Understanding Long-Term Capital Gains Tax (LTCG) in India

Brief Overview of LTCG Tax

Long-Term Capital Gains Tax (LTCG) is a tax levied on the profits earned from selling capital assets that have been held for more than one year. These gains fall under the broader category of “Capital Gains” and are subject to specific tax provisions.

What Constitutes Long-Term Capital Gains?

Long-Term Capital Gains arise when you sell an asset after holding it for a significant period (typically more than one year*). The following assets qualify for LTCG treatment:

• Listed Securities
• LTCG on Zero-Coupon Bonds
• Unlisted Securities
• Immovable Property
• Other Long-Term Capital Assets

How Are Long-Term Capital Gains Calculated?

The calculation of LTCG depends on the type of asset and the duration of its holding. Here’s a breakdown:

Listed Securities (Other than Units):

• Tax Rate: 10% on gains exceeding ₹1 lakh.

Zero-Coupon Bonds**:

• Tax Rate: Choose the lower of:
  • 10% (without indexation)
  • 20% (with indexation)

Unlisted Securities or Shares (Non-Residents):

• Tax Rate: 10% on LTCG without computation of capital gain in foreign currency and indexation.
  • Formula: Tax = 10% × (Sale price – Cost of Acquisition)

Immovable Property (Sold by Residents):

• Tax Rate: 20%

What is Long-Term Capital Gains Tax on Mutual Funds?

LTCG tax applies when you sell a capital asset (such as mutual fund units) after holding it for more than one year. If your LTCG from mutual funds exceeds Rs. 1 lakh, it becomes taxable. The introduction of Section 112A streamlined the tax rate for LTCG on mutual funds, fixing it at 10% without any indexation benefit.

How to Save LTCG on Equity-Oriented Funds

• Invest in Equity Mutual Funds and hold them for at least 12 months to qualify for LTCG tax benefits.
• Gains up to ₹1 lakh are tax-free in equity funds, but any gains above that are taxed at 10%.

LTCG on Equity-Linked Savings Scheme (ELSS)

• ELSS funds are equity-oriented mutual funds with a lock-in period of 3 years.
• Gains from ELSS are subject to the same tax rules as other equity funds.

LTCG vs. Short-Term Capital Gains (STCG)

• LTCG applies to assets held for more than one year, while STCG applies to assets held for less than one year.
• Different tax rates and rules govern these two categories.

Tax Treatment in Case of Losses

• If you incur losses on LTCG, you can carry them forward to offset against future long-term gains.
• One can offset capital losses from STCG against future long-term as well as short-term gains.

Tax Rate on Selling House Property

• For immovable property sold by residents, the tax rate on LTCG is 20%.

Indexation Benefit for Long-Term Capital Assets

• Indexation adjusts the cost of acquisition for inflation.
• It is applicable to zero-coupon bonds.

Calculating LTCG Tax on Investments

• To calculate LTCG tax, determine the gains based on the asset type and holding period.
• One can offset capital losses from STCG against future long-term as well as short-term gains.• Consult a tax professional or use online calculators for accurate results.

Remember, understanding LTCG and its implications is crucial for effective tax planning. Always seek professional advice and make informed investment decisions.

*Holding period for Unlisted Shares and Immovable Property should be more than 24 months.
**For Zero Coupon Bond, listed Securities and Units of equity oriented mutual funds, holding period should be more than 12 months

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