Long Term Capital Gains Tax

To reach an understanding of what exactly long-term capital gains tax is, it is important to understand all the small threads related to it. For starters, Capital Assets are the assets personally owned by an individual such as houses, plots, stocks, collection of art, bonds, etc. Capital Assets, when sold at a profit, provide in return Capital Gains.

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Now, Capital Gains fall under the category of “Income” and as everyone knows, income is taxable, hence, tax needs to be paid for any capital gains made in a particular financial year. This is known as Capital Gains Tax. Capital Gains Tax is further categorized into 2 sub-categories: Long term capital gains tax and short-term capital gains tax.

Here we will discuss in detail the Long term Capital Gains tax, how it is calculated, exemptions, and how to save tax under Long term Capital Gains.

Tax On Long Term Capital Gains Highlights

Here are the main highlights of the long term-capital gains that will help you understand them easily.

  • Definition: Taxes levied on capital assets that provide gain, in the long run, are known as long term capital gains tax

  • Duration of returns: Typically, long term capital assets offer returns between 12 months to 36 months

  • Tax rate: In general, the tax applicable on long term capital gains is (20% + surcharge + cess) as applicable

  • Special cases for taxation: 10% is levied on the total gains on capital, if:

  • As per Section 112A of the Income Tax Act, 1961, earnings are made after the sale of listed securities (which has to be more than Rs. 1,00,000).

  • Earnings are made after the sale of listed securities (which are acknowledged by the Stock Exchange of India). Securities include Mutual Funds, Bonds, or UTI sold before 10th July 2014.

Illustration:

Here is a small illustration for a better understanding of tax levied in the above conditions:

For example, an investor sells his shares (equity) at Rs. 5,00,000 which he purchased 23 years ago for Rs. 28,100 somewhere outside the stock exchange. So, his indexed COA (Cost of Acquisition) will be

Indexed COA = (Purchase price * CII (Cost Inflation Index) of the purchase year / CII of the year of sale)

(28,100 * 280/100) = Rs. 84,264.

If not availing indexation,

Actual profit = Selling price – Indexed COA

Rs. 5,00,000 – Rs. 28,100 = Rs. 4,71,900

So, the total amount will be 10% of the taxable amount, which is Rs. 47,190.

Assets That Qualify for Long Term Capital Gains

The basic rule to qualify for long term capital gains is the investments in the assets that offer returns from 1 year to 3 years. Here are some of the few assets that can qualify for long term capital gains:

  • Property or Plots

  • Mutual funds

  • Agricultural land

  • Stocks & Bonds

Exemptions on Long Term Capital Gains Tax

As per the fiscal year 2020-2021, an individual is permitted the exemption of tax if they do not fall above the basic exemption limit category. The following are the exemptions in which an individual is allowed exemption on long term capital gains (LTCG) tax:

  • For Indian residents 80 years and above with an annual income equal to or below Rs. 5,00,000

  • For Indian residents from 60 to 80 years with an annual income equal to or below Rs. 3,00,000

  • For Indian residents 60 years and below with an annual income equal to or below Rs. 2,50,000

  • For Hindu Undivided Family (HUF) with annual income equal to or below Rs. 2,50,000

  • For Non-Resident Indians (NRIs) exemption limit is Rs. 2,50,000 without any age consideration, whatsoever

It is important to know that under the Long term capital gains tax, no other tax deductions can be earned under Sections from 80C to 80U. 20% tax would be levied on the entire profit amount under LTCG tax.

Long term capital gains tax is levied since 2018 after being introduced in the Union Budget back then on all the capital assets exceeding Rs 1,00,000.

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