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What is a Long Term Capital Gain Tax?

Long term capital gain tax arises on the transfer or sale of a long-term capital asset. The prerequisite to a long term capital gain tax is that the asset must qualify to be a long term capital asset. To qualify as a long term capital asset, holding period is important. Hence, it is crucial to understand the concept of holding period while calculating capital gains.

Meaning of a Long Term Capital Asset

A long term capital asset is an asset that has been held by the assessee or taxpayer for more than 36 months or 24 months or 12 months depending on the class of asset. The asset should not be held with the intention of using for the purpose of business or profession. For example a stock-in-trade is not a capital asset. This is because stocks are mainly bought and sold to generate revenue. On the other hand, an asset is bought with the intention of holding for a longer period as an investment to appreciate the capital invested. 

Holding Period for Long Term Capital Gain Tax

Capital AssetPeriod 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 IndiaMore than 12 months 
Unlisted equity sharesMore than 24 months 
Unit of Debt oriented FundUnlisted securities(other than shares)Other capital assetsMore than 36 months 
Balanced Funds (equity-oriented)More than 12 months 
Balanced Funds (debt-oriented)More than 36 months 
Hybrid Mutual (equity exposure more than 65% of total investment)More than 12 months 
Hybrid Mutual (equity exposure less than 65% of total investment)More than 36 months

Long Term Capital Gain Tax Rate

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

How to Compute Tax on Long Term Capital Gain?

Long term capital gain 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
Long Term Capital Gain 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 on Calculation of LTCG

Mr. Arun purchased a house property on 23rd September 2004 for Rs 24 lakhs. Additionally, he also paid Rs 1,20,000 as stamp duty. On 17th July 2021 he sold the house property for Rs 86 lakhs. He invested Rs 16 lakhs in NHAI bond which is covered under section 54EC.

The following table explains the long term capital gain on sale of house property:

ParticularsAmount
Sale price of the houseRs 86,00,000
Less: Expenditure incurred in connection with a transferRs 1,20,000
Less: Indexed cost of acquisition of the houseCost of acquisition * (CII of the year of transfer/CII of the year of acquisition)Rs 24,00,000 * (317/113)Rs 67,32,743
Less: Indexed cost of improvement for the houseNil
Long-term capital gainRs 17,47,257
Less: Tax Exemption Under Section 54ECRs 16,00,000
Long Term Capital Gain TaxRs 1,47,257

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
12002-03105112013-14220
22003-04109122014-15240
32004-05113132015-16254
42005-06117142016-17264
52006-07122152017-18272
62007-08129162018-19280
72008-09137172019-20289
82009-10148182020-21301
92010-11167192021-22317
102012-13200202022-23331

Exemptions for Long Term Capital Gain Tax

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.

Carry Forward a Capital Loss on Sale of Asset 

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 department.

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

Learn Short-Term Capital Gains Tax on Shares