Capital gains tax is levied whenever an individual earns a profit by selling capital assets such as residential plots, vehicles, stocks, bonds, and even collectables such as artwork.
It is primarily categorised into 2 types: Short-Term Capital Gains Tax and Long-Term Capital Gains Tax. Transactions involving any such capital asset are taxable under the Income Tax Act of India, as well as cess and any other surcharge that may be applicable on the sale.
These taxes apply on movable and immovable assets, including residential properties, vacant plots, and assets like shares (both equity and listed) debentures, units of Equity-Oriented Mutual Funds, Government Securities, UTI, Zero-Coupon Bonds, etc.
These can attract the calculation of LTCG tax in India after 12 months to 36 months of ownership (depending on the type of property).
Calculation of LTCG Tax
For the calculation of the Long Term Capital Gains (LTCG) tax, the tax is charged on the profit gained from the sale of an asset held for longer than 24 months.
The LTCG tax rate is determined by the asset type and the holding period.
In India, for example, the LTCG tax on equities, mutual funds and stocks is 12.5% if the profits reach Rs. 1.25 lakh in a fiscal year. The LTCG tax rate is 12.5% with an indexation advantage for other assets such as real estate, gold, and debt mutual funds.
To compute the LTCG tax, perform the following steps-
- Calculate the Asset's Sell Value.
- Calculate the Cost of Acquisition.
- Calculate the Indexed Cost of Acquisition.
- Calculate the LTCG.
- Calculate the Tax.
Let’s assume you have invested Rs.40 lakh in equity funds in 2020. By 2024, your funds are collectively valued at Rs.55 lakh. Let’s look at the difference in the LTCG tax you are liable to pay prior and post the Union Budget 2024 announcement
Formula to calculate LTCG tax = Gains (minus) exemption amount * rate of tax
Here, gains are calculated by deducting the redemption amount deducted by investment amount.
From the above example, this would be Rs.55 lakh (minus) Rs.40 lakh = Rs.15 lakh
Previous LTCG @10%; (Exemption – Rs.1 lakh) - Regulation Before Union Budget 2024
(Gains – Rs.1 lakh)*10%.
Rs.15,00,000 – Rs.1,00,000)*10% = Rs.14,00,000*10% = Rs.1,40,000
New LTCG LTCG @ 12.5%; Exemption – Rs.1.25 lakh) - Regulation After Union Budget 2024
(Gains – Rs.1.25 lakh)*12.5%
(Rs.15,00,000 – 1,25,000)*12.5% = 13,75,000*12.5% = Rs.1,71,875
Tax on Long-term Capital Gain
In India, profits from the sale of assets held for more than 24 months are subject to long-term capital gains tax. The kind of asset and the relevant tax legislation determine the tax rate on long-term capital gains.
If long-term capital gains exceed INR 1 lakh, long-term capital gains tax is currently assessed on listed assets at a rate of 12.5%. However, long-term capital gains will not be subject to taxation if securities transaction tax (STT) was paid on the acquisition and sale of the securities.
The long-term capital gains tax rate for other assets, such as gold or real estate, is 12.5%, with an indexation advantage. This indicates that the asset's purchase price, adjusted for inflation, determines the tax rate.
Assets | LTCG Tax Rate |
Equity Mutual Funds, Stocks | 12.5% |
Gold, Debt Funds, Miscellaneous Assets, Land, Flats, Real Estate | 12.5% |
After the Union Budget 2024, the proposed tax rate for listed securities is 12.5% without indexation.
Exemptions on Long-Term Capital Gains Tax
Capital gains up to Rs 1.25 lakh per year (equity) are exempted from capital gains tax.
Long-term capital gain tax rate on equity investments/shares will continue to be charged at 12.5% on the gains. On the other hand, short-term capital gains tax on shares or equity investments will be charged at 15%.
Long-term Capital Gains Tax | On the sale of:
| Applicable Tax Rate: 12.5% over and above Rs 1.25 lakh |
Others | Applicable Tax Rate: 12.5% |
Saving Tax on Long-Term Capital Gain
Here are the details about saving tax on long-term capital gain-
Investing in Residential Property
One can purchase new residential house property to save taxes on long-term capital gains. These exemptions are linked under Section 54 and Section 54F:
- Section 54:
Under Section 54, an individual or Hindu Undivided Family will be exempted from paying long-term capital gains tax if they sell a built-up house and use the capital gain to purchase or construct a new residential property.
The new property has to be purchased either 1 year before or 2 years after the sale of the existing property. If the seller wishes to construct a new property, it must be completed within 3 years of selling the house.
Moreover, the entire capital gain has to be invested in buying the new property if the seller seeks an exemption from tax. Otherwise, any excess amount not utilised to purchase the property will be chargeable for long-term capital gain tax in India. The amount should also be utilised to purchase or construct only one property in India.
- Section 54F
Under Section 54F, when an individual or a Hindu Undivided Family sells any capital asset other than a residential property and utilises the capital gain to purchase or build a house, then the total value will be exempted from taxes.
In this case, the total net sale consideration has to be invested instead of only the capital gain. In case the total net sale consideration is not invested, the amount will be taxable according to a proportionate basis under the Income Tax Act of India. The rest of the conditions will be similar to Section 54.
Investing in Bonds - Section 54EC
One can also follow Section 54EC to save on long-term capital gains tax by transferring the total amount to acquire bonds issued by NHAI and RECL.
The list of these bonds is available on the official website of Income Tax Department of India.
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Capital Gain Account Scheme
A capital gain account scheme allows an investor to enjoy tax exemptions without purchasing a residential property. The Government of India allows the withdrawal of funds from this account only to purchase houses and plots.
If withdrawn for other purposes, the funds must be utilised within 3 years of withdrawal.
Otherwise, the total profit amount will be charged in accordance with the long-term capital gain tax rates as applicable.
The long-term capital gains tax was introduced with the introduction of the Union Budget of 2018. Every individual is liable to pay LTCG after selling capital assets exceeding Rs. 1 Lakh. One can follow the details mentioned above to know more about taxes on long term capital gains.
