Long Term Capital Gains Tax (LTCG) in India

Some of the investments that can generate long-term capital gains are:

1. Sale of Property: When you sell a property that has been held by you for at least  years, the money you get from the sale can be considered long-term capital gains.
2. Sale of Agricultural Land: Similar to the sale of property, if agricultural land is sold after having been held for one to three years, the returns are considered to be long-term capital gains.
3. Mutual Fund Investments: If you invest in mutual funds and hold the investments for about one year, the returns that you get from the investment will be classified as long term capital gains.
4. Stocks: The returns from investments in stocks and bonds also qualify as long-term capital gains since these investments too may be held for extended periods of time.

How are Long-Term Capital Gains are Calculated?

The computation of long-term capital gains is a fairly simple process. You buy an asset at today's value, that is your expense, you then sell it a few years later for a price that is higher than what you bought it for and you may assume that the entire amount that has be earned over and above what you spent is your capital gain, but it's not.

To calculate the gain you need three things, the cost of the initial investment, the price at which you sold it and the cost inflation index. The last part is an index that the government publishes to inform people about the inflation that changes the price of the asset.

The Method of Calculating the Gain is: (Calculation)

Step 1: Indexed cost of acquisition = purchase price X (CII of year of purchase/CII of year of sale)

Step 2: Actual gain = sale price – indexed cost of acquisition

Long-Term Capital Gains Tax Rates

Long-term capital gains are typically subject to a 20% tax rate (plus applicable surcharge and cess), but certain special circumstances may allow the taxpayer to choose a 10% tax rate (plus surcharge and cess).

The 10% tax rate benefit is only available under the following circumstances:

1. When the long-term capital gains resulting from the sale of listed securities exceed Rs. 1,00,000 (Section 112A).

1. When the long-term capital gains result from the transfer of any of the following assets:
   1. a) Any security (*) listed on a recognized Indian stock exchange.
   2. b) Any unit of a UTI or mutual fund (whether listed or not) (**); and
   3. c) Zero coupon bonds.

(*) Securities are defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956, and include shares, stocks, bonds, debentures, debenture stocks, or other marketable securities of a similar nature in or of any incorporated company or other corporate body, Government securities, and other instruments declared to be securities by the Central Government, as well as rights or interests in securities.

(**) This option is only available for units sold on or before 10 July 2014.

The tax rates for long-term capital gains and short-term capital gains are mentioned in the table below:

Long-term Capital Gains Arising from Sale of Listed Securities

With effect from Assessment Year 2019-20, the Finance Act 2018 introduced a new Section 112A. This section pertains to capital gains from the transfer of a long-term capital asset, that is, an equity share in a company, a unit of a business trust, or a unit of an equity-oriented fund. Under this new section, such capital gains exceeding Rs. 1,00,000 will be taxed at a rate of 10%.

To be eligible for this concessional rate of 10%, the following conditions must be met:

1. In the case of an equity share in a company, Securities Transaction Tax (STT) has been paid on both the acquisition and transfer of the capital asset.
2. In the case of a unit of a business trust or a unit of an equity-oriented fund, STT has been paid on the transfer of the capital asset.

For listed equity shares acquired by the taxpayer before 1 February 2018, the cost of acquisition shall be considered to be the higher of the following:

1. The actual cost of acquisition of the asset.
2. The lower of the following:

a) The fair market value of such shares as on 31 January 2018

b) The actual sales consideration accruing on its transfer

The Fair Market Value (FMV) of listed equity shares shall be their highest quoted price on the stock exchange as on 31 January 2018. If there is no trading in such shares on 31 January 2018, the highest price of the share on a date immediately preceding 31 January 2018, on which trading takes place in that share, shall be deemed to be its fair market value.

For units that are not listed on a recognized stock exchange, their Fair Market Value (FMV) will be deemed to be their net asset value as of 31 January 2018. However, suppose the capital asset is an equity share in a company that was not listed on a recognized stock exchange on 31 January 2018 but was listed on the date of transfer. In that case, the FMV will be deemed to be the cost of the unlisted shares increased by the Cost Inflation Index (CII) for the financial year 2017-18.

Long-term Capital Gains Arising from Transfer of Specified Asset

If a person who pays taxes has made long-term capital gains from the transfer of any listed security, mutual fund unit (whether listed or not), or zero-coupon bond, which are not covered under Section 112A, they have two choices.

1. The first choice is to use indexation and calculate capital gains, which will be subject to a regular tax rate of 20% (plus surcharge and cess as applicable).

1. The second choice is not to use indexation, and the capital gains will be taxed at a rate of 10% (plus surcharge and cess as applicable).

To determine which option to choose, the taxpayer must calculate the tax liability under both options and select the option that results in a lower tax liability.

Tax Exemption on Long-term Capital Gains

Under Section 54 of the Income Tax Act 1961, a person who sells a residential property can claim tax exemption on long-term capital gains if they use the gains to buy or construct another residential property. This exemption is applicable only to long-term capital assets, i.e., immovable properties held for more than two years.

The following conditions must be met to avail of this exemption:

1. The seller must purchase a residential property either one year before or two years after selling the original property.

1. If the seller is constructing a house using capital gains, the construction should be completed within three years from the date of the sale of the original property. 
2. The new residential property must be situated in India.
3. If the newly purchased or constructed property is sold within three years of its construction or purchase, the exemption will be revoked.

Exemptions on LTCG Tax

If an individual's income is below the basic exemption limit, they will not have any tax liability. However, a question arises as to whether an individual can adjust the basic exemption limit against long-term capital gains. The depends on the individual's residential status (resident or non-resident). The provisions related to this are as follows: Only a resident individual or Hindu Undivided Family (HUF) can adjust the basic exemption limit against long-term capital gains.

Therefore, a non-resident individual or non-resident HUF cannot adjust the exemption limit against long-term capital gains. A resident individual can adjust long-term capital gains, but only after adjusting other income first. In other words, the income other than long-term capital gains must be adjusted against the basic exemption limit first, and then any remaining limit (if any) can be adjusted against long-term capital gains.

The basic exemption limit refers to the income threshold below which an individual is not required to pay any tax. For the financial year 2022-23, the basic exemption limit varies depending on the age and residential status of the individual. Individuals who are residents and 80 years or above have an exemption limit of Rs. 5,00,000.

For those who are residents and between the ages of 60 and 80 years, the exemption limit is Rs. 3,00,000. Individuals who are residents and below 60 years have an exemption limit of Rs. 2,50,000. Non-resident individuals have a standard exemption limit of Rs. 2,50,000, regardless of their age. HUFs have an exemption limit of Rs. 2,50,000.