Investing is a critical, indispensable part of financial planning. However, the tax implication of the investments we pick is often overlooked. One such tax that investors need to be aware of is the Long-Term Capital Gains tax or LTCG. Understanding LTCG is essential as it can significantly impact the returns on your investments, altering your entire financial plan.
What are Capital Assets?
Capital assets include stocks in companies, homes, cars, investment properties, and bonds. They can also be unique items like art pieces or collectables. When it comes to businesses, a capital asset is defined as an item with a useful life extending beyond one year. However, such an item is not meant to be sold during the regular operation of the business. These assets are expected to generate value for the business over a long period. When these assets are sold, the profits are subject to LTCG tax.
Also Read: Income tax slabs in India 2024-25: Old vs new tax regime, deductions and more
What is Long Term Capital Gains Tax or LTCG Tax?
LTCG tax is a tax that investors need to pay on the profit generated from the sale of a capital asset held for a specific period.
The definition of a "long-term" asset varies based on the type of asset.
- For instance, for immovable property, the asset must be held for more than two years to be considered long-term.
- However, for listed equities and mutual funds, the asset needs to be held for more than one year.
The tax applies only to the gains, not the total amount received from the asset"s sale.
Various Assets, Holding Period and Tax Rate
The tax rate for LTCG varies based on the type of asset and the period it is held. For instance, the LTCG on the sale of listed equity shares and equity-oriented mutual funds, where STT (Securities Transaction Tax) is paid, and the asset is held for more than a year, is taxed at ten percent if the gain exceeds Rs1 lakh. The tax rate for other assets, such as property or gold, is 20 percent with indexation.
