What is Long-Term Capital Gains Tax? Everything You Should Know About

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Any profit/ gains arising from the transfer of capital assets, such as property, shares, bonds, etc., are subject to income tax under the head of ‘Income from Capital Gains’. Long-Term Capital Gains (LTCG) arise from the sale of capital assets, such as stocks and properties, held for more than 24 months (12 months for listed shares and equity funds).

The tax rate on long-term capital Gains is 12.5% for all capital assets. However, for listed equity shares, equity-oriented funds, and units of business trusts, LTCG exceeding ₹1.25 lakh will be taxed at a flat 12.5%. These can trigger LTCG tax in India after 12 to 36 months of ownership. 

Effective from 23rd July, 2024, a uniform 12.5% tax rate applies to long-term capital gains (LTCG) across all asset classes, regardless of indexation benefits. Previously, LTCG on listed shares and equity mutual funds was taxed at 12.5% on gains exceeding ₹ 1.25 lakh, while other assets were taxed at 20% with indexation or 10% without indexation. 

What is Long-Term Capital Gains Tax?

• Capital gains/ profits arising from the transfer of Long-Term Capital Assets are referred to as Long-Term Capital Gains for LTCG.
• An asset held for more than 24 months is termed a long-term capital asset.
• For listed equity shares, equity-oriented funds, and units of business trust, the holding period is 12 months. (if held for more than 12 months, they are considered long-term capital assets.)

The Long-Term Capital Gains taxation is divided into two sections: Section 112 and Section 112A. 

Section 112A applies in the case of the following assets:

• Equity share in a listed company.
• Unit of equity-oriented fund
• Unit of business trust

Section 112 applies to all other cases of Long-Term Capital Gains not covered under Section 112A. 

Long-Term Capital Gain (LTCG) Tax Rate

Calculation of Long-term Capital Gains Tax

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To calculate the Long-term capital gains accurately, follow the steps mentioned below:

Step 1: Determine the Full Value of Consideration

The total amount received from the transfer of capital assets. It includes the monetary payment received or the fair market value in certain specified circumstances.

Step 2: Determine the Net Value of Consideration

The net value of consideration is determined by deducting expenses related to the transfer, such as commission, brokerage, etc.

Step 3: Calculate the Cost of Acquisition

The purchase price of the assets is to be determined. For assets that receive indexation benefits (such as immovable property), we have to adjust the cost of acquisition using the Cost Inflation Index, which the government notifies every year.  

Step 4: Deduct exemptions under Section 54/54B/54EC/54F

Certain types of long-term capital gains may be eligible for exemptions under specific conditions (e.g., reinvestment in certain assets, such as residential property).

Step 5: Long-Term Capital Gains chargeable to tax

The long-term capital gains chargeable to tax formula is: 

LTCG is chargeable to tax = Net Sale consideration – Cost of Acquisition – Cost of Improvement – Exemptions under Section 54/54B/54D/54EC/54F. 

Step 6: Long-Term Capital Gains Tax

12.5% tax rate is applied on the LTCG amount chargeable to tax. If the indexation benefit is used, a 20% tax rate is applied. If listed equity shares or equity-oriented mutual funds are sold, a ₹1.25 lakh exemption applies.   

The formula to calculate the indexed cost of acquisition is:

Indexed cost of acquisition = Cost of acquisition* (CII of the year of transfer/ CII of the year of acquisition)

Long-Term Capital Gains (LTCG) arise from the sale of capital assets, such as stocks and properties, held for more than 24 months (12 months in case of listed shares and equity funds).

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Difference Between Short-Term Capital Gains & Long-Term Capital Gains

Here is the key difference between short-term and long-term capital gains.  

Budget 2024 new tax rates – Short-term Vs. Long-Term Capital Gains

Calculation of Long-Term Capital Gains (LTCG) with Example

Formula to calculate LTCG Tax = Gains (minus) exemption amount* rate of tax 

For Example, the LTCG tax on equities, mutual funds and stocks is 12.5% if the profits reach ₹1.25 lakh in a fiscal year. The LTCG tax rate is 12.5%, with indexation for other assets such as real estate, gold, and debt mutual funds. 

Sol. Previous LTCG@ 10%; (Exemption – ₹1 lakh) – Regulation Before Union Budget 2024

(Gains – ₹1 lakh)*10%; ₹15,00,000 – ₹1,00,000* 10% = ₹14,00,000*10% = ₹1,40,000.

New LTCG@12.5%; Exemption – ₹1.25 lakh) – Regulation After Union Budget 2024

(Gains – ₹1.25 lakh)*12.5%; (₹15,00,000 – 1,25,000)*12.5% = 13,75,000*12.5% = ₹1,71,875

Long-Term Capital Gains on Shares

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In India, profits from the sale of assets held for more than 24 months are subject to long-term capital gains tax. The kind of asset and the relevant tax legislation determine the tax rate on long-term capital gains. 

If long-term capital gains exceed INR 1 lakh, they are currently subject to a 12.5% long-term capital gains tax on listed assets. However, long-term capital gains will not be subject to taxation if the securities transaction tax (STT) was paid on the acquisition and sale of securities.  

The long-term capital gains tax rate for other assets, such as gold or real estate, is 12.5%, with indexation. This indicates that the asset’s purchase price, adjusted for inflation, determines the tax rate. 

Long-Term Capital Gains Tax Rate on Shares

Key changes in Budget 2024 that the mutual fund should be aware of include:

• Uniform LTCG Tax Rate: Long-term capital gains on shares (LTCG) will now be taxed uniformly at 12.5% across all asset classes. The Budget 2024 has eliminated the indexation benefit, which previously allowed a lower LTCG tax rate. Prior rates of 20% with indexation and 10% without indexation are no longer applicable.  
• Revised Holding Periods: From 23rd July 2024, assets will be classified as long-term if held for more than 12 months (for listed securities on Indian stock exchanges) or more than 24 months (for other asset classes). Investors can classify listed securities as long-term investments after holding them for over a year.
• Exclusion of Certain Assets from LTCG Classification: Profits from debt mutual funds, debt ETFs,market-linked debentures, and unlisted bonds and debentures will not be considered short-term capital gains. 

Long-Term Capital Gain on Mutual Fund

LTCG tax on mutual funds is comparatively lower than the short-term capital gains tax on Mutual Funds. This tax system has been adopted to encourage investors to keep their money invested for a longer period.  

What is an Indexed Cost of Acquisition?

The cost of Acquisition is indexed by the cost inflation index (CII). The purpose of this application is to adjust inflation on your Mutual Fund assets over the years. This calculation reduces capital gains on Mutual Funds and increases an individual’s cost base. 

The following table represents the holding period for Mutual Funds:

These mutual funds with long-term capital gains are a healthy investment option, as individuals can exploit the high-yield factor of equity funds and the lower risk of debt funds. 

• Debt-oriented Balanced Funds: Like equity-oriented hybrid funds, these funds are also composed of a mix of equity shares and debentures. However, unlike it, debt-oriented balanced funds comprise 60% or more of debt instruments.
• Unlisted Equity Funds: These equity funds are directed towards the purchase of stocks or shares that are not listed on any recognised stock market. Gains from these funds are considered short-term capital gains in mutual funds. 

Long-Term Capital Gains Tax Rate on Mutual Funds

Here is a breakdown of the current LTCG tax on mutual fund rates for different schemes, including equity-oriented and non-equity-oriented funds, to help you make informed investment decisions: 

• Equity-Oriented Schemes: The long-term capital gains from equity-oriented mutual funds are taxed at a rate of 12.5%. The government revised this tax rate in the Union Budget 2024 to encourage long-term investment in equities.
• Non-Equity-Oriented Schemes: For non-equity-oriented funds, the long-term capital gains are also taxed at 12.5% down from the previous rate of 20%. 

How to Avoid LTCG Tax on Mutual Funds (Exemptions)

The Income Tax Act provides certain exemptions and deductions that can help reduce the tax liability on long-term capital gains from mutual funds.

• Threshold Limit: For equity-oriented mutual funds, gains up to ₹1.25 lakh in a financial year are exempt from tax. Only gains exceeding his threshold are subject to the 12.5% LTCG tax.
• Section 54EC: Capital gains up to ₹50 lakhs from the sale of a long-term asset can be exempted if the proceeds are invested in specified bonds within 6 months. 

Exemption of Long-Term Capital Gains

• Various exemptions under the Income-tax Act help reduce the LTCG chargeable to tax if the capital gain is reinvested in specified assets or instruments.
• Certain conditions must be met to claim deductions against capital gains. 

One of the most popular exemptions is investment in notified bonds under Section 54EC. This exemption is available on Long-Term Capital Gain on any asset. 

Below, we discussed the Exemption Section with the maximum limit of exemption required for Long-Term Capital Gains (LTCG):

Long-Term Capital Gain Tax on Property

• Long-Term Capital Gain arises from selling property held for more than 24 months.
• As mentioned above, the rates will be 20% if the transfer is made on or before 22nd July 2024, after indexation benefit. For subsequent transfers, the tax rate shall be 12.5% without the indexation benefit.
• There are certain exemptions available to reduce your LTCG chargeable to tax further further.
• In case of a sale of land and building made after 23rd July 2024, the taxpayer will have the option to pay tax at 20% with indexation benefit and at 12.5% without indexation benefit if such land/building was acquired before 22nd July 2024. 

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Sip Redemption and FIFO for LTCG

FIFO: FIFO or First In, First Out, refers to the structure whereby the mutual fund units purchased before the other units are deemed to be sold first in the context of your redemption. The NSDL and CDSL depositories prescribe this FIFO treatment to compute tax liabilities and net realisable holdings uniformly. 

Importance of FIO For Investors

Given your situation, FIFO determines the holding period of your units and whether the gains are Short-Term Capital Gains (STCG) or Long-Term Capital Gains (LTCG).

•  Equity-oriented funds: Short-term capital gains (STCG) at a rate of 20% will apply to units held for 12 months or less. Long-Term Capital Gains (LTCG) where the units have been held for more than 12 months and the gain exceeds ₹1.25 lakh, the tax rate is 12.5%.
• Debt funds after April 2023: Short-term gains are included in your income and taxed at slab rates. Long-term gains (held > 36 months) are taxed with indexation benefits.

How FIFO Works in Your Demat Account?

For Example: 

January 2024: You purchase 200 units at a NAV of ₹50.

July 2024: You add 200 units at a NAV of ₹60.

September 2025: You redeem 250 units at a NAV of ₹70. 

Sol. First 200 units from January 2024 held for 19 months (LTCG = 200*₹20 = ₹4,000, taxed at 12.5% on all gains exceeding ₹1.25 lakh in this financial year). The next 50 come from July 2024 (14 months, LTCG; 50 × ₹ 10 = ₹500 gain).

Explanation:

Each lot’s profits are taxed separately according to FIFO. The long-term capital gain (LTCG) on units purchased in January is calculated independently, while units purchased in July could be short-term capital gains (STCG) or long-term capital gains (LTCG), depending on whether they have exceeded the one-year holding period. There is no blended LTCG rate.    

Conclusion

Long-term capital gains tax (LTCG) is an essential aspect of taxation for investors. Understanding the holding periods of assets, the applicable tax rates, and the available exemptions can help investors optimise their tax liabilities and make informed investment decisions by exploring various tax-saving options and staying up to date with the latest tax regulations. Investors can make the most of their long-term capital gains and work towards long-term wealth creation and financial goals. The tax rate on long-term capital Gains is 12.5% for all capital assets. However, for listed equity shares, equity-oriented funds, and units of business trusts, LTCG exceeding ₹1.25 lakh will be taxed at a flat 12.5%. These can trigger LTCG tax in India after 12 to 36 months of ownership. LTCG tax on mutual funds is comparatively lower than the short-term capital gains tax on Mutual Funds. This tax system has been adopted to encourage investors to keep their money invested for a longer period.

FAQs

What is a long-term capital gain?

Ans. Capital gains/ profits arising from the transfer of Long-Term Capital Assets are referred to as Long-Term Capital Gains for LTCG. An asset held for more than 24 months is termed a long-term capital asset. For listed equity shares, equity-oriented funds, and units of business trust, the holding period is 12 months. (If held for more than 12 months, they are considered long-term capital assets.)

How are long-term capital gains for real estate taxed in India?

Ans. Long-term capital gains (LTCG) on real estate arise from the sale of property held for more than 24 months. LTCG is taxed at a flat rate of 20% with indexation benefit in case of purchase made on or before 22nd July, 2024. For sales made on or after 23rd July, 2024, the tax rate of 12.5% will apply, without indexation benefit.

Is there any way to avoid paying taxes on LTCG?

Ans. Yes, you can avoid paying taxes on LTCG by claiming exemptions under Section 54/54B/54D/54EC/54F. These exemptions can be claimed only if the conditions set out in these sections are met. 

When to pay the Long-Term Capital Gains Tax?

Ans. Long-term Capital gains tax is usually paid when an asset is sold for a profit. The tax due is computed based on the sale profits, and the nation and the kind of asset sold define the appropriate tax rate. In some situations, estimated tax payments may be required throughout the year, with the actual tax return and payment due by the tax filing date. 

What is the LTCG tax rate on shares?

Ans. The Budget 2024 has eliminated the indexation benefit, which previously allowed a lower LTCG tax rate. Prior rates of 20% with indexation and 10% without indexation are no longer applicable. If long-term capital gains exceed INR 1 lakh, they are currently subject to a 12.5% long-term capital gains tax on listed assets. 

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