India has a long-term capital gain (LTCG) tax on earnings realized from selling assets of value over a determined timeframe. Real estate, equities, mutual funds, and even gold qualify, regardless of asset type. Knowing the mechanics of calculating LTCG and taxing it can make a difference in financial planning.
This post outlines what counts as a long-term capital gain, the tax rates at which one must pay tax, available exemptions, and legal ways of saving on taxes.
Introduction
Each time you sell an asset for a price higher than you acquired it for, you earn a capital gain. But if that gain is taxable and at what tax rate will depend on how long you owned the asset before you sold it. In India, the Income Tax Act makes a distinction between short-term and long-term capital gains, both taxed differently. This blog is about long-term capital gain tax, which is levied on gains from assets that have been held for over a specified time.
From stocks and mutual funds to property and gold, LTCG can be applied to various investments. Though long-term gains tend to be taxed at lower rates than short-term gains, they too are subject to taxation except when certain exemptions hold. It’s essential to know LTCG rules to ensure that investors can maximize returns without surprise tax demands.
What is Long-Term Capital Gain (LTCG)?
A long-term capital gain is one that accrues when a capital asset is sold after the asset has been held for a “long-term” duration as specified in the tax legislation. The holding duration differs according to the type of asset –
| Asset Type | Holding Period to Qualify as Long-Term |
| Listed shares and equity mutual funds | More than 12 months |
| Unlisted shares, property (land/building) | More than 24 months |
| Debt mutual funds, bonds, gold, jewellery | More than 36 months |
If you keep the asset for more than this time and later sell it for a profit, the gain is considered long-term and taxed under LTCG rules.
Tax Rates on Long-Term Capital Gains
Tax rate on LTCG varies based on the type of asset sold. This is how it goes –
1. Listed Equity Shares & Equity Mutual Funds
- Tax rate – 10% on gains above Rs 1 lakh per financial year
- Exemption – First Rs 1 lakh of LTCG exempted
- Indexation benefit – Not permitted
- Conditions – STT (Securities Transaction Tax) to be paid at both buy and sell points
Example – If you receive Rs 1.5 lakh as long-term capital gains on selling listed shares, only Rs 50,000 is tax-deductible at 10%, so you pay a Rs 5,000 tax.
2. Real Estate (Land or Building)
- Tax rate – 20% with indexation relief
- Indexation – Compensates purchase price for inflation based on the Cost Inflation Index (CII)
- Exemption opportunities – Provided under Sections 54, 54F, and 54EC
This can substantially lower your tax bill if invested in certain ways (detailed later).
3. Debt Mutual Funds, Gold, and Other Capital Assets
- Tax rate – 20% with indexation benefit
- Applicable to debt mutual funds, gold ETFs, jewellery, antiques, etc.
Note – According to the Finance Act 2023, from April 1, 2023, indexation benefits are stripped away for debt mutual funds in which not more than 35% of funds are invested in equities. These are now taxed according to the investor’s slab (such as short-term gains), regardless of their holding period.
How is LTCG Calculated?
The simple formula for computing LTCG is –
LTCG = Full Sale Value – (Indexed Cost of Acquisition + Indexed Cost of Improvement + Expenses on Sale)
Where –
- Indexed cost = Acquisition cost indexed for inflation using the CII brought out by the Income Tax Department
- Expenses on sale can include brokerage, legal charges, stamp duty, etc.
Indexation reduces taxable gains by taking into account inflation.
Exemptions Available on LTCG
The Income Tax Act provides various schemes to exempt LTCG under prescribed conditions. These are –
1. Section 54 – Sale of Residential Property
On selling a residential house, if the capital gain is used to purchase or construct another residential house within a specified time limit (1 year prior to sale or 2 years subsequent to sale; 3 years for construction), the gain is exempt.
Conditions –
- Available only to individuals and HUFs
- The new house should be purchased in India
- You can only avail of this benefit on the purchase of a single house out of each sale
2. Section 54F – Selling Any Other Asset Except A House
This relief is available in case you are selling an asset other than the house (e.g., shares, gold, etc.) and spending the proceeds in purchasing a house.
Condition – The whole net consideration should be invested in the new property not merely the gain.
3. Section 54EC – Investment in Bonds
If you receive LTCG on sale of land or building, you can invest the gain (upto Rs 50 lakh) in notified bonds such as NHAI or REC within 6 months and claim exemption.
Lock-in period – 5 years
Set-Off and Carry Forward of LTCG
When you have a long-term capital loss, it is set off against long-term gains only, and not against short-term gains. If unused during the same year, it can be carried forward for 8 years of assessment.
It proves to be beneficial in the years when market slides result in losses so that you can offset gains in the future and lower tax burdens.
LTCG and Filing of ITR
Long-term capital gains have to be disclosed on filing your income tax return (ITR) –
- ITR-2 – For those with capital gains but no business income
- ITR-3 – For those with business/professional income as well as capital gains
You have to reveal the details of the asset, holding period, purchase/sale date, and whether exemptions have been availed.
Conclusion
Long-term capital gain tax is a key aspect of personal finance, particularly for real estate investors, mutual fund investors, and equity market investors. Fortunately, the taxation regime for long-term gains is quite favourable with lower tax rates, exemptions, and benefits of indexation.
With a general knowledge of LTCG rules, the rates of tax, and the exemptions that are available, one can structure their investments such that they not only follow the tax norms but also maximize their overall return. Whether you’re selling a property, closing an old mutual fund, or selling shares, an understanding of LTCG tax can enable you to make wiser, tax-smart choices.
References
The Income Tax Rules, 1962
The Income Tax Act of 1961 (Act No. 43 of 1961)
