What is long-term capital gains tax (LTCG)?

Long-term capital gains tax (LTCG) is the tax levied on the profit earned from the sale of assets that have been held for a long period. Unlike short-term capital gains, LTCG benefits investors who are willing to hold their investments for a longer duration. Let’s explore what LTCG is, how it works in India, and its implications for investors.

1. What Is Long-Term Capital Gains (LTCG)?

Long-term capital gains refer to the profit earned from the sale of assets that have been held for more than a certain period. In India, the holding period differs based on the type of asset:

• For **equity shares** and **equity mutual funds**: More than 1 year.
• For **real estate**: More than 2 years.
• For **debt mutual funds** and **bonds**: More than 3 years.

If you sell any asset after holding it for more than the prescribed time, the profit made from the sale is considered a long-term capital gain and will be taxed at a different rate than short-term capital gains.

2. LTCG Tax Rates in India

In India, long-term capital gains are taxed based on the type of asset and the amount of the gain:

• For **equity shares** and **equity mutual funds**: LTCG is taxed at 10% on the gains exceeding ₹1 lakh in a financial year. The tax is applied only to the portion of the gain above ₹1 lakh, and there is no indexation benefit (i.e., no adjustment for inflation).
• For **real estate (property)**: LTCG is taxed at 20% with indexation benefit, which helps adjust the cost of the asset for inflation.
• For **debt mutual funds** and **bonds**: LTCG is taxed at 20% with indexation benefit after holding the asset for more than 3 years.

The LTCG tax provides a more favorable tax rate compared to short-term capital gains, especially for long-term investors in the stock market or real estate.

3. How Is LTCG Calculated?

To calculate long-term capital gains, subtract the purchase price of the asset from the sale price. If the asset has been held for the long-term period, it qualifies for LTCG. The gains are taxed at the specified rate based on the asset type.

For example:

• You bought 100 shares of a company at ₹500 each, totaling ₹50,000, and held them for more than 1 year.
• After 2 years, you sold the shares for ₹700 each, totaling ₹70,000.
• Your long-term capital gain is ₹70,000 (sale) - ₹50,000 (purchase) = ₹20,000.

Since the holding period is more than 1 year, this is a long-term capital gain. If your gain exceeds ₹1 lakh in a financial year, it will be taxed at 10% on the portion above ₹1 lakh.

4. Indexation Benefit in LTCG

For assets like real estate and debt mutual funds, the tax is calculated after applying the indexation benefit. Indexation adjusts the purchase price of the asset for inflation, which reduces the capital gain and, in turn, the tax liability.

For example, if you bought a property for ₹50 lakh in 2005 and sold it for ₹1 crore in 2020, the purchase price of ₹50 lakh can be adjusted for inflation using the cost inflation index (CII). This results in a lower taxable capital gain.

5. Exemptions and Deductions in LTCG

Under Section 54 of the Income Tax Act, there are exemptions available for long-term capital gains tax in certain cases:

• If you sell a residential property and invest the capital gain in another residential property, you may be eligible for an exemption under Section 54.
• If you reinvest the capital gains in specific bonds (under Section 54EC), you may also qualify for exemption.

These exemptions help reduce the tax burden on long-term capital gains, making long-term investing more attractive for individuals looking to reinvest their profits.

6. Conclusion

Long-term capital gains tax (LTCG) is a tax applied to profits made from the sale of assets that have been held for more than the prescribed period. The tax rates are generally lower than short-term capital gains tax, and investors can take advantage of benefits such as indexation for assets like real estate and debt funds. Understanding how LTCG works and the available exemptions is crucial for optimizing your investment strategy and minimizing tax liability.