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Introduction:

There are two types of capital gains tax that exist under the provisions of the Income Tax Act, 1961 Long Term Capital Gains tax (LTCG) and Short Term Capital Gains tax(STCG) and . The LTCG tax is imposed by the government on the profit generated from the sale of capital assets such as shares or house property held for an extended period. If you intend to sell a capital asset owned for more than a year, you must pay the Long-Term Capital Gains tax. Explore further to understand the assets subject to LTCG tax, its rate and calculation, and more. 

Long Term Capital Gains Tax:

Long Term Capital Gains are profits earned when individuals sell a capital asset after holding it for a period of 1 year, 2 years, or 3 years. You can earn LTCG from the following

• When an investor sells equity shares after holding them for more than 12 months, the resulting gains are classified as Long-Term Capital Gains. It is important to note that the equity shares must be listed on the stock exchange.

• The proceeds from the sale of a property owned for more than 24 months constitute your Long-Term Capital Gain. Prior to March 31, 2017, holding an immovable capital asset (house property, building, and land) for more than 36 months was required to qualify for Long-Term Capital Gains.

•  If you plan to sell an equity-oriented mutual fund scheme that you have invested in and have held for more than a year, the profit will be recognized as Long-Term Capital Gains (LTCG). Additionally, the government grants a one-lakh exemption annually. Should the sum exceeds this limit, Long Term Capital Gains are subject to 10% taxation, without any indexation benefit.

• For debt-oriented funds, a 20% LTCG tax is applied to the realised returns after considering the indexation benefit.

In addition to listed stocks and equity-oriented mutual fund units, the following are deemed long-term capital assets if held for over 1 year:

• UTI units, whether quoted or unquoted, are treated the same way.

• Debentures, bonds, and other financial securities listed on stock exchanges are included.

• Zero-coupon bonds

Tax Rates:

The Long-Term Capital Gains rates for various asset classes are as follows:

• For debt instruments such as bonds and mutual funds, the LTCG is taxed at a rate of 20% after factoring in indexation benefits.

• Long-term capital gains (LTCG) arising from the sale of real estate assets are subject to a 20% tax rate when calculated with indexation. This rate is also applicable to gains from the sale of gold and other metals.

• The Long-Term Capital Gains Tax rate for profits derived from equity mutual funds is 10%, without the benefit of indexation. Nevertheless, gains up to Rs. 1,00,000 are exempt from tax.

• The sale of listed equity shares now incurs a tax of 10% on gains under LTCG provisions. Similar to equity mutual funds, listed equity shares also have an exemption of up to Rs. 1,00,000.

• Gains or profits from the sale of unlisted shares attract an LTCG tax rate of 20% after considering indexation benefits.

 Long Term Capital Gains Tax  Calculation:

After acquiring Long-Term Capital Gains, it is essential to determine the applicable tax rate to calculate the tax liability. The computation process becomes straightforward once you have identified the correct LTCG tax rate.

To conduct this calculation, you’ll need three essential pieces of information: the cost inflation index, your selling price, and the initial cost at which you invested.. It’s worth noting that you can find the inflation index in a government publication that tracks changes in asset prices based on inflation.

Tax Formula:

• First, calculate the indexed cost of acquisition using the formula: Purchase price x (CII of the year of purchase / CII of the year of sale).

• Next, calculate the actual gain by subtracting the indexed cost of acquisition from the sale price.(Sale price – The indexed cost of acquisition)

Tips to Minimize Long-Term Capital Gains Tax:

• Investing the entire gained amount in bonds issued by REC and NHAI allows individuals to save on taxes by availing the exemption under Section 54EC. The list of eligible bonds is available on the official website of the Income Tax Department of India.

• A highly effective method to save tax on your Long-Term Capital Gains is by investing in residential property, thereby qualifying for tax exemption under Sections 54 and 54F.

• Under Section 54, both individuals and Hindu Undivided Families (HUFs) can claim an exemption on Long-Term Capital Gains by either buying or constructing a new residential property. The condition is that the property must be purchased one year before or two years after selling the previous property. If constructing a new property, it must be completed within three years after the sale.

•  Section 54F provides that if an individual or Hindu Undivided Family (HUF) utilizes the proceeds to purchase or construct a house after selling their capital asset (excluding residential property), the entire capital gain will be exempted.

• Another method to save on taxes is by utilizing the Capital Gains Account Scheme. This scheme offers exemptions without the necessity of acquiring a residential property. However, funds from this account can be withdrawn for the purchase of plots and houses.

• If the withdrawal is made for any purpose other than purchasing a residential property, it should be utilized within three years. Failure to utilize the amount within this timeframe will subject the total profit to Long-Term Capital Gains tax at the applicable rates.

Conclusion:

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 decision, calculate the amount of tax you need to pay to plan your finances. However, as discussed in this article, there are ways to save on LTCG taxes.