Long Term Capital Gains Tax (LTCG)

LTCG or Long-Term Capital Gains apply to earnings from selling capital assets like stocks, mutual funds, or real estate held for a specific period, typically exceeding one year. This contrasts with short-term capital gains, taxed on assets held for shorter durations.

LTCG is essentially a government levy on your investment income. The tax rate depends on the type of asset and your income bracket. While it can seem complex, understanding the basics is key. This tax can impact your investment returns, so knowing how to minimise your LTCG burden potentially is valuable.

LTCG (Long-Term Capital Gains) tax applies to various investment types in India, but primarily on those held for a long term and generating capital gains.

Equity Investments: This includes stocks or shares of listed companies and equity-oriented mutual funds (holding at least 1 year).

Real Estate: Profits from selling property held for more than a specific period (usually 2 years) are subject to LTCG.

Business Trust Units: These units function similarly to shares and attract LTCG if held for over a year.

You must know a few things to determine how much Long-Term Capital Gains (LTCG) tax you owe. First off, this tax applies to the profit you make from selling something you have owned for more than 24 months.

The rate of LTCG tax depends on what you are selling and how long you have had it.

Let us take India as an example: if you sell equities, mutual funds, or stocks and make a profit of over ₹1 lakh in a year, you will pay a 10% tax on that profit.

For other assets like real estate, gold, or LTCG on mutual funds, the tax rate is 20%, but you get an advantage called indexation.

Here is how you calculate your LTCG tax:

• Find out how much you sold your asset for, i.e., its Sell Value.

• Figure out how much you paid for the asset in the first place, i.e., Cost of Acquisition.

• Adjust the cost of acquisition using indexation, i.e., Indexed Cost of Acquisition.

• Calculate your LTCG, which is the difference between the Sell Value and the Indexed Cost of Acquisition.

• Apply the tax rate to your LTCG to find out how much tax you owe.

For example, if you sold equities mutual funds for ₹5 lakhs after holding them for three years, and the indexed cost of acquisition is ₹3 lakhs, your LTCG would be ₹2 lakhs.

Since the profit exceeds ₹1 lakh, you would pay a 10% tax on the amount above ₹1 lakh, which in this case would be ₹10,000.

In India, when you sell assets that you have owned for more than 24 months, you may need to pay long-term capital gains tax. The rate of this tax depends on the type of asset you are selling and the tax laws that apply to it.

• If the profit you make from selling assets like stocks, shares, real-estate properties or business units exceeds ₹1 lakh, you will typically face a long-term capital gains tax rate of 10% for listed assets.

However, there is an exception: if you paid the securities transaction tax (STT) when you bought and sold the securities, you might not have to pay this tax.

• The taxation of LTCG is 20% for other assets like gold or real estate. But here's the catch: you can adjust the asset's purchase price for inflation, which might lower the tax rate you have to pay. This process is known as indexation.

The usual long-term capital gain percentage stands at 20%, augmented by surcharge and cess as applicable. However, there are certain exceptions where individuals are subject to a lower tax rate of 10% on their total Capital Gains. These instances include:

• Long-term capital gains generated from the sale of listed securities exceeding ₹1,00,000, as per Section 112A of the Income Tax Act of India.

• Profits earned from the sale of securities listed on a recognised stock exchange in India, zero-coupon bonds, and any Mutual Funds or UTI sold on or before 10th July 2014.

Let us consider a scenario:

Suppose Ms Patel invests in a piece of land for ₹3,50,000 and decides to sell it after holding it for 15 years for ₹12,00,000. Based on inflation adjustments, the indexed cost of acquisition for the land amounts to ₹7,80,000.

After deducting the indexed cost of acquisition from the selling price, her taxable gain would be ₹4,20,000. If she chooses to utilise indexation, she would owe a 20% tax on this amount, totalling ₹84,000.

Alternatively, if she opts not to utilise indexation, her taxable gain would be calculated directly by subtracting the selling price from the cost of acquisition, resulting in ₹8,50,000. Applying the 10% tax rate on this taxable amount, she would owe ₹85,000 in taxes.

In India, there are a couple of ways to potentially avoid paying Long-Term Capital Gains Tax (LTCG) entirely or get some relief.

Here are the main exemptions to be aware of:

Section 54:

Under Section 54, individuals or Hindu Undivided Families can avoid paying long-term capital gain tax for property if they sell a built-up house and utilise the capital gain to buy or construct a new residential property.

The new property should be purchased either 1 year before or 2 years after selling the existing property. If opting for construction, it must be completed within 3 years of selling the house.

To qualify for tax exemption, the entire capital gain must be invested in buying the new property. Any surplus amount not utilised for the property purchase will be subject to long-term capital gains tax. Additionally, the investment should be made in only one property in India.

Section 54F:

Under Section 54F, individuals or Hindu Undivided Families can avoid taxes when selling any capital asset other than residential property and utilising the capital gain to purchase or construct a house.

In this case, the entire net sale consideration must be invested, not just the capital gain. Failure to invest the full amount will result in a proportionate taxable amount as per Indian Income Tax laws.

Investing in Bonds - Section 54EC:

Section 54EC allows taxpayers to save on long-term capital gains tax by investing the total amount in bonds issued by NHAI and RECL. The list of eligible bonds is available on the Income Tax Department of India's official website.

Capital Gain Account Scheme:

This scheme provides tax exemptions without the necessity of purchasing a residential property. Funds withdrawn from this account can only be used for purchasing houses or plots within 3 years of withdrawal. Failure to do so will subject the total profit amount to applicable long-term capital gains tax rates.

Understanding Long-Term Capital Gains Tax (LTCG) is crucial for any investor in India. By familiarising yourself with the applicable tax rates, exemptions, and potential saving strategies, you can make informed investment decisions and maximise your returns.

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