Long-Term Capital Gains Tax

Investments are important for all ages, especially young adults. People are constantly seeking investment opportunities that offer long-term returns.

However, understanding the different taxes applicable to any investments, including capital gains, is necessary for making informed decisions. Capital gains refer to the profits you earn after selling a personal asset, such as stocks, collectables, mutual funds, real estate, etc.

In this detailed guide, you will learn more about what is LTCG tax, how LTCG taxation works, and other important information on long-term gains tax.

What is Long-Term Capital Gains Tax?

A long-term capital gains tax is a tax levied on the profits earned from the transfer or sale of long-term assets such as mutual funds, stocks, real estate and other investments.

You must hold the possession of these assets for a predetermined period, typically at least one year, to be allowed to make a sale.

Once you sell any of these long-term assets, you earn long-term capital gains, which add to your taxable income. This taxable income is liable for taxation under the Income Tax Act.

Understanding Capital Assets for LTCG Taxation

A capital asset is any significant property owned by a person or entity. There are different categories of capital assets, and each attracts a high return value upon sale. Two sections, Section 112 and Section 112A apply to long-term capital gains taxation.

Section 112A is applicable to -

• Units of a business trust.
• Equity shares of a listed company.
• Units of an equity-oriented fund.

On the other hand, Section 112 is applicable to all other long-term capital gains, excluding the ones under Section 112A.

Let’s look at some of the common examples of capital assets in reference to capital gain tax on long-term capital gain.

• Real Estate- Both commercial and residential properties fall in this category.
• Collectables- This category includes any high-value sculptures, paintings, antiques, etc.
• Gold or Jewellery- High-value assets like gold jewellery and other jewellery items are also considered capital assets.
• Shares- Shares of any company that represent a certain ownership are considered capital assets.
• Equity - Investments in bonds, debentures, government securities, etc., are also considered capital assets for long-term capital gains if they are held for more than one year.

Budget Updates 2024 for LTCG Taxation

The new Budget 2024 updates are applicable from 23 July 2024. The changes in the long-term capital gains tax are as follows -

• Holding Period- The holding period for any asset subject to long-term capital gains is now 24 months. The 36-month period is no longer applicable.
• Uniform Exemption Limit and Tax Rates- The long-term capital gain exemption limit for the transfer of equity-oriented and listed equity shares has increased from ₹1 lakh to ₹1.25 lakhs. The taxation rate for long-term capital gains tax has also increased from 10% to now 12.5%. This rate is applicable to all types of capital gains.
• No Indexation- The indexation benefit for long-term capital gains from the sale of assets is no longer available.
• Real Estate and Land Taxation- For real estate purchases and sales, taxpayers can choose a 12.5% tax rate without indexation or a 20% tax rate with indexation. This rate applies only to properties purchased on or before 23 July 2024.

Long-Term Capital Gains Tax Brackets

How Much are Long-Term Capital Gains Taxed?

To understand how long-term capital gains are taxed, you must first learn the following -

Before the amendments in Budget 2024, long-term capital gains were taxed at different rates, depending on their nature and categorisation. At present, the long-term capital gain exemption limit is ₹1.25 lakh. Any capital gain exceeding ₹1.25 lakh is liable for a tax liability.

Previously, the capital gain exemption limit was fixed at ₹1 lakh and a tax rate of 10%. However, the current tax rate is 12.5% for capital gains exceeding ₹1.25 lakh.

Long-Term Capital Gains Tax on Shares

All listed equity shares and mutual funds (equity-oriented) have a fixed long-term capital gain exemption limit of ₹1.25 lakh. This is applicable to all transfers completed after 23 July 2024. For transfers before 22 July 2024, the applicable tax rate is 10%.

The holding period must be more than 12 months for these shares to be qualified as long-term capital assets.

Example of LTCG Taxation on Shares -

In 2018, Mr Anish bought 50 shares of XYZ company at ₹50 each and held them for two years. As these shares were held for two years, they became a long-term capital asset. He then sold the shares in 2020 for ₹150 each.

• Total purchase cost- ₹2500
• Total sale cost- ₹7500
• Total capital gain- ₹7500 - ₹2500 = 5000

Since the total capital gains are below ₹1.25 lakh, there are no tax liabilities on these gains.

Long-Term Capital Gains Tax on Property

For property sales, long-term capital gains are only applicable if the holding period is equal to or more than 24 months.

The tax rate for sales made before 22 July 2024 will be 20% after considering indexation. However, for sales made after 23 July 2024, the fixed tax rate of 12.5% will apply without any indexation.

Example of LTCG Taxation on Property -

Ms Meera bought a studio apartment for ₹2 lakh in 2022 and sold it for ₹4 lakh in 2024.

• Total purchase cost- ₹2 lakh
• Total sale cost- ₹4 lakh
• Total capital gain- ₹4 lakh - ₹2 lakh = ₹2 lakhs

Since the capital gain or profit is more than ₹1.25 lakhs, the long-term capital gain tax liability is as follows -

• Capital Gain - Long-Term Capital Gain Exemption Limit =
• ₹2 lakh- ₹1.25 lakh = ₹75,000
• LTCG Tax = 12.5% of ₹75,000 = ₹9375

Long-Term Capital Gain Calculator - Step-by-Step Process

Calculate How Much You Earn from Sale or Transfer

The first thing you need to calculate is your earnings from the sale or transfer of a long-term asset. The total amount is calculated by subtracting the potential expenses of finalising the transfer or completing the sale from the final sale price.

For example, if you earn ₹7 lakh by selling your land and your expenses are ₹50,000, your net earnings will be ₹6.5 lakh.

Check the Original Cost

Next, you need to check the original cost of land. For example, you bought the land for ₹3 lakh 2 years ago.

Calculate Capital Gains

For the final step, calculate your capital gains by using the simple formula below -

Using this formula, your capital gains for this example are -

₹6.5 lakh - ₹3 lakh = ₹3.5 lakh

Check Tax Liability

For the final calculation of the long-term capital gains tax, you need to subtract the long-term capital gain exemption limit of ₹1.25 lakh from your capital gains and then multiply it with the applicable tax rate.

To do so -

• Taxable Income = ₹3.5 lakh - ₹1.25 lakh = ₹2.25 lakh
• Tax Rate = 12.5%
• Tax Liability = 12.5% X ₹2.25 lakh = ₹28,125

Factors Impacting Long-Term Capital Gains Tax

Asset Category

The type of asset you invest in for capital gains can impact your long-term gains tax. For most capital assets, the tax rate is fixed at 12.5% for any earnings or gains above the long-term capital gain exemption limit of ₹1.25 lakh.

However, according to the new amendments to Budget 2024, an indexation benefit is no longer applicable. Thus, you must carefully consider and categorise your investments in long-term assets.

Exemption Limit

For equity-oriented shares and assets, there is a strict long-term capital gain exemption limit of ₹1.25 lakh. However, there is no strict exemption limit for non-equity assets. Thus, when investing in long-term assets, plan and choose investments that keep your capital gains within the exemption limit.

Holding Period

You must hold your capital assets for 12 to 24 months, depending on the type of asset, to be eligible for the benefits under long-term capital gains tax. A shorter holding period will attract a higher tax rate, as they will be considered short-term capital gains.

Date of Sale and Acquisition

The date of purchase and sale also impacts the long-term capital gains tax. Any capital asset purchased or sold before 22 July 2024 has a lower exemption limit of ₹1 lakh and a fixed tax rate of 10% with the benefit of indexation. However, capital assets sold after 23 July 2024 have a higher exemption limit of ₹1.25 lakh with a fixed tax rate of 12.5%.

Exemption for Long-Term Capital Gains Tax

• Section 54EC- For LTCG taxation, investors can claim an exemption of up to ₹50 lakhs if they reinvest their capital gains into specific bonds within six months of the asset sale. The bonds are typically offered by the Rural Electrification Corporation (REC) or the National Highways Authority of India (NHAI).
• Section 54- You also get an exemption from LTCG taxation if you reinvest your capital earnings from the sale or transfer of a residential property into another residential property within a short period.
• Section 54F - Under this section, investors can benefit from an exemption from long-term gains tax. To do so, the profits must be earned from the sale of any other capital asset (bonds, shares, etc.) other than a residential property. The earned gains must then be reinvested into a new residential property.

This reduces your tax liabilities. However, you must check the specific eligibility and conditions applicable to this section.

• Long-Term Capital Gain Exemption Limit- As discussed, any capital gain below ₹1.25 lakh is exempt from LTCG taxation.

How to Save Capital Gain Tax on Long-Term Capital Gain?

• Longer Holding Period- Maintain a longer holding period for your long-term assets to benefit from a lower tax rate. This will also help increase your tax returns in the future.
• Tax-Loss Harvesting - Use your capital losses to offset capital gains. In simple words, you must identify assets that attract losses and sell them before the year-end. In turn, they will reduce your taxable income due to lower capital gains.  
• Diversify Investments- Reinvest your capital gains in bonds and specific assets that qualify for tax deductions and exemptions to reduce your tax liability from LTCG taxation.

Tips to Reduce Tax Liabilities

Tax liabilities, including LTCG taxation, can often become a significant financial burden if not planned correctly. Thus, it is crucial to understand the importance of tax saving to reduce your tax liability and increase your earnings.

To plan and adopt tax-saving strategies, you must review the different deductions available under the Income Tax Act. Here is all you need to know.

• Section 80C- Under Section 80C, you can avail of a range of tax deductions to reduce your tax liability. Some options include life insurance policies, public provident funds, equity-linked savings schemes, charitable donations, investments in the national pension system, etc.
• Section 80TTB (for senior citizens)- For specific retirement savings accounts, any income earned by senior citizens is eligible for tax deduction for a predetermined amount.
• Section 80E - Any interest payments made towards education loans to fund your or your child’s higher education are eligible for a tax deduction under Section 80E. This reduces your overall tax liability.
• Section 80D- All premiums paid towards health insurance plans for yourself, your spouse, children and parents are also eligible for tax deductions under Section 80D. For health insurance premiums for yourself, your spouse and children, you can avail of a deduction of up to ₹25,000, whereas for senior parents or citizens, the deduction amount is up to ₹50,000.

Also Read -

• Tax Guide - How Does Health Insurance Help You Save Tax Under Various Sections?
• Tax Benefits on Health Insurance that Most People Are Unaware of

Difference Between Short- and Long-Term Capital Gains

Conclusion

It is important to understand the role of long-term capital gains tax and learn ways to reduce its impact on tax liabilities today. Buying capital assets for long-term returns is always a good idea. However, failing to plan this out correctly can result in a higher tax liability and reduced savings.

There are many ways to reduce your overall tax liability, and investing in health insurance plans with Reliance General Insurance ​is one effective way to secure your health and savings.

You also benefit from ample customisation flexibility, a 100% claim settlement ratio*, a user-friendly website and affordable premiums with us.

Frequently Asked Questions

• Is there a fixed holding period for long-term capital gains tax?

Yes, you must hold capital assets for more than 12 or 24 months to be eligible for long-term capital gains and the applicable tax rate. Previously, a 36-month holding period was also applicable, but it has been eliminated in the Budget 2024 updates.

• Is the tax rate fixed for all long-term capital gains?

Yes, as per the new amendments, a fixed tax rate of 12.5% applies to all long-term capital gains, regardless of the category. However, please note that the date of purchase and sale of capital assets can impact the tax rate.

• What does the transfer of capital assets mean according to the Income Tax Law?

The transfer is commonly referred to as the sale of any asset. However, for Income Tax Law for capital assets, it can also be referred to as conversion of a capital asset, sale of a capital asset, exchange or relinquishment of an asset, compulsory acquisition of an asset, or disposing of or parting with any asset.

• What is indexation?

Indexation is a strategic method of adjusting the cost of an asset against inflation to reduce the impact of inflation on capital gains-related taxable income. However, the Budget 2024 updates removed the indexation benefit, which applies to most capital assets, especially long-term capital assets.

• What does the holding period mean in LTCG taxation?

The holding period in long-term capital gains tax refers to the length or duration of time you possess an asset before selling it to gain profits. The holding period for long-term capital assets is between 12 and 24 months, depending on the type of asset you choose for investment.

• When do I pay long-term gains tax?

Typically, you need to pay the long-term gains tax when you sell your capital asset for a profit. However, in certain circumstances, you may be required to pay smaller amounts all year long, with the final tax return date fixed based on the ITR filing dates.

Disclaimers:

*T&C Apply. For more details on risk factors, terms and conditions, brochure, and exclusions, please read the policy wording and CIS carefully before concluding a sale.

This is the overall claim settlement ratio for FY 2023-24 without claim outstanding at the start of the financial year as per public disclosure of Reliance General Insurance Co. Ltd.

*Tax benefits are subject to conditions under Section 80D of the Act and amendments thereof. The tax laws are subject to amendments/changes from time to time. Please consult your tax advisor for details.