As an investor, you will come across the term long-term capital gain quite often when evaluating your options. It is essential to understand what this means as it can help you make better decisions in the future. However, before we get into what long-term capital gains are, it’s vital to understand the term capital gain.
What is capital gain?
Capital gain is the profit that is received through the sale of a capital asset such as a machine, plant, jewellery, vehicle, patent, land, building etc. These gains are further classified as short term or long term gains depending on the holding period of the asset.
Short-term capital gains refer to gains made on selling an asset you’ve held for less than 36 months. On the other hand, long-term capital gains refer to the gains made after selling an asset you’ve held for over 36 months. However, there are certain exemptions to this time period of holding for 36 months which are
- In case of house property, building, and land, if the asset is held for a period of 24 months, then long term capital gains tax must be paid forming another exception to the 36 month rule.
- In case of equities and equity oriented mutual funds if the asset is held for a period of more than 12 months, then the gains made on sale of such assets is categorised as long term capital gains
A few examples of equity oriented assets include
- Zero coupon bonds
- Unit Trust of India units
- Equity-based mutual funds units
- Securities that are listed on a stock exchange such as government securities, bonds, debentures, equity shares and preference shares.
Certain assets are commonly mistaken to be capital assets when they aren’t. They are as follows –
- Any item used for business
- Agricultural land in rural India
- Special bearer bonds
- Personal goods
- Sovereign Gold bonds
- Gold deposit bond
Capital gains are considered to be a type of income for an individual and hence are taxed as per the Income Tax Act. They are not applicable to inherited property as there is technically no sale of the asset, only a transfer of the ownership of the asset. However, if the inherited asset is sold, then capital gains tax will be applicable.
Calculation of Capital Gains
It is calculated based on the following factors –
- Expenses or the cost of improvement of the capital asset;
- Acquisition cost of the capital asset;
- Full value of consideration that the seller will receive if there is a property transfer.
Long term capital gain is calculated as follows –
- The full value of the asset must be first considered.
- Deductions such as cost of improvement of the asset, acquisition costs and improvement costs must be considered and subtracted from the full value of the asset.
- Thereafter, all exemptions applicable as per Section 54B, Section 54F, Section 54EC, and Section 54 of the Income Tax Act must be duly applied. Make a note these exemptions are available only on Long term capital gains made from sale of residential property, land building only. Various sections of Sec 54 deal with various assets. Section 54F can be used for long term gains from equities only when the entire sale consideration is used for the purchase of a house property.
- The long term capital gains is arrived at after making all these deductions and exemptions.
Difference Between Long Term and Short Term Capital Gains Tax
Both are determined by the difference in value of the sale and purchase price.
- However, the differences between the two are as follows –
|Parameter||Short Term Capital Gain (STCG)||Long Term Capital Gain (LTCG)|
|Time Duration of Asset||It is so considered if it is for a period less than 36 months for regular assets and 12 months for equities and equity oriented mutual funds||It is considered if it is for a period more than 36 months for regular assets and 12 months for for equities and equity oriented mutual funds.|
|Computation||Short term capital gains = sale cost of asset – expenditure incurred on asset – cost of acquisition/improvement||Long term Capital Gains = cost of selling a property – Indexed cost of acquisition|
|Tax Rate||15% (For equities)
Slab rate for all other categories
|10% for equities & equity oriented mutual funds when the gain is over Rs 1 lakh in a Financial year.
20% for all other categories with indexation
Long Term Capital Gain Tax Rate
The tax rate for long term capital gains is –
- For sale of equity shares and equity oriented mutual funds, it is 10% of the amount which is more than Rs. 1,00,000.
- For all other forms of sale except the sale of equity shares, it is 20% of the amount but with indexation.
- For all debt funds, the tax rate is 20% with indexation.
Also surcharge and cess may be charged as and when applicable.
Exemptions on Capital Gains from property in the Income Tax Act
- Sale of house property by investing in up to two house properties, provided that the capital gains does not exceed Rs. 2,00,00,000.
- Sale of any other asset but house property and the amount is invested into the construction of a new property within a period of 3 years, or reinvested in bonds.
- Additionally, you can avail exemption on capital gains from transfer of land used for agricultural purposes.
- Exemptions under Sec 80C cannot be used for capital gains
- Also, for specific categories of individuals, the exemptions subsist as follows –
- Residential Indians of 80 years of age with an annual income below Rs. 5,00,000.
- Residential Indians between 60 to 80 years of age who earn Rs. 3,00,000 per annum.
- For individuals of 60 years or younger, the exempted limit is Rs. 2,50,000 every year.
- Hindu Undivided Families with an annual income under Rs. 2,50,000.
- The exempted limit is Rs. 2,50,000 for non-residential Indians.
Relation Between Long Term Capital Gain and Long Term Capital Loss
A capital loss is a loss on the sale of a capital asset. As with capital gains, capital losses are also divided into short and long term losses. These long term capital losses can be set off only against long term capital gains and if the set off is not possible, the loss can be carried forward for 8 years.
Understanding which assets can offer you long-term capital gain is critical if your investment goal is to generate wealth for the future. Conversely, if you need funds that can be liquidated within a shorter term, then you can have a look at our article about short-term capital gains.
FAQs on Long term capital gains
- What is the tax rate for long term capital gain?
The tax rate is 20% for long term capital gain.
- Can I avoid paying long term capital gains tax if I earn income from selling a house?
Yes, if you invest the money in bonds.