What is Long-Term Capital Gains Tax: Calculation on Different Asset Classes?
Long-term capital gains are gains earned on the sale of long-term capital assets held for 36 months or more (24/12 months in some cases). These gains are considered ‘income’ and hence are taxable. The LTCG is 10% for gains in shares, & equity funds and 20% for gains in the sale of property and other long-term assets.
In this blog, you will learn what long-term capital assets, long-term capital gains are, how the LTCG is calculated, exemptions and important terms to know.
What is LTCG?
As the name suggests, long-term capital gains (LTCG) are the gains earned on the disposition of long-term capital assets. The tax that these gains attract is called long-term capital gains tax. Before heading on to understanding the calculation of the long-term capital gains and their treatment in terms of various long-term assets, it is important to know basics like, what capital assets are and how long-term capital gains are determined.
What are long-term capital assets?
Almost any asset that does not have a liquidity quotient, like cash, is a capital asset. For example, any property (irrespective of whether owned for personal use or running a business), securities, land, vehicle, artefacts, jewellery, machinery, paintings, sculpture, lease rights, or patents come under capital assets.
In-trade invested stocks, raw and intermediate materials for production, and consumables held for a business are not considered capital assets. Similarly, if somebody owns a movable property for personal use, the same also does not come under the ambit of capital assets. Some other assets do not have high liquidity, yet they are not considered capital assets—for example, special bearer bonds, specific gold bonds, rural agricultural land, etc.
What makes a capital asset a long-term capital asset is its period of holding, i.e., how long it has been held from its time of acquisition until its transfer or disposition. Any capital asset held for 36 months or more is classified as long-term. From Financial Year 2017-2018, immovable capital assets like land, buildings, property, etc., and unlisted company shares, if held for 24 months or more, also come under long-term capital assets. However, the long-term holding time for some assets, like listed shares and securities like debentures, units of UTI, zero-coupon bonds, etc., is 12 months or more.
What are long-term capital gains?
When sold after 36 months (in some cases 24/12 months), capital assets will either generate gains or cause losses. If the long-term capital is disposed of or transferred at a price higher than its acquisition price, the return thus generated will be called long-term capital gains.
Tax on LTCG
Long-term capital gains taxation is categorised into two provisions, as outlined in Section 112 and Section 112A of the Income Tax Act. Section 112 specifies income tax rates on all kinds of long-term capital assets, except equity shares, equity-oriented mutual funds, and business trusts where STT is paid on transfer.
The LTCG on equity shares was exempted under Section 10 (38) till 2017-18, but the exemption was misused by certain taxpayers, causing a loss of tax revenue. Hence, to prevent the diversion of funds from important sectors, like infrastructure, manufacturing, etc., to capital markets, CBDT removed the exemption by introducing a new Section 112A.
*Please note LTCG will be applicable on equities only if the gains are more than ₹1 lakh.
Long term assets covered in Section 112
Section 112 specifies income tax rates on all kinds of long-term capital assets (except the one prescribed in Section 112A), such as:
- Listed securities
- LTCG on zero-coupon bonds
- Unlisted securities
- Immovable property
- Other long-term capital assets
Also Read: What is the Gold Monetisation Scheme?
Long term assets not covered in Section 112A
Section 112A below does not apply to capital assets covered by this section:
- Listed equity shares where STT paid on acquisition or transfer
- Units of equity-oriented mutual funds where STT paid on transfer
- Units of business trust where STT paid on transfer
LTCG tax rates
The usual long-term capital gains tax is 20% along with applicable surcharge and cess. However, in some cases, the applicable tax rate is 10%. They are –
- The LTCG tax rate on assets covered under 112 A is 10% without indexation benefit. This tax rate is applicable on capital gains exceeding Rs. 1 lakh from the sale of listed securities.
- LTCG on any such marketable securities like – (a) stocks, bonds, shares, debentures, etc. that are listed in a recognised stock exchange, (b) units of listed and unlisted UTI or mutual funds (minimum holding period for debt mutual funds is 36 months), and (c ) zero coupon bonds.
Calculation of LTCG
Now that we know what LTCG is, the associated provisions under the Income Tax Act, and the tax rates, the subsequent step is to understand how LTCG is calculated. The amount of tax that you pay depends on the long-term capital gains figure and the nature of the asset (assets under Section 112 or Section 112A). Let us discuss how to arrive at the long-term capital gains amount.
The LTCG is calculated as follows –
LTCG = Full value consideration received – (Indexed cost of acquisition + Indexed costs of improvement + Cost of transfer)
Indexed cost of acquisition = Cost of acquisition x CII of the year of acquisition/transfer
Indexed cost of improvement = Cost of improvement x CII of the year of acquisition/transfer
Note: CII is the Cost Inflation Index
Below are two illustrations to help you understand how long-term capital gains are calculated and taxed.
Illustration 1: Suppose Mr. Roshan bought 300 shares of PQR Company (which is a listed company) at Rs. 500 per share in January 2021. In September 2022, he sold them off at Rs. 10,00 per share. Since the selling price is higher than the buying price, there is a capital gain. And since Mr. Roshan held the share for more than 12 months, the gains thus earned are long-term capital gains.
The capital gains earned is: (300 x 1000) – (300 x 500)
= 3,00,000 – 1,50,000
Here, the LTCG tax will be applicable at 10% on the amount excess of Rs. 1,00,000 i.e., Rs. 50,000.
So, the long-term capital gains tax will be Rs. (10% x 50,000) = Rs. 5000
Illustration 2: Ms Khan bought a house for Rs, 30,00,000 in 2012. In 2020, she sold it at Rs. 46,00,000.
Now, following the formula for LTCG with indexation, we will first have to calculate the CII of the relevant year.
CII = CII of FY 2020-21/CII of FY 2012-13
Indexed cost of acquisition = Cost of acquisition x CII of the year of acquisition
= 30,00,000 x 1.50
LTCG = Full value consideration – The indexed cost of acquisition (in this case, Improvement and Transfer costs are assumed to be 0 for easier calculation)
= Rs. (46,00,000 – 45,00,000)
= Rs. 1,00,000
Applicable tax = 20% of LTCG
= 20% x 1,00,000
Thus the long term capital gains tax will be Rs. 20,000.
Carry Forward and Set off of Long Term Capital Gains
The Income Tax Act allows you to set off your losses made from one asset with the gains made from another. However, below are some points that need to be kept under consideration:
- Capital losses, short-term or long-term, cannot be adjusted with any other income head like salary, interest, etc.
- You can set off your long-term capital losses only against long-term capital gains.
- You can set off your short-term capital losses with long-term and short-term capital gains.
- You can carry forward short- and long-term capital losses for 8 assessment years if not adjusted in the same year.
- You cannot carry forward Capital losses if you are not filing your ITR in that particular year. Even if you have not earned any income, you must file your returns to carry forward your losses.
Exemptions on LTCG Tax
If an individual meets the following criteria, they will be exempted from paying LTCG tax –
- Super senior citizens (above 80) with an annual income lower than ₹ 5,00,000 are exempted from LTCG tax.
- Resident Indians aged 60 to 80 years, with an annual of ₹ 3,00,000, are exempted.
- Resident Indians below 60 years will get an exemption of up to ₹ 2,50,000.
- HUFs can get an exemption from LTCG tax if their annual income is not more than ₹ 2,50,000.
- Non-resident Indians, irrespective of age, will get an exemption of up to ₹ 2,50,000.
- A resident Indian of HUF can claim tax exemption on capital gains from selling a residential property if the amount is reinvested in the purchase/construction of a new residential property under Section 54 of the Income Tax Act.
- Section 54 of the Income Tax Act can save a lot on taxes for property sellers. It allows taxpayers to claim an exemption on the Capital Gains arising from the sale of their residential property, subject to certain conditions. You can sell your current property and reinvest the sale proceeds without worrying about paying hefty taxes.
- The profit earned from selling assets like land, buildings etc., after holding them for over 2 years are called long-term capital gains and are taxable at 20%. To reduce this tax liability, you can invest in a few specific assets classified under section 54EC of the Income Tax Act, 1961.
- The capital gains earned from selling assets other than house property and reinvesting the sale proceeds in buying or constructing a house are exempted under Section 54F.
How to save tax on the sale of Agricultural land?
Section 54B of The Income-Tax Act, 1961, offers eligible individuals to reinvest the sale proceeds from their agricultural land into a new agricultural land and get capital gain exemptions.
Only individuals/HUF who are Indian residents and sell agricultural land in an urban area can avail of the benefits. The entire sale proceeds must be invested in the new agricultural land within 2 years from the date of such sale.
The condition here is you need to hold the new agricultural land for a minimum of 2 years from the date of purchase. If it is sold before the 2 years, the Capital Gains tax exemption will be revoked, and you will be required to pay the tax.
Remember the following points:
- If an individual has sold multiple agricultural lands, the capital gain exemptions can only be claimed for one such sale in a financial year.
- If the agricultural land is jointly owned, each owner can claim an exemption in proportion to their share in the land.
LTCG on Different Investments
LTCG on equity shares
Prior to the Union Budget 2018, LTCG on equity-oriented funds was tax-free as such equity shares were already subject to Securities Transaction Tax (STT). However, since 01 April 2018, all long-term capital gains (LTCG) over Rs 1 lakh on listed equity shares per financial year are taxable at the rate of 10% without the benefit of indexation. The surcharge on LTCG on equity shares is capped at 15%.
LTCG on mutual funds
There are different tax rules for Mutual Funds based on the investments they hold. After 12 months of holding, all types of listed equity funds attract a tax rate of 10% on any amount above Rs. 1 lakh. Equity-oriented hybrid funds are taxed exactly like equity funds. The tax on long-term capital gains for debt funds is capped at 20% post indexation. Debt-oriented balanced funds attract LTCG taxation like debt funds only. So do the unlisted equity funds.
LTCG on exchange-traded funds
Exchange-traded funds, or ETFs, can be of four types — index ETF, gold ETF, sectoral or thematic ETF, and international ETF. LTCG on exchange-traded funds held for more than one year will be taxed at 10% with an indexation benefit. A provision earlier allowing LTCG at 10% without indexation is no longer available for units sold after 10th July 2014. Long-term capital gains made on gold ETFs and international ETFs (units held for over one year) are taxed at 20% after indexation.
LTCG on fixed income investments
Debt instruments such as debentures, corporate bonds, tax-free bonds, government securities, etc., as well as unlisted bonds and debentures, can be referred to as fixed income investments. If the holding period on these listed investments exceeds 12 months, the LTCG tax rate is either 20% with indexation or 10% without indexation. At the same time, the LTCG tax rate for unlisted fixed income investments exceeding 12 months is 20% without indexation.
LTCG on gold investments
Investment in gold was traditionally limited to physical units in the form of gold coins, bars, and jewellery. However, in modern times, one can also buy gold ETFs, gold mutual funds, sovereign gold bonds, and digital gold. If the holding period on any of these gold investments exceeds 36 months, the LTCG rate is 20% with indexation.
LTCG on real estate investments
If the holding period on immovable property is longer than 24 months, the LTCG tax rate applicable to these investments is 20% with indexation. But in the case of real estate investments, there are additional regulations on the purchase and sale of real estate, such as 1% TDS on property sales exceeding Rs. 50 lakh and mandatorily reporting sales exceeding Rs. 30 lakh to the Income Tax Department, among others.
Another component of real estate investments includes Real Estate Investment Trusts, or REITs. These are further subdivided into two categories: Listed REITs and REITs Mutual Funds. Holdings exceeding 36 months qualify for LTCG taxation which stands at 10% on gains exceeding Rs. 1 lakh for listed REITs and 20% with indexation for REITs Mutual Funds.
Important Terms to Know
In the discussion above, several technical terms, especially surrounding the indexed calculation of LTCG tax, have been mentioned. It won’t be easy to calculate the LTCG without having a clear understanding of the same. So, read on to have a brief understanding of the terms discussed below:
Full value consideration
Full value consideration is the consideration received in cash or in kind by the individual transferring their assets. Full value consideration is computed by taking the sum of expenses incurred in relation to the asset transfer, the cost of acquisition of the assets, and the cost of the improvement.
Cost of acquisition
The cost of acquisition is the total expenses incurred in obtaining or buying the ownership of an asset. Except for the sales tax, any other related expenses, like stamp duty, registration fees, etc. are included in the cost of acquisition.
Cost of improvement
This cost is not applicable to securities and shares. These typically apply to real capital assets like a house, vehicle, equipment, etc. Any expenses incurred in the restoration, improvement, or remodelling of a real asset are called the cost of the improvement.
Cost inflation index
The Cost of inflation index (CII) is used to calculate a capital asset’s inflation-adjusted cost price. It is issued by the Central Board of Direct Taxes (CBDT). To put it simply, CII gives the current value of the asset after adjusting the inflation rate.
Income tax levied on long-term gains received on various capital assets is called Long-term Capital Gains Tax (LTCG). Having a thorough understanding of different types of LTCG tax rates that may apply to your investments is crucial. It helps investors assess how much profit they will make from an investment and helps save time and effort by avoiding notice from the Income Tax Department.
What is long-term capital gains tax?
If the sale or transfer of a capital asset, held for more than 36 months (24 months in case of immovable assets like buildings or houses, and 12 months for shares), results in a gain, then the same is considered as ‘income’, which is taxable. The tax levied on the sale of such capital assets is called the “long-term capital gains tax.”
Is long-term capital gains on shares exempted from taxation?
If the amount of the long-term capital gains on shares is less than Rs. 1 lakh, then the capital gain amount is exempted from taxation. In the case of long-term capital gains on shares being more than Rs. 1 lakh, the LTCG tax is applicable on the amount excess of Rs.1 lakh.
What is indexation?
Indexation is the inflation adjustment made to the current value of the asset. When you sell an asset, its relative value changes because of the effects of inflation. Indexation allows you to get the current value of your asset at current prices.
What is the tax rate on LTCG?
Usually, long-term capital gains are taxed at 20%. However, there are exceptions to this. Some specific assets are taxed at 10%. To know how different assets are taxed, go through the contents of the blog.
How are long-term capital gains calculated?
Long-term capital gains are calculated using the following formula:
LTCG = Full value of consideration or Final sale price – (Indexed cost of acquisition + Indexed cost of improvement + Cost of transfer)