Long-Term Capital Gain (LTCG) Tax: Rates, Calculation, and Example
Long-term capital gains (LTCG) are a cornerstone of financial planning and taxation in India. They refer to profits derived from selling assets held for a certain duration at a price higher than their original purchase cost. With the updates introduced in Budget 2024, understanding LTCG is essential for investors, property owners, and taxpayers.
This comprehensive article provides detailed insights into LTCG tax rates, calculation methods, applicable exemptions, and practical examples to aid understanding.
Table of content
Budget 2024 Updates
The Budget 2024 introduced notable changes to the taxation of Long-Term Capital Gains (LTCG), marking a significant shift in how gains from various asset classes are treated. These updates aim to simplify tax compliance, encourage investment, and bring uniformity across asset categories.
Revised Holding Periods
The concept of holding periods determines whether a capital asset is classified as short-term or long-term. The revised holding periods for LTCG, applicable from FY 2024-25, are as follows:
12 months for listed securities, including equity shares, equity-oriented mutual fund units, and units of Business Trusts (like REITs and InvITs). This shorter holding period recognizes the liquidity and market dynamics of listed securities.
24 months for all other assets, including real estate, unlisted shares, gold, and other non-financial investments. This extended period reflects the relatively illiquid nature of these assets and ensures fairness in taxation.
These uniform holding periods simplify tax planning and ensure consistency for taxpayers holding diverse portfolios.
Updated Tax Rates and Exemptions
For Listed Equity Shares, Equity-Oriented Units, and Business Trust Units:
The exemption limit has been raised from ₹1 lakh to ₹1.25 lakh annually, providing additional relief to small investors. Gains beyond this threshold will be taxed.
The tax rate has been increased from 10% to 12.5%, resulting in a moderate rise in tax liability for larger investors, aligning with broader revenue considerations.
For Other Financial and Non-Financial Assets:
The tax rate has been reduced from 20% to 12.5%, benefiting taxpayers who hold long-term assets.
Indexation benefits have been removed for these assets. Indexation previously allowed taxpayers to adjust the cost of acquisition for inflation, reducing taxable gains. Its removal increases simplicity but could result in higher tax outflows.
For Land and Building Sales:
Properties sold after 23rd July 2024 will be taxed differently based on their acquisition date:
Properties acquired before 23rd July 2024 can opt for taxation at 12.5% without indexation or 20% with indexation, allowing flexibility for taxpayers to choose the most tax-efficient option.
Properties acquired on or after 23rd July 2024 will be taxed at a flat 12.5% without indexation, streamlining the tax structure for newer transactions.
What is Long-Term Capital Gain (LTCG)?
Long-Term Capital Gain (LTCG) is the profit earned from the sale of a long-term capital asset. The classification of an asset as long-term depends on its holding period. For example:
Listed Securities and Equity Funds: Assets held for more than 12 months qualify as long-term.
Other Assets: Assets held for more than 24 months fall under this category.
LTCG is critical in financial planning because it enjoys lower tax rates compared to short-term capital gains, incentivizing long-term investments and wealth accumulation.
How to Calculate Long-Term Capital Gain?
The calculation of LTCG requires determining the gain after deducting specific expenses from the sale price.
Formula:LTCG = Sale Price - (Indexed Cost of Acquisition + Indexed Cost of Improvement + Transfer Expenses)
Key Components Explained:
Sale Price: The price at which the asset is sold. This could include the transaction value stated in the sale deed or the fair market value, depending on tax regulations.
Indexed Cost of Acquisition: The cost of purchasing the asset, adjusted for inflation using the Cost Inflation Index (CII) published annually by the government. Indexation ensures taxpayers are not penalized for inflationary gains.
Indexed Cost of Improvement: The cost of any improvements or renovations made to the asset, also adjusted for inflation using the CII. This applies to assets like real estate where enhancements increase their value.
Transfer Expenses: Expenses directly related to the sale, such as brokerage fees, stamp duty, legal charges, and registration costs, are deductible from the sale price.
Detailed Examples of LTCG Calculation
Example 1: With Indexation
Component | Amount (₹) |
Sale Price | 50,00,000 |
Indexed Cost of Acquisition | (30,00,000) |
Indexed Cost of Improvement | (5,00,000) |
Transfer Expenses | (1,00,000) |
LTCG | 14,00,000 |
Tax Liability:
Tax rate: 20% with indexation.
Tax payable: 20% of ₹14,00,000 = ₹2,80,000.
Example 2: Without Indexation
Component | Amount (₹) |
Sale Price | 50,00,000 |
Cost of Acquisition | (25,00,000) |
Cost of Improvement | (5,00,000) |
Transfer Expenses | (1,00,000) |
LTCG | 19,00,000 |
Tax Liability:
Tax rate: 12.5% without indexation.
Tax payable: 12.5% of ₹19,00,000 = ₹2,37,500.
LTCG Tax Rates
New Tax Rates Effective from FY 2024-25
Listed Securities: Taxed at a flat 12.5%, regardless of indexation.
Other Assets:
Without Indexation: 12.5%.
With Indexation: 20% (applicable only for assets acquired before specified dates).
Surcharge on LTCG
The applicable surcharge depends on the total taxable income:
10% to 37% based on income brackets. This surcharge significantly impacts high-income taxpayers.
LTCG Tax Exemptions
The Income Tax Act offers several provisions for reducing LTCG tax liability:
Exemption for residential property sales.
Reinvest the proceeds into another residential property within a specified period.
Invest LTCG in government-notified bonds (e.g., REC or NHAI) within six months of the sale.
These bonds have a lock-in period and a maximum investment cap of ₹50 lakh per financial year.
Exemption for non-residential property sales if proceeds are reinvested in a residential property.
Conditions include not owning more than one residential property at the time of sale.
FAQ
Q1. Can I carry forward LTCG losses?
Yes, LTCG losses can be carried forward for up to 8 assessment years and adjusted against future LTCG.
Q2. Are mutual fund dividends taxable?
No, mutual fund dividends are not considered LTCG and are taxed separately based on applicable rules.
Q3. How are inherited properties taxed under LTCG?
The holding period of the previous owner is included when calculating LTCG, and the cost is based on the original purchase price or fair market value as of April 1, 2001.
Q4. What happens if I reinvest only part of the proceeds?
If you reinvest only a portion of the proceeds in eligible assets, you can claim an exemption proportionately under Sections 54 or 54F.
Q5. Are gifts of assets subject to LTCG?
LTCG tax is not applicable on gifted assets; however, the recipient will be liable for LTCG upon selling the asset.
Q6. How does indexation affect LTCG tax liability?
Indexation adjusts the purchase cost for inflation, effectively reducing the taxable gain and lowering tax liability for eligible assets.
Q7. What is the maximum LTCG exemption available?
The maximum exemption depends on the reinvestment provisions under Sections 54, 54EC, or 54F, and the specific limits set by these sections.
Q8. Are equity-linked saving schemes (ELSS) eligible for LTCG tax benefits?
Yes, gains from ELSS investments are treated as LTCG if held for more than 12 months, and the tax rates apply accordingly.
Q9. Is the sale of agricultural land subject to LTCG tax?
No, profits from the sale of agricultural land situated in rural areas are exempt from LTCG tax.
Q10. What is the penalty for non-disclosure of LTCG in ITR?
Non-disclosure of LTCG may result in penalties and additional tax liability, including interest under Section 234F of the Income Tax Act.
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