Long Term Capital Gains Tax

Whenever we earn profits on our investments or assets, we would have to pay tax on it. Throughout our life, we invest in a plethora of financial products to earn higher returns and for our overall financial well-being. Saving and investing our money is a trait that all of us should have as it can help us during emergency situations, as well as, fulfill many dreams, including building a house, buying a car, retiring comfortably, and so on. Meanwhile, it is important to learn about the taxes you would have to pay on your investments so that you don’t get any surprises later.

In this blog, we will be talking about what capital gains are, the types of capital gains taxes, the calculation of long-term capital gains taxes, the exemptions, and how you can save tax on long-term capital gains.

What Are Capital Gains?

Generally, capital gains refer to the gains or profits an individual makes on the sale of any capital assets. These could either be financial or non-financial assets. Financial assets are those that are non-physical or intangible in nature such as bonds, stocks, deposits, mutual funds, etc., Meanwhile, non-financial assets can be any physical item, which ranges from property, automobiles, etc.,

For example, you bought a house for ₹75 lakhs in October 2014. The full value of consideration in the financial year of 2017-18 was ₹2.1 crores. The house was held for more than 24 months, and hence, it is deemed a long-term capital asset. After considering the cost of improvement, and considering inflation, the cost price was adjusted, and the indexed cost of acquisition was also taken into account. The adjusted cost of the property was then settled at ₹1.4 crores.

This means you have accumulated a net capital gain worth ₹65 lakhs. After a long-term capital gains tax rate of 20% was levied on the net capital gain, the tax liability that was calculated to be paid would be around ₹13 lakhs. But there are also exemptions that are provided by the tax authorities which can offset the gains and the amount of tax to be paid if managed in the right way.

What Are The Types Of Capital Gains Taxation?

Based on the holding period, capital gains can be classified into the below two categories.

Short-Term Capital Gains (STCG)

Any asset that is held for less than 36 months is termed a short-term asset. In the case of immovable properties, the duration is 24 months. The profits generated via the sale of such an asset would be treated as short-term capital gain and it would be taxed accordingly.

Long-Term Capital Gains (LTCG)

Any asset that is held for more than 36 months is termed a long-term asset. The profits generated via the sale of such an asset would be treated as long-term capital gain and it would attract tax accordingly.

What Qualifies As Long-Term Capital Gains?

As mentioned above, long-term capital gains are gains that you earn from investments that offer returns in periods ranging from 1 to 3 years. Here are some of the investments that can generate long-term capital gains:

Agricultural Land: If the agricultural land is sold after having been held for 1 to 3 years, the returns are considered to be long-term capital gains.
Property: When you sell a property that has been held by you for at least 3 years, the money you get from the sale can be considered long-term capital gains.
Mutual Funds: If you stay invested in mutual funds for 1 year, the returns that you earn from that investment will be classified as long-term capital gains.
Stocks: If you hold on to your investments in stocks and bonds for extended periods of time, the gains from these investments would be classified as long-term capital gains.

How Are The Long-Term Capital Gains Taxed?

Generally, long-term capital gains are taxed at 20% (plus surcharge and cess as applicable). However, in certain special cases, the gains may be (at the option of the taxpayer) taxed at 10% (plus surcharge and cess as applicable).

The important point to note here is that the benefit of charging long-term capital gains at 10% is available only in the below cases:

Long-term capital gains that you earn from the sale of listed securities and exceeds ₹1 lakh (Section 112A);
Long-term capital gains that you earn from the transfer of any of the below assets:
- Any security which is listed in a recognized stock exchange in India;
- Any unit of UTI or mutual fund (whether listed or not); and
- Zero coupon bonds

Long-Term Capital Gains On Shares

When you make profits from selling stocks in less than 12 months from purchase, they are termed short-term capital gains and short-term capital gains tax is applicable to them. When the holding period is more than 12 months, the profit is termed as long-term capital gains and long-term capital gains tax is applicable to them.

Currently, the long-term capital gains tax rate is 10% levied on profits of over ₹1 lakh without any indexation benefits. Here's an example to understand it better. If you bought shares worth ₹10 lakhs in 2019. Until March 2023, the price of the shares rose to ₹14 lakhs. Here, you have made a profit of ₹4 lakhs. If you sell the shares today, you will have to pay a 10% tax on the ₹4 lakhs profit made.

The important thing to note here is that indexation benefits can be claimed by the investor for gains made before January 31, 2018. According to the latest income tax rules, indexation benefits will not apply to gains made after January 31, 2018.

Also, for equity shares and equity mutual funds bought on or before 31st January 2018, the cost of acquisition will be calculated as below.

1. Lower of Fair Market Value as of 31st January 2018 or the Actual Selling Price 2. Step 1 or Actual Cost Price, whichever is higher.

Long-Term Capital Gains On Mutual Funds

From April 1, 2023, capital gains from debt mutual funds will be taxed as per the investor's income tax slab rate, irrespective of the holding period. The below rates are applicable for mutual funds from April 1, 2023.

What Are The Exemptions On Long-Term Capital Gains Tax?

There are basic exemption limits on long-term capital gains tax and this means an individual will be exempted from paying any tax if their annual income is below a predetermined limit. Below is the basic exemption limit in case of an individual for FY2022-23:

For resident individuals of the age of 80 years or above, the exemption limit is ₹5 lakhs.
For resident individuals of the age of 60 years or above but below 80 years, the exemption limit is ₹3 lakhs.
For resident individuals of the age of below 60 years, the exemption limit is ₹2.5 lakhs.
For non-resident individuals, irrespective of their age of the individual, the exemption limit is ₹2.5 lakhs.
For Hindu Undivided Family (HUF), the exemption limit is ₹2.5 lakhs.

It is important to note that no deductions are allowed from long-term capital gains under Sections 80C to 80U.

How To Save Tax On Long-Term Capital Gains?

Here are a few ways in which you can save tax on long-term capital gains.

So, here's what you do: You can get an exemption from paying long-term capital gains tax if you buy a new house either 1 year before the sale of the old property or within 2 years of selling it. If you are planning to build a new house, you should do so within 3 years of the sale of the old property. You can get an exemption on the entire capital gains, or up to the cost of the new residential property, whichever is lower.

Exceptions Under Section 54

You can get an exemption only for the purchase of one house. If you are using capital gains to buy more than one house, you will be able to claim an exemption only for the cost of one house.
The next important point is that you can get an exemption under Section 54 only if you are buying a house in India. If you buy any residential property outside India, you will not get any exemption from paying long-term capital gains tax.
You cannot sell the new house bought from the gains of sale of the old house until 3 years after the purchase of completion of construction. This means, if you sell the new house before three years of its purchase or construction is completed, the benefit received by you under Section 54 will be revoked and you will be asked to pay the long-term capital gains tax.

Exemption Under Section 54EC

Under this Section, if you invest the amount you received as capital gains in specific notified government bonds and securities, you don't have to pay any long-term capital gains tax on the sale of any long-term capital. The bonds should be bought within 6 months of the sale of the asset and the maximum amount you can invest is ₹50 lakhs. However, this investment is restricted to a single financial year.

If the 6-month period is spread into 2 financial years, you can invest ₹5 lakhs twice i.e. you can claim tax deductions of up to ₹1 crore. Here’s an example to help you understand better. If you sold your asset in January 2022 and received a capital gain of ₹75 lakhs, you can buy notified bonds worth ₹50 lakhs in February 2022 and invest the remaining ₹25 lakhs in bonds in April 2022 to avail of full exemption.

Exceptions Under Section 54EC

You can get the exemption only if you invest in the notified bonds and securities.
If you sell the bonds within 3 years of buying them, the exemption will be withdrawn.
If you also take a loan on the bonds within 3 years of purchase, the exemption will be withdrawn.

Capital Gains Account Scheme (CGAS)

This scheme allows you to protect your long-term capital gains until you are able to invest them as specified in Sections 54 and 54F. You can open a CGAS account only if you are unable to invest it in a house before the due date for filing an income tax return (July 31 after the given assessment year). Once the money is deposited into this account, you need to use it within 2 years (in case of purchase of a new house) or 3 years (in case you are constructing a new house).

The Government of India allows you to withdraw your funds from this account only if you wish to purchase houses and plots. If you withdraw the funds for any other purposes, they have to be used within 3 years of withdrawal. Otherwise, the entire profit amount will be charged in accordance with the long-term capital gain tax rates as applicable.

In The End…

Every year, thousands of Indians buy and sell assets for which they have to pay taxes. It is important that we understand what capital gains are and the amount of taxes we need to pay on them to better utilize our gains. As mentioned in the article, there are ways in which you can save tax on your long-term capital gains. It is important to know how much tax you will be paying and how it is calculated before you spend your long-term capital gains.

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Category Of Mutual Funds	Holding Period	Long-Term Capital Gains Tax
Equity funds (invest 65% or more in the equity shares of domestic listed companies)	Over 12 months	10% without indexation
Aggressive Hybrid Funds	Over 12 months	10% without indexation
Arbitrage Funds	Over 12 months	10% without indexation
Other Funds (invests minimum 65% in equity)	Over 12 months	10% without indexation
Balanced Hybrid Funds	36 months	20% with indexation
Other Funds (invests more than 35% but less than 65% in equity)	36 months	20% with indexation
Debt Mutual Funds	36 months	Applicable tax rates
Floated funds	36 months	Applicable tax rates
Conservative Hybrid Funds	36 months	Applicable tax rates
Other Funds (invests 35% or less in equity)	36 months	Applicable tax rates