Long term capital gains (LTCG) tax: Rates, calculation, and more

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 2023-24: 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.

1. For instance, for immovable property, the asset must be held for more than two years to be considered long-term.
2. 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.

Also Read: Types of Mutual funds in India based on investment goals, asset class, risk and more

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.

Assets	LTCG Tax Rates
Equity-oriented mutual funds, stocks	10%
Gold, real estate and land, flats, debt funds, various assets	20%

How to Calculate LTCG

Calculating LTCG can be a complex process as it involves several steps.

1. The first step is to calculate the full value of consideration. This is the amount that the asset is sold for.
2. Next, deduct the cost of acquisition (what you paid when you bought the asset) and the cost of improvement (any expenses incurred to improve the asset).
3. Also, deduct any expenditures related to the transfer of the asset.
4. The resulting amount is your LTCG.

So, for example, if you bought a property for Rs50 lakh and sold it for Rs80 lakh, your LTCG would be Rs30 lakh.

Also Read: Section 80C: Income tax deduction and limits under section 80C, 80CCD in 2023

Set Off and Carry Forward

Two concepts that help taxpayers minimise their tax liability are set off and carry forward. Set off allows you to offset losses against gains in the same year, reducing your taxable income. For example, if you made a profit of Rs50,000 from selling shares but incurred a loss of Rs20,000 from selling property, you can offset the loss against the gain, reducing your taxable income to Rs30,000.

On the other hand, carry forward allows you to carry forward your losses to future years and offset them against future gains. This can be particularly beneficial when the losses are substantial.

Also Read: How to check ITR refund status online

Indexation

Indexation is a technique to adjust the purchase price of an investment to reflect the effect of inflation over the holding period. This adjusted cost is called the indexed acquisition cost. Indexation benefits are available only for specific long-term capital assets. It helps to increase the acquisition cost of the asset, thereby reducing the total taxable amount.

Exemptions on Long Term Capital Gains Tax

Certain exemptions under the Income Tax Act can help reduce your LTCG tax liability. Some of these include LTCG on the sale of a residential house, LTCG on the sale of land and building, and LTCG Tax Exemptions on the sale of agricultural land.

For instance, Section 54 exempts LTCG from selling a house property if the gains are used to buy another house property.

FAQs

1. What are the differences between short-term and long-term capital gains?

Short-term capital gains are defined by profits from the sale of an asset held for a short period, typically less than a year. Long-term capital gains, on the other hand, are profits from the sale of an asset held for more than a year. The tax amounts for short-term and long-term capital gains can be different.

2. How can I save tax on LTCG?

There are several ways to save tax on LTCG. These include investing in specified bonds, buying a new house property, or investing the gains in specified assets.

3. What is the rate of LTCG tax in India?

The rate of LTCG tax in India varies based on the type of asset. For listed equities and equity-oriented mutual funds, the rate is ten percent if the gain exceeds Rs1 lakh. For other assets, such as property or gold, the rate is 20 percent with indexation.