Long-Term Capital Gains Tax (LTCG): What It Is & How It Works?
Capital Gains Tax is imposed, when an individual realises a profit from the sale of capital assets. These assets range from residential properties and vehicles to Stocks, Bonds and even collectables like art pieces.
This Tax has two primary categories: Short-Term Capital Gains (STCG) Tax and Long-Term Capital Gains (LTCG) Tax. The sale of such assets is subject to taxation under the Income Tax Act of India, along with any applicable cess or surcharges.
This Tax is relevant to both movable and immovable properties, encompassing residential buildings, vacant land and financial assets such as equity and listed Shares, Debentures, units in Equity-Oriented Mutual Funds (MFs), Government Securities and Zero-Coupon Bonds. The duration for which the asset is held, ranging from 12 to 36 months based on the asset type, determines the applicability of the LTCG Tax in India.
What is a Long-Term Capital Gain?
As per Section 45 of the Income Tax Act 1961, LTCG is the profit arising from the sale of a capital asset held for a specific duration. This duration varies based on the type of asset but typically ranges from 12 to 36 months. LTCG is considered as income in the year of the asset's transfer and is taxable under 'Capital Gains.'
Capital Assets in Focus
A Capital Asset is essentially any property held by an individual, regardless of its connection to their business or profession. This also includes securities held as per SEBI regulations.
What qualifies as Long-Term Capital Gains?
Frame for Different Assets
The classification of a long-term capital asset varies:
For immovable properties and unlisted shares, its assets are held for more than 24 months
For Zero-Coupon Bonds, the period is over 12 months.
In general, the holding period for long-term capital assets ranges from 1 to 3 years.
Inclusions in Long-Term Tax Regime
Assets falling under the LTCG category include:
Listed Equity Shares
Units of Equity-oriented Funds
Units of a Business Trust.
Taxation on Long-Term Capital Gains
LTCG Tax Rate
LTCG exceeding Rs 1 lakh from Equity Shares, Equity-oriented Mutual Funds and Business Trust units are taxed at 10% (Section 112A of the Income Tax Act). For other capital assets, the rate is 20%, with surcharges and applicable cess.
Computation of LTCG
The Calculation Method
Section 48 of the Income Tax Act outlines how to calculate LTCG. The key components include:
Expenditure Incurred: Costs related to the transfer
Cost of Acquisition: The original purchase cost of the asset
Cost of Improvement: Expenses for any improvements or additions to the asset.
The cost of acquisition and improvement can be adjusted for inflation using the Cost Inflation Index (CII) notified by the government.
Exemptions on LTCG Tax
Ways to Save on LTCG
Several exemptions under the Income Tax Act can reduce your LTCG Tax burden:
Investment in the Capital Gains Account Scheme (CGAS)
Reinvestment of property sale proceeds into another property within specified timelines
Certain Mutual Fund (MF) investments are held for over a year.
Long-Term Capital Gains on Equity-Oriented Funds
Taxation and Calculation
Equity-oriented Funds, which invest a minimum of 65% in equities, are subject to a 10% LTCG Tax, if gains exceed Rs 1 lakh without the benefit of indexation. An example calculation would be:
Sale Consideration: Rs 4,00,000 (10,000 units @ Rs 40)
Less: Cost of Acquisition: Rs 2,00,000 (10,000 units @ Rs 20)
LTCG: Rs 2,00,000 (Rs 4,00,000 - Rs 2,00,000)
Taxable LTCG above Rs 1 lakh: Rs 10,000 (10% of Rs 1,00,000)
Saving on LTCG for Equity-oriented Funds
Offsetting Capital Gains and Losses
You can offset any capital loss against a capital gain of a similar nature. For example, a long-term capital loss can only be offset against a long-term capital gain.
LTCG on Equity Linked Savings Scheme
Taxation of ELSS
Equity Linked Savings Scheme (ELSS), which falls under Section 80C for Tax exemptions, is also subject to a 10% LTCG Tax on profits over Rs 1 lakh.
For instance, if you invest Rs 4,00,000 in ELSS and redeem it at Rs 7,00,000:
Full Value of Consideration: Rs 7,00,000
Less: Cost of Acquisition: Rs 4,00,000
LTCG: Rs 3,00,000 (Rs 7,00,000 - Rs 4,00,000)
Taxable LTCG: Rs 20,000 (10% of Rs 2,00,000)
Broader Implications of LTCG in India
Impact on Investment Decisions
LTCG Tax significantly influences investor behaviour and decision-making. For instance, the difference in tax rates between short-term and LTCG can affect how long investors choose to hold onto their assets for. Long-term investments are often encouraged due to the typically lower tax rates on LTCG compared to STCG Tax.
Real Estate and LTCG
In the context of real estate, LTCG Tax plays a crucial role. A property held for more than <24> months falls under the LTCG regime. This encourages individuals to consider longer-term investments in property rather than short-term speculative trading.
Factors Influencing LTCG Calculation
One of the key aspects of LTCG calculation is the benefit of indexation, which applies to certain assets. Indexation adjusts the cost of acquisition of an asset to account for inflation, effectively reducing the taxable gain.
Capital Loss Set-off
Investors can also set-off capital losses against capital gains. This means a loss incurred on the sale of one asset, can be adjusted against gain from another, reducing the overall Tax liability. However, it is important to note that long-term losses can only be set-off against long-term gains.
Planning for LTCG Tax Liability
Tax Planning Strategies
Understanding LTCG Tax implications is vital for effective Tax planning. Investors should consider the holding period of their assets and the Tax implications before making buy or sell decisions. For instance, selling an asset just before it qualifies as a long-term asset might result in a significantly higher Tax.
Seeking Professional Advice
Given the complexity of Tax laws, seeking advice from Tax professionals can be beneficial, especially for significant investments or complex transactions. This ensures compliance with Tax laws and optimal Tax planning.
Understanding the nuances of LTCG is essential for anyone engaged in the sale of long-term assets. This blog aimed to clarify the definition, computation and taxation of LTCG, offering insights into navigating this aspect of financial planning, effectively. Whether you're an individual investor or a professional, grasping the concept of LTCG is key to making informed decisions and optimising your Tax liabilities.
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