gains (STCG) tax is applicable when the holding period of the investment is up to one year. However, Long-Term Capital Gains (LTCG) tax is applicable when the holding period exceeds one year.
The rate of taxation for equity assets for Short-Term Capital Gains is 15%. On the other hand, the rate of taxation for LTCG is 10% without any indexation benefit. There is a relief provision for LTCG as well. Investors do not have to pay any tax on gains of up to Rs. 1,00,000. - Debt assets: Debt assets have different Short-Term and Long-Term Capital Gains taxes applicable for different holding periods. For debt assets, STCG is levied when the holding period of these assets is up to 36 months or 3 years. In the case of LTCG, these debt holdings must exceed 36 months or 3 years.
The rate of taxation of STCG depends on the investor’s respective slab rates. On the other hand, the rate of LTCG tax on debt asset classes is 20% with indexation benefits. - Real estate: For real estate, the holding period for STCG tax to be applicable is up to 2 years. Similarly, the holding period for LTCG tax to apply is more than 2 years for these asset classes.
Again the rate for Short-Term Capital Gains tax for gains earned from real estate is according to the respective tax slab of individuals. In the case of Long-Term Capital Gains, the rate of taxation is 20% on proceeds after considering indexation. - Gold: Individuals are liable to pay tax on gains accrued from the sale of gold and other metals. The holding period for STCG is up to 3 years and for LTCG is more than 3 years. The rate of taxation for STCG is as per tax slabs, and for LTCG is 20% after considering indexation benefits.
Final Word
If you have sold or are planning to sell a capital asset that you have possessed for more than a year, you are liable to pay Long-Term Capital Gains tax. Before making the final call, calculate the amount of tax you need to pay in order to plan your finances. However, as mentioned in this article, you can also save on LTCG taxes.
FAQs
Ans: No, in such a case, assessees do not have to pay any tax, and they can set off the loss amount with the cost of investment they made before. However, they must file their ITR to gain this benefit.
Ans: No, the exemption is only available if one uses their long term capital gains to buy or build a property in India. Also, the construction must get finished within three years of selling the previous property.
Ans: While calculating tax, we only take the indexed cost of acquisition. This is because the values get adjusted against the changes in inflation over the years during which a person holds a capital asset. So, for example, if an asset is held from 2001 to 2003, it will consider two years of inflation.
Ans: The tax exemption limits are as follows:
1. For resident Indians aged 80 years or above: Earnings up to Rs. 5,00,000 are tax-exempt
2. Resident Indians aged 60-79 years: Earnings of up to Rs. 300,000 are exempted from tax
3. Individuals aged below 60 years: No tax is applicable on an income of up to Rs. 2,50,000
4. HUF: Exemption is available if the annual income of an HUF is not more than Rs. 2,50,000.
5. NRIs: Earnings of up to Rs. 2,50,000 are tax-exempt
Ans: LTCG taxes will apply on gains accrued for the sale of any real estate property that is more than 24 months old and up for sale. LTCG has taxed at the rate of 20% plus the applicable surcharge with the benefit of indexation.
Individuals can deduct or reduce any cost incurred during the sale of property, cost of purchasing or owning that property, expenses incurred on improvement or modification of structure, etc.
Ans: No, the tax will not be applicable in case of losses incurred. LTCG is only levied on capital gains and that too first Rs.1 lakh is exempt from any taxation.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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