Long Term Capital Gains Tax (LTCG)

Investments that provide returns over a longer period of time are called as long term capital gains or LTCG. All the investments that offer returns in periods that range between 1 and 3 years can be called as long term capital gains.

When anyone makes an investment, it is almost always with the view of getting a return from that investment. There are some investments that will provide returns over a short period of time and there are those that provide returns over a longer period of time. These returns are known as long term capital gains and can include returns from investments like mutual funds, zero coupon government bonds etc.

What Qualifies as Long Term Capital Gains?

When it comes to determining what will be considered a long term capital gain the rules say that investments that provide returns in periods ranging from 1 year to 3 years can be considered long term capital gains. This means that if a person has held an investment for 3 years before transferring it, then the returns from the investment at the time of transfer it will be considered a long term capital gains. Some of the investments that can generate long term capital gains are:

  • Sale of 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.

  • Sale of Agricultural Land:

    Similar to the sale of property, if agricultural land is sold after having been held for 1 to 3 years, the returns are considered to be long term capital gains.

  • Mutual Fund Investments:

    If you invest in mutual funds and hold the investments for about 1 year, the returns that you get from the investment will be classified as long term capital gains.

  • 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 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

To calculate the capital gains let us take an example. Raj has bought a house for which he has paid Rs. 20 lakhs. 5 years later, he wants to sell the house and manages to do so for Rs. 35 lakhs. Now, in his case let us assume that the cost inflation index (CII) at the time of buying the house was 543 and that at the time of selling the house was 667.

The indexed cost of acquisition will be: 20,00,000X (667/543) = 24,56,722
The gains will be: 35,00,000 – 24,56,722 = 10,43,278

Tax on Long Term Capital Gains

The basic tax on long term capital gains is 20% with an addition of extra cess and surcharges like education cess whenever they are applicable. The government, in an effort to ease the burden of heavy taxes, has also provided for certain exceptions under special circumstances. When a gain is eligible for such exemptions, the tax on them may actually reduce from 20% to just 10%. The surcharges and cess applicable will remain as they are.

Assuming that the gain, in the case of Raj and the house that he sold, does not qualify for any exemptions, we can now calculated the tax payable by him. The taxable amount in his case will be Rs. 10,43,278. So the tax payable will be:

Tax = 20% of gain = 2,08,655
Tax + Cess of 3% = 2,14,914

Exemptions on LTGC Tax

Since the government recognises that in many cases, the tax payable may come up to a huge amount, it provides for a bit of relief by allowing for certain exemptions that either ease the tax payable or remove it entirely. These exemptions are:

  • With regards to buying and selling of properties, if the money gained from the sale of a property is invested in another one within 1 to 2 years, the gains are exempted from tax. This exemption will also not apply if the property sold or transferred within 3 years of purchase.
  • If the amount gained from a long term capital gain is invested in the Capital Gains Account Scheme then it may be exempt from tax.
  • In some cases, returns mutual fund investments held for longer than 1 year will also not be taxable as per offers from the asset management company.

Frequently Asked Questions

  1. What tax is applicable if I sell a capital asset in less than 1 to 3 years?
  2. If the assets are sold before they qualify for long term capital gains then they will qualify for short term capital gains. The tax also will be applicable according to the terms of short term capital gains.

  3. I sold my house in India and want to invest it in a house in another country. Will I get the long term capital gains exemption?
  4. The exemption from LTCG is applicable only if the new property being bought or constructed is located in India.

  5. Do I have to pay tax in case of losses in long term capital gains?
  6. No. In such a case the losses can be set off against the cost of investments for the financial year. But it is important to file taxes in order to draw this benefit.

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