If you are an investor or a seller of assets in India, you might have heard of the term long-term capital gains (LTCG) tax. But what exactly does it mean, and how does it affect your income and tax liability? Here, we will explain the concept and calculation of LTCG tax in India for different types of assets, such as equity shares, equity-oriented mutual funds, debt-oriented mutual funds, property, gold, bonds, etc.
What is Long-Term Capital Gains Tax?
Long-term capital gains tax is applied to the gains you make from selling a capital asset you have held for a specified period. This period varies depending on the type of asset. For example, for immovable property like real estate, the asset must be held for more than two years to be considered long-term. For movable property such as jewellery, the period is three years; for listed shares or equity-oriented mutual funds, it is one year.
How is LTCG Tax Calculated?
You can compute LTGC using the following steps:
1. Determine the Full Value of Consideration:
The first step in calculating LTCG tax involves identifying the total amount received from selling the asset. This figure represents the total value of consideration and serves as the starting point for assessing capital gains.
2. Deduct Expenses:
Subtract any directly related expenses incurred during the sale process. This may include brokerage fees, legal expenses, or any other costs directly associated with the transaction. The resulting amount is the net consideration after deducting these expenses.
3. Calculate Indexed Cost of Acquisition and Improvement:
Adjust the original purchase price and the cost of any improvements made to the asset for inflation. This adjustment is performed using the Cost Inflation Index (CII) provided by the Income Tax Department. The indexed cost reflects the asset’s current value, considering the impact of inflation over the holding period.
4. Subtract Exemptions:
If eligible, subtract exemptions allowed under Sections 54, 54EC, 54F, and 54B2 from the calculated gains. These sections provide specific conditions under which exemptions can be claimed, such as investing in specified assets or utilising the gains for specific purposes. Deducting eligible exemptions reduces the taxable amount of LTCG.
Example of LTCG Calculation
Suppose you purchased 100 shares of a company at Rs 500 each in 2018 and sold them for Rs 800 each in 2024. Your total value of consideration is Rs 80,000 (100 shares * Rs 800). If the indexed acquisition cost is Rs 60,000 and you have no other deductible expenses or exemptions, your LTCG is Rs 20,000 (Rs 80,000 – Rs 60,000).
Planning and Saving on LTCG Tax:
Planning and saving on LTCG tax in India requires a strategic approach. Here are some bullet points to guide you through the process:
- Understand the LTCG Tax Rate: As of 2023, the LTCG tax rate on listed equities and equity-oriented mutual funds is 10% if the gain exceeds Rs 1 lakh. For other assets like property or gold, it’s 20% with indexation. You can also invest in a term plan for tax deduction. To invest in this insurance, first, use the term plan calculator.
- Utilise the Exemption Under Section 54: If you have sold a residential property, reinvest the gains into another residential property within the specified time frame to claim an exemption under Section 54.
- Invest in 54EC Bonds: To save on LTCG tax without purchasing a new house, consider investing in 54EC bonds within 6 months of the asset sale.
- Hold Investments for the Long Term: Assets held for more than 12 months are considered long-term, which can benefit from indexation, reducing the taxable amount.
- Claim Exemptions for Agricultural Land: LTCG from selling agricultural land in rural areas is not taxable. Ensure the land qualifies as rural based on the criteria set by the Income Tax Act.
- Offset Gains with Capital Losses: Carry forward capital losses for up to 8 years and set them off against future capital gains to reduce the tax burden.
- Gift Assets to Family Members: Transfer assets to family members in lower tax brackets to optimise the overall family tax liability.
- Keep Accurate Records: Maintain detailed records of acquisition costs, improvements, and sale details to calculate capital gains and applicable taxes accurately.
Understanding LTCG tax is critical to making informed decisions about your investments. By knowing how to calculate your tax liability and taking benefit of exemptions and deductions, you can effectively manage your taxes and maximise your returns.
Remember, while this guide offers a general overview, your individual circumstances may require specific advice. Always seek professional guidance to ensure compliance with the latest tax laws and to optimise your tax strategy.