Reading time: 9 minutes
Subscribe

A long term capital gain tax arises on a transfer or sale of a capital asset. There are other factors that contribute towards the taxability of such a transfer like type of asset, holding period, applicable tax rate, exemption etc. In this article we have covered all about LTCG and its tax implications.

Long Term Capital Gain Tax
Long Term Capital Gain Tax

What is a capital asset?

In simple terms, a capital asset is a property of any kind which is held by the assessee irrespective of whether the asset is used for personal use or business purposes. Below are certain assets, which are not considered as capital assets for the purpose of the income-tax act:

  • Stock-in-trade, raw material held for business or profession
  • Personal effects, for example, car, which is held for personal use*
  • Rural agriculture land
  • Gold deposit bonds issued under the Gold Deposit Scheme 1999
  • Deposit certificate issued under the Gold Monetisation Scheme 2015

*  Personal effects do not include jewelry, archaeological collections, drawings, paintings, which means when these mentioned assets are sold, capital gains will be applicable.

What is a long term capital gain tax in India?

Any profits arising from the transfer of a capital asset is a capital gain on which tax shall be levied. Below are the essential conditions which need to be satisfied for taxing capital gains:

  • There shall be a capital asset
  • The capital asset must have been transferred
  • Profits should arise from the transfer of such capital asset

Furthermore, capital gain tax in India can be subdivided into:

  1. Short-term capital gains
  2. Long-term capital gains

What is STCG gain?

A capital gain arising from the sale of a short term capital asset is a short term capital gain. The applicable tax on STCG is different for different assets. The gain is taxable at income tax slab rates and also as a percent of the gain.

What is a long term capital gain?

Capital gains arising on the transfer of a long-term capital asset are referred to as long-term capital gains. A long term capital asset is an asset that has been held by the assessee for more than 36 months/24 months/12 months depending on the class of asset. The holding period is an essential factor while calculating capital gains

Holding period for long term capital assets:

Capital AssetType of gainPeriod of holding to qualify as long- term capital asset
Equity shares listed in a recognized stock exchangeUnits of an equity-oriented fundUnits of Unit Trust of IndiaLTCGIf held >= 12 months
Unlisted equity sharesLTCGIf held >= 24 months
Unit of Debt oriented FundUnlisted securities(other than shares)Other capital assetsLTCGIf held >= 36 months
Balanced Funds (equity-oriented)LTCGIf held >= 12 months
Balanced Funds (debt-oriented)LTCGIf held >= 36 months
Hybrid Mutual (equity exposure more than 65% of total investment)LTCGIf held >= 12 months
Hybrid Mutual (equity exposure less than 65% of total investment)LTCGIf held >= 36 months

Tax rate on long-term capital assets

Capital AssetTax rates applicable
Equity shares listed in a recognized stock exchangeUnits of an equity-oriented fundUnits of Unit Trust of India10% over and above Rs. 1,00,000 without indexation
Unlisted equity shares20% with indexation
Unit of Debt oriented FundUnlisted securities(other than shares)Other capital assets20% with indexation
Balanced Funds (equity-oriented)10% over and above Rs. 1,00,000 without indexation
Balanced Funds (debt-oriented)20% with indexation
Hybrid Mutual (equity exposure more than 65% of total investment)10% over and above Rs. 1,00,000 without indexation
Hybrid Mutual (equity exposure less than 65% of total investment)20% with indexation

Meaning and applicability of Cost Inflation Index

Cost Inflation Index or CII is used in the calculation of the indexed cost of acquisition and improvement for the purpose of computing the long-term capital gains. In simple terms, the cost inflation index is used to estimate the increase in the price of assets due to inflation. 

Finance Act 2017 had changed the CII for adjusting the cost of acquisition of a long-term capital asset to April 1 2001 instead of earlier 1st April 1981. Now, while calculating capital gains wherein the benefit of indexation is allowed, the indexed cost has to be calculated as per the below table:

S. NoFinancial YearCost Inflation IndexS. No.Financial YearCost Inflation Index
12001-02100112011-12184
22002-03105122012-13200
32003-04109132013-14220
42004-05113142014-15240
52005-06117152015-16254
62006-07122162016-17264
72007-08129172017-18272
82008-09137182018-19280
92009-10148192019-20289
102010-11167

How to compute long-term capital gain?

LTCG Tax can be computed as per the below table:

Full value of considerationxx
Less: Expenditure incurred in connection with a transferxx
Less: Indexed cost of acquisition*xx
Less: Indexed cost of improvement**xx
Long term capital gainxx
Less: Exemptionsxx
LTCG Taxxx

* Indexed cost of acquisition : 

Cost of acquisition * (CII of the year of transfer/CII of the year of acquisition)

** Indexed cost of improvements:

Capital expenditure on improvements after 01-04-2001 * (CII of the year of transfer/CII of the year in which improvement was made)

Illustration of long term capital gain tax

Equity oriented mutual funds

Long Term Capital Gain

Any LTCG, exceeding Rs 1,00,000, arising on sale of equity-oriented mutual funds, will be liable to tax @10% provided securities transaction tax has been paid on the purchase and sale of the equity-oriented mutual fund.

Any LTCG, below Rs 100,000 arising on sale is tax-free.

Securities transaction tax(STT) is levied on the purchase or sale of securities which includes units of an equity-oriented mutual fund.

Computation of long term capital gains in case of equity-oriented mutual funds

Suppose Aditi had invested in an equity-oriented mutual fund in April 2016 and the investment amount was Rs. 1,00,000 at a NAV of Rs. 10 and decided to redeem the same in July 2019 say at a NAV of Rs. 30

In the above case, the gains arising from the sale will be considered as long term capital gain and the benefit of indexation will not be allowed while computing the capital gain.

Here’s how the calculation would be made in such a case:

ParticularsAmount(INR)
The full value of the consideration received (10,000 units @30)3,00,000
Sale consideration(A)3,00,000
Less: Cost of acquisition1,00,000
Long-term capital gain(C=A-B)2,00,000
Period of holdingMore than 36 months
Rate of tax10%
Tax payable 2,00,000*10% = 20,000

Debt oriented mutual funds

Long Term Capital Gain

Any long-term capital gain, arising on transfer of a debt fund, will be liable to tax @20% with indexation benefit

Indexation is used to adjust the purchase price of an investment to reflect the effect of inflation on it. It increases the purchase price of the asset which will eventually lead to lower profits hence bringing down your taxable income. 

Suppose Amit had invested in a debt fund in April 2016 and the investment amount was Rs. 1,00,000 at a NAV of Rs. 10 and decided to redeem the same in July 2019 say at a NAV of Rs. 20

In the above case, the gains arising from the sale will be considered as long term capital gain and the benefit of indexation will be allowed while computing the capital gain.

Here’s how the calculation would be made in such a case:

ParticularsAmount
The full value of the consideration received (10,000 units @20)2,00,000
Sale consideration(A)2,00,000
Less: Indexed cost of acquisition1,09,470
Long-term capital gain(C=A-B)Rs 90,530
Period of holdingMore than 36 months
Rate of tax20%
Tax payable Rs 90,530 * 20% = Rs 18,107

Systematic Investment Plan (SIP)

SIP’s are taxed in a different way as compared to the above-mentioned method. If you think of it, SIP’s are nothing but just a different way of investing in mutual funds. It allows a person to invest small or large depending on their financial capability and gives them the flexibility to choose the tenure of the investments.

When it comes to taxability of SIP, each investment made (say on a monthly basis) will be treated as a new investment and the period of holding will be counted from the date of the investment for computation of capital gain.

So, in a case where you have made a SIP of say Rs. 5000 per month, only the gains which have been earned on the investments made a year ago will be tax-free.

Exemptions capital asset

SectionAssessee to whom allowedConditionsQuantum of tax exemption
Section 54Individual/HUFTransfer of a residential house, income from which is charged to tax under income from house property.The asset must be a long-term capital assetInvestment in the purchase of two residential houses in India provided the taxable capital gain does not exceed Rs. 2 crores. This benefit is available once in a lifetime.Actual amount invested or capital gain, whichever is lower.
Section 54BIndividual/HUFTransfer of agricultural land.Used for agricultural purposes for 2 years immediately preceding the date of transferPurchase of another agricultural landActual amount invested or capital gain, whichever is lower.
Section 54FIndividual/HUFTransfer of a long-term capital asset, not being a residential house.Investment in one residential house within 3 years from the date of transfer.1. If the cost of the new house is less than the capital gain, the entire capital gain is exempt.2. If the cost of the new house is more than the capital gain:LTCG*(amt invested/net consideration)
Section 54ECAny assesseeTransfer of long-term capital asset, being land or building, or both.Investment in the specified bonds of NHAI, RECL or PFCActual amount invested subject to a maximum of Rs. 50 lakh, or the capital gain, whichever is lower.

Capital gain tax on the sale of a house property

Long term capital gain on sale of house property can be determined as per the below:

Sale price of the housexx
Less: Expenditure incurred in connection with a transferxx
Less: Indexed cost of acquisition of the housexx
Less: Indexed cost of improvement for the housexx
Long-term capital gainxx
Less: Tax Exemption Under section 54, 54B, 54D Under Section 54EC, 54ED, 54Fxx
Taxable long-term capital gainxx

Carry forward a loss on asset sale

Long term capital loss can only be adjusted against long-term capital gains only. It can be carried forward up to the next 8 assessment years from the assessment year in which the loss was incurred. In order to carry forward the loss, the taxpayer must file income tax return. The taxpayer must also file income tax return within the due date specified in the income tax act.

Capital gain account scheme

Capital gain account scheme is an account that allows the taxpayer to save their capital gain if they are unable to invest the same as specified in section 54 & 54F of the income tax act. The taxpayer can only deposit the amount in the said account only if they are unable to invest the gains before the due date of filing of income tax returns

Published on August 20, 2020