Key Insights, Tax Rates, and Exemptions of Long-Term Capital Gains (LTCG)

When it comes to the world of investments, understanding capital gains is crucial for optimizing your financial planning. One of the key components of capital gains taxation is Long-Term Capital Gains (LTCG). But what exactly does it mean, and how does it impact your taxes? In this blog, we’ll delve into LTCG, how it’s taxed, exemptions, and provide you with practical examples of LTCG tax to help you understand its implications.

What is Long-Term Capital Gain (LTCG)?

In simple terms, Long-Term Capital Gains (LTCG) refer to the profits earned from the sale of a capital asset—such as property, stocks, or bonds—that has been held for more than a specified period. When assets like real estate or shares are sold after being held for a longer duration, the profit is considered a long-term capital gain and is taxed differently than short-term capital gains.

Categories of Long-Term Capital Assets

The Indian Income Tax Act classifies capital assets into two main categories:

Short-Term Capital Assets

Assets held for less than the prescribed period (usually 36 months for immovable property, and 12 months for listed shares and equity-oriented funds).

Long-Term Capital Assets

Assets held for more than the prescribed holding period (24 months for most assets and 12 months for listed securities or equity funds).

How to Calculate Long-Term Capital Gain (LTCG)?

Understanding how LTCG is calculated is essential for determining how much tax you will owe. Here’s a step-by-step breakdown of the calculation:

Full Value of Consideration

This refers to the total amount received from the sale of the asset. It includes the amount received in cash, or in some cases, the fair market value.

Net Sale Consideration

From the full value of consideration, subtract any expenses incurred during the transfer process, such as commission or brokerage fees.

Cost of Acquisition

The original purchase price of the asset. For assets eligible for indexation (such as real estate), this amount is adjusted using the Cost Inflation Index (CII), which accounts for inflation.

The formula to calculate the Indexed Cost of Acquisition is:

Indexed Cost of Acquisition = Cost of Acquisition × (CII of the year of sale/CII of the year of acquisition)

Exemptions

There are several exemptions under sections 54, 54B, 54D, 54EC, and 54F that may reduce the LTCG. These exemptions are available if the gains are reinvested in specific assets, like residential property.

LTCG Chargeable to Tax

Finally, after considering the above, the remaining gain is chargeable to tax as LTCG.

The formula for LTCG chargeable to tax is:

LTCG Chargeable to Tax = Net Sale Consideration − (Indexed Cost of Acquisition + Indexed Cost of Improvement) − Exemptions

LTCG Tax Rates: What You Need to Know

The tax rates on LTCG vary depending on the type of asset and when the transfer occurs. Here’s a breakdown of the applicable tax rates:

Equity Shares and Equity-Oriented Mutual Funds:

• Transfers made on or before 22nd July 2024: Taxed at 10% for LTCG above Rs. 1 lakh.
• Transfers made on or after 23rd July 2024: Taxed at 12.5% for LTCG exceeding Rs. 1.25 lakh.

Other Assets (Real Estate, Unlisted Shares, etc.):

• Transfers on or before 22nd July 2024: Taxed at 20% after applying the indexation benefit.
• Transfers after 23rd July 2024: Taxed at 12.5% without indexation benefits. However, land and building assets have an option of either:
• 12.5% without indexation, or
• 20% with indexation benefits (if acquired before 23rd July 2024).

LTCG Tax on Shares: An Example

Let’s consider LTCG tax on shares to understand how it works in real life:

Suppose you purchased equity shares of a listed company for Rs. 50,000 and sold them after 15 months for Rs. 70,000.

• The LTCG would be:

LTCG = 70,000 − 50,000 = 20,000

If the sale occurs after 23rd July 2024, the LTCG tax rate would be 12.5% on gains above Rs. 1.25 lakh. Since the gain is below the threshold, no tax is applicable.

LTCG Tax on Property: Real-Life Example

Consider LTCG on property. Suppose you bought a property in 2005 for Rs. 20,00,000 and sold it in June 2024 for Rs. 65,00,000. The Cost Inflation Index (CII) for 2005-06 was 117 and for 2024-25, it is 363.

Using the formula for indexed cost of acquisition:

Indexed Cost = 20,00,000 × 363/117 = 62,05,128,000

So, the LTCG would be:

LTCG = 65,00,000 − 62,05,128 = 2,94,872

With no exemptions applied, this gain would be taxed at 20%, resulting in a tax of Rs. 58,974.

Exemptions on Long-Term Capital Gains

Certain exemptions can significantly reduce your LTCG tax liability. Here are the key exemptions:

1. Section 54: Exemption available on the sale of a residential property if the capital gain is reinvested in a new residential property.
2. Section 54B: Exemption on the sale of agricultural land, provided the gain is reinvested in agricultural land.
3. Section 54F: Exemption when selling any asset (other than residential property) and investing the gains in purchasing or constructing a new residential property.
4. Section 54EC: Exemption on reinvestment in specified bonds within 6 months of transfer.

Example of LTCG Tax Without Indexation

John bought a house for Rs. 20,00,000 in 2005 and sold it in August 2024 for Rs. 65,00,000.

Without the indexation benefit, the LTCG is:

LTCG = 65,00,000 − 20,00,000 = 45,00,000

This will be taxed at 12.5%, resulting in a tax liability of Rs. 5,62,500.

Filing LTCG in ITR-2

If you’re wondering how to file LTCG in ITR-2, the process is straightforward:

1. In Part A of the ITR-2, go to Schedule CG and fill in the details of your capital gains.
2. The total LTCG will be auto-populated into Part B under Total Income from the data filled in the other schedules.

In conclusion, understanding LTCG, its calculation, tax rates, and exemptions is vital for anyone looking to minimize their tax liability. With strategic planning, such as utilizing exemptions and knowing when indexation benefits apply, you can ensure that your capital gains are taxed efficiently. Whether it’s LTCG on shares, property, or any other asset, staying informed will help you make the most of your investments.

To explore more about LTCG, tax-saving strategies, and how to maximize your returns, stay connected with TaxSpanner for expert guidance on tax-related matters.