Investment, regardless of the avenues or assets, requires consideration of multiple factors, including tax liabilities. Any profit earned through the selling of capital assets is termed capital gains. These gains are treated as earnings and taxed as per applicable rates and regulations. Long-term capital gain (LTCG) taxes are significant for investors and property owners. Staying well-informed about all tax-related responsibilities and keeping up with the latest updates and developments is a crucial part of drafting an efficient investment strategy.
Here, we shall explore taxation on long term capital gain, different rates based on assets, the calculation method, strategies to save on taxes, and more!
Long-Term Capital Gains Tax
Depending on the time when the asset is being sold, capital gain taxes are categorized into two categories – short-term and long term capital gain taxation. This categorization further differs for various assets.
| Asset | When Considered Long Term |
| Equity shares and equity-oriented mutual funds | If sold a minimum of 12 months after the acquisition |
| Real Estate, Gold, and Debt-Oriented Funds | If sold a minimum of 36 months after the acquisition |
Long term capital gain taxation may include more favorable rates than short-term capital gain. The aim primarily is to encourage wealth generation over longer periods.
Long-Term Capital Gain Tax Rates on Various Assets
Not all investment channels have the same features and benefits; similarly, not all assets belong to the same class. Naturally, the long term capital gain taxation requirements often apply differently to varying assets, for instance:
- LTCG taxes on equity and equity-oriented funds:
- 12.5% rate on capital gains above ₹1.25 lakh (without indexation)
- No tax to be applied on LTCG up to ₹1.25 lakh per year
- Subject to Securities Transaction Tax (STT).
- LTCG taxes on real estate, land, and unlisted shares:
- 12.5% rate after being held for 24 months
- Costs accrued for property enhancement or registration may be deducted
- LTCG taxes on gold and other bullion:
- A rate of 12.5% if held for at least 24 months
- Making charges and such other costs may be included in the selling price
Long-Term Capital Gain Tax Calculation
The first step involves calculating the capital gains, and then the long term capital gain taxation follows.
Calculating the Long-Term Capital Gains
Long-term capital gains = Selling Price – (Transfer Costs + Indexed Cost of Acquisition and Improvement)
Here,
- The selling price is the net amount to be received from the asset sale.
- The transfer costs refer to any charges that occurred during the ownership transfer, like brokerage and lawyer fees.
- Indexed cost is what you receive when you multiply the original cost of purchase with the Cost Inflation Index or CII of the purchase year and then divide the amount by the CII of the sale year. Indexed cost balances the inflationary cost and allows the purchase price to move upwards. It thus helps decrease the taxable gain.
Calculating the Long-Term Capital Gain Tax
Once you have calculated the long-term capital gains, refer to the long term capital gain taxation rates for varying assets discussed above and calculate your long-term capital gain tax liability accordingly.
Exceptions on Long-Term Capital Gain Taxes
Following are the exceptions investors can enjoy on long term capital gain taxation:
Section 54
Section 54 offers exemption on long term capital gain taxation to individuals and HUF members on LTCG if the following conditions are met:
- The asset sold must be a build-up property and the capital gain from the sale must be used for purchasing a residential property or constructing a new one.
- The capital gain must go into buying or constructing a single property within India.
- The new property must be purchased at least 1 year prior or 2 years after the sale of the existing property.
- In the case of construction, all work must be done within 3 years of the sale.
- The entire sum of capital gain must be invested in the new property. Any capital gain remaining after the purchase of the new property will be taxed as applicable.
Section 54EC
Section 54EC provides investors with an exemption from long term capital gain taxation if:
- Capital gains from any land or building sale are invested in notified bonds, such as bonds issued by the National Highway Authority of India (NHAI) and the Rural Electrification Corporation (REC).
- The investment is made within the first six months of the sale date.
- The investment amount is no more than ₹50 lakh for individuals, and for shared partners, the same cap applies to each partner’s share.
Section 54F
Section 54F allows individuals and HUF family members to enjoy exemption from long term capital gain taxation if capital gains acquired through the sale of any asset other than a residential property are used for purchasing or building a house. Terms and conditions include:
- The total capital gain should be invested.
- Any remaining amount is to be charged at the applicable LTCG rate.
Strategies to Save Taxes on Long-Term Capital Gain Taxes
The taxation on long term capital gain can significantly impact your overall earnings. Besides using Sections 54, 54EC, and 54F to receive an exemption from LTCG taxation, the following tax-saving strategies can be considered:
- Investment Diversification: Include tax-saving investment channels into your portfolio to reduce LTCG tax liabilities and also ensure portfolio diversification.
- Use Indexation: Take advantage of indexation benefits to decrease your taxable gains, especially for real estate and gold.
- Leverage Tax-Free Limit: Strategically schedule your asset sales to keep the annual capital gains within the ₹1.25 lakh tax-free limit.
Wrapping Up!
While meeting the tax liability is not only important but mandatory to avoid legal hassles, there are ways to attain exemptions. Start by determining your payable tax liability and then check out different ways to reduce the same.
