Long Term Capital Gains Tax (LTCG) is a crucial component of income tax that applies to earnings derived from the transfer of capital assets such as real estate, stocks, bonds, and cars. These assets are defined as short-term or long-term based on their holding length, with long-term capital gains referring to income from assets held for a longer period, usually more than a year.
Before the Union Budget 2024, long-term capital gains on equity mutual funds and shares that exceeded Rs. 1 lakh in a fiscal year were taxed at 10%, plus applicable surcharges and cess. However, recent revisions announced by the Finance Minister have raised the LTCG tax rate for equity-linked assets while decreasing it for other assets.
Budget 2024 Long-Term Capital Gains Update
Unified Tax Rate: All long-term capital gains, whether from financial or non-financial assets, will be taxed at a single rate of 12.5%. The exemption limit on capital gains on listed financial assets has been increased from ₹1 lakh to ₹1.25 lakh per year, benefiting low and middle-income taxpayers.
Holding Period: Listed financial assets that have been held for more than a year are considered long-term. Unlisted financial assets and all non-financial assets must be held for a minimum of two years to be considered long-term.
Unlisted Bonds and Debentures: Capital gains from unlisted bonds, debt mutual funds, and market-linked debentures are taxed at the corresponding rates, regardless of holding term.
If a taxpayer owns a capital asset for more than 36 months before its transfer, it is classed as a long-term capital asset. Certain assets, such as listed equity or preference shares on a recognized Indian stock market (where share listing is not mandatory).
If the transfer occurs on or before July 10, 2014, equity-oriented mutual fund units, debentures, Unit Trust of India (UTI) units, and zero-coupon bonds will be considered long-term capital assets if held for 12 months rather than 36 months.
It should be noted that unlisted firm shares and immovable property, such as land or buildings, will be classified as long-term capital assets if held for 24 months rather than 36 months.
Also Read: Union Budget 2024-25: Key Highlights
What are Long-Term Capital Gains?
Long Term Capital Gains (LTCG) are the gains earned from the sale of a capital asset held for a long time. These gains are subject to lower tax rates than short-term capital gains, making them a desirable option for investors. The LTCG tax rate varies by asset type, but prominent categories include real estate, stocks, mutual funds, and bonds.
For example, in the case of equity-oriented mutual funds and equities, the LTCG tax rate is frequently 10% for profits beyond a certain threshold. Understanding LTCG is critical for successful tax planning and maximizing investment returns, particularly for long-term investors seeking to optimize their portfolios.
Also Read: Capital Gains Tax: Calculations Exemptions and Tips
Overview of Long-Term Capital Tax Rate
Long-Term Capital Gains (LTCG) are the profits gained from the sale of assets that have been held for a predetermined duration. In India, the tax rate on long-term capital gains varies according to the type of asset and the date of transfer. LTCG Tax Rates on various assets, including listed equity shares and equity-oriented mutual funds:
Transfers done on or after July 23, 2024: LTCG over ₹1.25 lakh in a financial year is taxed at a 12.5% rate.
Transfers done up to July 22, 2024: LTCG is taxed at a 10% rate.
With long-term capital gain indexation, taxpayers will be able to adjust the overall cost of acquisition as per inflation, thus reducing the taxable capital gains.
Different Areas of Long-term Capital Gain
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Long-Term Capital Gain Tax on Property
A long-term capital gain on property happens when it is held for more than 24 months and is sold later. The tax rate on such gains was reduced in Budget 2024. For transfers done on or before July 22, 2024, the tax rate is 20% after indexation advantages. However, for successive transfers, the rate is decreased to 12.5% without indexing. To provide extra relief, taxpayers who sell land or structures purchased before July 23, 2024, can select between two tax rates: 20% with indexation or 12.5% without indexation.
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Long-term Capital Gain Tax on Shares
If you are holding a share for a long time and you are selling it, you will gain long-term capital gain. The gain is computed by subtracting the initial purchase price from the selling price. Long-term capital gains treatment applies to listed equity shares with a holding tenure of at least 12 months. To be classified as a long-term capital asset, unlisted equity shares must be held for at least 24 months.
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Long-term Capital Gain Tax on Mutual Fund
If you keep equity mutual fund units for more than a year before selling them, you may realize long-term capital gains (LTCG). The first ₹1.25 lakh of LTCG from equities mutual funds is exempt from taxation. Any gains beyond this threshold are taxed at a flat rate of 12.5%. It’s vital to remember that there is no indexation benefit for LTCG on mutual funds, thus the gains are taxed at their full value.
Steps to Calculate Long-Term Capital Gains Tax
There is a specific step to calculate the long-term capital gains tax. Below are the steps-
Determine the Full Value of Consideration, which is the total sum obtained from selling or transferring the capital asset.
It covers monetary compensation, the market value of any property received, and other benefits.
Determine the Net Value of Consideration.
Subtract all charges associated with the transfer, such as brokerage fees, commissions, and advertising costs.
Determine the cost of acquisition:
Identify the asset’s initial purchase price.
For assets eligible for indexing: To account for inflation, use the Cost Inflation Index (CII) when calculating purchase costs. To calculate the indexed cost of acquisition, multiply the cost of acquisition by the ratio of the CII of the year of transfer to the CII of the year of acquisition.
It is important to note that long-term capital gains indexation benefits are no longer included for transfers made after July 23, 2024.
Exemptions for long-term capital gains may apply if they are reinvested in residential property or certain assets. See Sections 54, 54B, 54D, 54EC, and 54F for more information.
Calculate Long-Term Capital Gains Subject to Tax:
Apply the following formula: LTCG liable to tax = net selling consideration – (Indexed cost of acquisition + Indexed cost of improvement) – exemptions under Section 54/54B/54D/54EC/54F.
Example: If you sold a home for ₹1 crore, incurred expenses of ₹1 lakh, and the indexed cost of purchase was ₹50 lakh, your LTCG taxable to tax would be ₹49,00,000.
Example of Long-Term Capital Gain Indexation
To understand the long-term capital gain indexation, below is a short example.
Prithvi bought a flat in the year 2007 for Rs 20,00,000. He sold the same in 2024 for Rs 65,00,000. Now calculating the taxable capital gain assuming Cost Inflation Index (CII) for 2007-08 is 117 and for 2024-25 is 363.
| Particular | Amount | Amount |
| Value Consideration | 65,00,000 | |
| Less: Expenses incurred wholly and exclusively for such transfer | Nil | |
| Net Sale Consideration | 65,00,000 | |
| Less: Indexed cost of acquisition(20,00,000 * 363/117) | 62,05,128 | |
| Less: Indexed cost of improvement | Nil | |
| Long-term Capital Gains(LTCG) | 2,94,872 | |
| Less: Exemptions under section 54/54B/54D/54EC/54F | Nil | |
| Long-term capital gains chargeable to tax | 2,94,872
|
Factors Affecting Long-Term Capital Gains Calculation
Different factors can affect the overall calculation of long-term capital gains. This includes the holding period, Cost Inflation Index (CII), acquisition period, and others.
1. Asset Type
Equity-oriented assets: These include mutual funds, listed shares, and ELSS. LTCG on such assets is taxed at 10% on gains over Rs. 1.25 lakh per fiscal year. Importantly, indexation provides no benefit to equity-oriented investments.
Non-equity assets include debt mutual funds, real estate, and gold. However, the indexed cost of purchase may be used to minimize the taxable gain.
2. Holding Period
The holding period is another important consideration.
- Equity-related assets: To be considered long-term, equity-oriented assets must be held for longer than a year.
- Non-equity assets: These normally have a holding term of more than three years. A longer holding duration may result in a greater impact of indexation on non-equity assets.
3. Cost Inflation Index (CII)
The CII is especially useful for non-equity assets. CII allows adjusting the overall purchase price as per the inflation and lowering the taxable gain.
Non-equity assets: The CII is used to determine the indexed cost of acquisition. The CII is released annually by the government to represent inflation rates.
Equity-oriented investments do not benefit from indexation, which may result in higher taxed gains.
4. Acquisition and Sale Date
- Impact on calculation: The exact acquisition and sale dates establish the appropriate CII for non-equity assets as well as the holding duration for all assets. These elements are critical in assessing whether an asset is eligible for LTCG treatment and computing the indexed cost or tax-exempt level.
- Grandfathering provisions: Due to changes in tax regulations, equity-oriented assets purchased before January 31, 2018, are calculated using the higher of the actual purchase price or the market price as of January 31, 2018.
What are the Exemptions in Long-term Capital Gains?
If you are keen to maximize your long-term return on investment, it is important to have a better understanding of exemptions in long-term capital gains. There are certain exceptions set by the Income Tax Act 1961. These are-
- Section 54: This section provides an exemption if you gain LTCG upon property sale and you invest in new property within a short period. This exemption is especially useful to people wishing to upgrade or change their principal dwelling.
- Section 54EC: It allows investors to claim an LTCG exemption of up to Rs. 50 lakhs if the profits from the sale of a long-term asset, such as land or a building, are invested in certain bonds within six months of the sale. To be eligible for the exemption, these bonds, which are normally issued by the National Highways Authority of India (NHAI) should be held for a certain period.
- Equities Shares and Mutual Funds: Gains on the sale of equities shares or equity-oriented mutual fund units are excluded from income tax for up to Rs. 1.25 lakh in a fiscal year, if the sale occurs on or after April 1, 2018. However, any gains over Rs. 1.25 lakh are subject to a 12.5% tax.
Final Words
Long Term Capital Gains (LTCG) have a significant impact on investors across a wide range of asset classes, including real estate, stocks, bonds, and mutual funds. Understanding the subtleties of LTCG, from its computation and applicable tax rates to the new modifications outlined in the Union Budget 2024, is critical for efficient tax planning and investment strategies.
