Long Term Capital Gains Tax (LTCG) - Exemption and Saving Tax on LTCG (2024)

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 10% if the profits reach Rs. 1 lakh in a fiscal year. The LTCG tax rate is 20% 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-

1. Calculate the Asset's Sell Value.
2. Calculate the Cost of Acquisition.
3. Calculate the Indexed Cost of Acquisition.
4. Calculate the LTCG.
5. Calculate the Tax.

For instance, if you sold equities mutual funds for Rs. 5 lakhs after holding them for three years and the indexed cost of acquisition is Rs. 3 lakhs, your LTCG will be Rs. 2 lakhs. The tax burden will be 10% of the amount that exceeds Rs. 1 lakh, which in this case is Rs. 10,000.

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 10%. 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 20%, with an indexation advantage. This indicates that the asset's purchase price, adjusted for inflation, determines the tax rate.

The long-term capital gain tax rate is usually calculated at 20% plus surcharge and cess as applicable. There are also special cases when an individual is charged at 10% on the total Capital Gains; these situations include –

1. Long-term capital gains earned by selling listed securities of more than Rs. 1,00,000. It is in accordance with the Section 112A of the Income Tax Act of India.
2. Returns earned by selling securities listed on a recognised stock exchange in India, zero-coupon bonds, and any Mutual Funds or UTI that were sold on or before 10th July 2014.

Let’s take a look at an example.

If Mr. Roy purchases equity shares (listed) of Rs. 28,100, and sells the same outside a recognised stock exchange after 23 years for Rs. 5,00,000, his indexed cost of acquisition (Rs. 28,100 * 280/100) will be Rs. 78,680.

Deducting that from the selling price, his taxable gain will be Rs. 4,21,320. If he opts to avail indexation, he will have to pay 20% tax on that total amount, which will be Rs. 84,264.

If he does not want to avail indexation, the taxable gain will be calculated by deducting the selling price and the cost of acquisition, Rs. 5,00,000 – Rs. 28,100 = Rs. 4,71,900. The total amount will be calculated at 10% of the taxable amount, which will be Rs. 47,190.

Exemptions on Long-Term Capital Gains Tax

An individual will be exempted from paying any tax if their annual income is below a predetermined limit. The tax exemption limit for the fiscal year 2019-2020 is the following.

1. Residential Indians of 80 years of age or above will be exempted if their Annual Income is below Rs. 5,00,000.
2. Residential Indians between 60 to 80 years of age will be exempted from long-term capital gains tax in 2021 if they earn Rs. 3,00,000 per annum.
3. For individuals 60 years or younger, the exempted limit is Rs. 2,50,000 every year.
4. Hindu Undivided Families can enjoy tax exemption if the annual income of their family is under Rs. 2,50,000.
5. For non-residential Indians, the exempted limit is flat Rs. 2,50,000 irrespective of the age of the individual.

Individuals are not liable to earn any tax deduction under Section 80C to 80U from long-term capital gains tax in India.

The entire profited amount will qualify for taxable income and will be charged a flat 20% tax under long-term capital gain. There is no minimum exemption limit on the entire amount, which makes it susceptible to attract large taxes.

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.

• 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.