Long-Term Capital Gains (LTCG)

Long-term capital gains (LTCG) arise when you sell a capital asset—such as real estate, equity shares, or various types of mutual funds—after holding it beyond the period that the Income Tax Act classifies as “long-term.” The minimum holding period is different for different assets: for instance, real estate and unlisted shares are treated as long-term after two years, equity-oriented investments after one year, and most debt-oriented funds after three years.

To compute LTCG, the sale consideration is adjusted by deducting the inflation-indexed cost of purchase, any indexed expenditure on improvements, and expenses incurred in completing the transfer. Indexation increases the historical cost to reflect inflation, thereby reducing the taxable portion of the gain. Taxpayers may also claim relief if they reinvest the gains in specific ways—for example, purchasing another residential property or investing in notified bonds—under provisions such as Sections 54, 54EC, and 54F. The tax rate depends on the type of asset: equity-related gains above ₹1 lakh are taxed at 10% without indexation, while most other long-term assets are subject to 20% tax with indexation benefits.

Illustration:

Consider a scenario where you sell a residential property after holding it for more than two years. After applying indexation to the original cost, suppose the remaining long-term gain amounts to ₹8 lakh. If you use this amount to acquire a new residential property within the prescribed time limits, you may claim exemption under Section 54 and reduce or eliminate your tax liability.

LTCG is reported in the Assessment Year that follows the Financial Year in which the gain arises. Thus, gains realized during FY 2022–23 would be declared and taxed in AY 2023–24.