LTCG Tax Calculation Examples: How it is Done - Groww
LTCG Tax Calculation Examples: How it is Done - Groww
Investing in mutual funds and other assets is crucial for individuals to create wealth. However, many financial terminologies may be difficult to understand.
Capital gain is one such term. It is the profit earned from the sale of capital assets. Property, buildings, leasehold rights, trademarks, etc, are some examples of capital assets. Capital gains are classified into two types: short-term and long-term gains.
Short-term assets are held for a short duration, whereas long-term assets are held for a longer duration. When such assets are sold, individuals need to pay capital gain tax in India. In this guide, we will understand the long-term capital gains tax in detail.
What is Long-Term Capital Gains Tax?
Long-term capital gain or LTCG tax is the income tax levied on the sale of assets that are held for a long duration. The assets may include shares, mutual funds, bonds, commodities and real estate. There are some of the key characteristics for the computation of LTCG tax are listed below:
Eligible Assets: The eligible assets for LTCG tax are equity shares, bonds, debentures, real estate, mutual funds and more.
Holding Period: The holding period for capital assets, such as residential property, houses, etc, is 24 months or more. However, for assets like securities, equity shares, debentures, bonds, etc., it is 12 months or more.
**Calculation:**Capital gain for immovable property is calculated by subtracting the indexed improvement cost or indexed acquisition cost from the tax sale amount. The remaining gain is the profit, which is subject to taxation.
Reporting and Compliance: To report LTCG, taxpayers need to mention the details in the ITR-2 or ITR-3 form while filing annual returns. The reporting details include acquisition cost, sale price and more. All the filed details need to be accurate.
Indexation: LTCG Indexation benefits are also available to manage or adjust the cost of improvement and acquisition for inflation. This benefit helps in reducing the capital gain tax and offers relief from the impact of inflation.
Tax Rates on Long-term Capital Gains
The applicable tax rate on long-term capital gains is referred to in the table below.
| Tax Name | Condition | Applicable Tax Rate |
|---|---|---|
| Long-Term Capital Gain Tax | When selling equity-oriented funds or equity shares etc, | 10% over and above ₹1 lakh |
| Long-Term Capital Gain Tax | Other capital assets | 0.2 |
Formula for Computation of Long-Term Capital Gain for Immovable Property
The long-term capital gain formula includes the following:
Capital Gains = Final Sale Amount - (Indexed House Improvement Value +Transfer Cost + Indexed Acquisition Cost)
Below is the meaning of the above-mentioned components:
Final Sale Amount: It is the total or final value obtained after selling the asset or property.
Indexed House Improvement Value: This is another essential component that covers the cost of renovation, addition or upgrades to increase the value of an asset or property over time.
Transfer Cost: This component covers the cost of transferring the ownership of assets or property. It includes the legal fees, transaction-related costs, real estate brokerage charges and more.
Indexed Acquisition Cost: This component covers the original cost of obtaining the property or asset adjusted for inflation. Its value accounts for variation in cost over time.
LTCG Calculation Example
Let’s understand the calculation of LTCG on property by example. Suppose person A purchased a property in 2010 for ₹50,00,000. Then, he decided to sell it in 2014 for ₹1,20,00,000.
Over time, person A invested in property renovation or maintenance, which cost him around ₹7,00,000. The transfer cost of the property is, let’s say, ₹2,00,000. Let’s assume the indexed acquisition cost based on inflation is ₹70,00,000.
So, as per the formula;
Capital gain = ₹1,20,00,000 - (₹70,00,000 + ₹7,00,000 + ₹2,00,000)
Capital Gain = ₹1,20,00,000 - ₹79,00,000
Capital gain = ₹41,00,000
The above capital gain amount is subjected to tax based on applicable tax rates.
Exemptions on Long-Term Capital Gain Tax
Investors will have certain exemptions in long-term capital gain tax under different sections of the Income Tax Act.
Section 54 of the Income Tax Act offers an exemption on LTCG tax if the capital gain is from selling a residential property and the amount is reinvested in two other residential properties within the decided time frame (Before the Budget of 2019, it was limited to a single house property).
Section 54EC of the Income Tax Act offers an exemption on capital gain up to ₹50 lakhs, which is generated from the sale of long-term assets if the amount is reinvested in the specified bonds within the 6-month duration.
Capital gains up to ₹1 lakh generated from the sale of equity-oriented mutual funds or equity shares on or after 1 April 2018 in the financial year are exempt from tax. However, capital gains over ₹1 lakh should be taxed at 10%.
Understanding LTCG Calculator
The LTCG calculator simplifies the calculation of long-term capital gain. Using the tool, individuals can determine their capital gain and tax liability.
The calculator consists of formula boxes where the individual enters the purchase cost, holding period, sale value, and more. After entering the value, the calculator displays the long-term capital gains.
However, the long-term capital gain tax calculator specifics may vary from online website to website. Below are the general instructions individuals need to follow to compute long-term capital gain using a calculator.
Step 1: Enter or add the value of sold assets such as equity shares, property, etc.
Step 2: Add the date of sale and purchase of the asset.
Step 3: Add the buying and selling price of the asset.
The LTCG calculator will generate the outcome, which is the amount of capital loss or gains, tax payable, tax applicable rate, indexed buying price, etc.
Conclusion
Long term capital gain tax is vital for individuals and investors. To pay capital gain tax on time, they need to know the LTCG calculation, applicable tax rate, holding period, and more.
However, individuals and investors can also be exempt from paying taxes under various sections. By knowing these sections, individuals can make informed decisions.
Reduce Tax Liability by Purchasing Health Insurance Policy
Another way to save tax is to invest in a health insurance policy. Under Section 80D of the ITA, individuals can save tax liability on the premium paid for medical insurance plans for a financial year.
The medical insurance plan offers financial coverage to individuals against various unforeseen medical emergencies. From pre-existing disease coverage to chronic illness to slow-growing disease, the health insurance policy will cover varied individual needs.
Tata AIG is a household name that offers different health insurance plans tailored to the needs of individuals. From critical illness insurance and senior citizen insurance to family floater health insurance, we have plans for everyone.
Disclaimer / TnC
Your policy is subjected to terms and conditions & inclusions and exclusions mentioned in your policy wording. Please go through the documents carefully.
Related Articles
How to save long-term capital gain tax?
How to save long-term capital gain tax?
Under various sections of the Income Tax Act, such as section 54, 54EC, etc., individuals or investors are exempt from paying the long-term capital gain tax.
What is long-term capital gains tax?
The tax that is levied on the capital gains of long-term assets is classified as LTCG tax.
Other Topics
