Table of Contents
Introduction
Capital gains can be defined as gains made on capital investment. It is the profit earned by an individual on sale the investment in assets such as stocks, real estate, bonds, Exchange Traded Funds (ETFs), commodities, Real Estate Investment Trust (REITs), etc. It can be of two types as:
Short-term capital gain (STGC) or Long-term capital gain (LTCG) depending upon the maturity period of that particular investment.
For example –
An individual earns capital gain from equity funds for a holding period of one year is short-term capital gain (STCG). If the holding period of equity funds is for more than a year, then it is long-term capital gain (LTCG).
What is Long-Term Capital Gain?
The capital gain which is earned on the long-term capital asset is known as a long-term capital gain. Although an asset whose holding period is more than 36 months (3 Years) is known as a long-term capital asset. In the case of immovable properties, the holding period is 24 months (2 Years) such as land, building, and house. For example –
If an individual selling his house after holding for 2 years, the income will treat as a long-term capital gain. For movable property, if the holding period is more than 3 years, then the income is known as STGC.
There are certain assets, whose holding period is more than a year and considered as a long-term capital assets. It includes:
- Equity or preference share listed or recognized on the stock exchange of India.
- Securities (debentures, debt, mutual fund, etc.) are list or recognize on the stock exchange of India.
- Units of UTI
- Units of equity-oriented mutual fund
- Zero-coupon bonds
What qualifies as Long Term Capital Gain?
Long-term capital gain means the investment that provides a return in the period range from 1 year to 3 years. If a person holds an investment for 3 years, the profit is capital gain on a long-term capital asset. Some of the long term capital gain examples are:
- When you sell a property that was taken for at least 3 years.
- Agricultural land hold for 1 year to 3 years.
- Mutual Fund that holds for about 1 year.
- The returns for investment in bonds and stocks.
Difference between Long-Term and Short-Term Capital Gain
Long-Term Capital Gain
Short-Term Capital Gain
- The holding period for long-term capital assets is less than 36 months for the regular assets and 12 months for the shares.
- The tax rate applicable for calculating the short-term capital gain is 15.00%.
- The short-term capital gain is calculated by = sale cost of the asset – (expenditure incurred on asset) – (cost of acquisition/improvement)
- On transfer of immovable property by the assessee, the holding period is less than 24 months (2 years)
- The holding period for short-term capital assets is more than 36 months for the regular assets and 12 months for the shares.
- The tax rate applicable for calculating the long-term capital gain is 20.00%.
- The long-term capital gain is calculated by = cost of selling a property – indexed cost of acquisition
- Whereas, in the case of long-term capital gain, the holding period exceeds 24 months.
How to calculate LTCG?
Long-term capital gain can calculate by a quite simple and effective process. To calculate the gain on long term capital assets, you need three things:
- The cost of initial investment
- The sold price of the investment
- The cost inflation index (CII)
Index cost of acquisition = Purchase Price X (CII of purchase year / CII of sale year)
Actual Gain = Sale Price – Index cost of acquisition
For Example:
Mr. Rahul Gupta brought a house at the cost of Rs 40 lakhs. 5 years later, he wants to sell the house for Rs 55 lakhs. Let us assume that the cost inflation index (CII) at the time of buying the house was 550. At the time of sale of the house, it was 670.
Index cost of acquisition = 40,00,000 X (670/550) = 48,72,728
Actual Gain = 55,00,000 – 48,72,72 = 6,27,272
Tax on LTCG
The tax on long-term capital assets is usually at 20% plus surcharge and cess (if applicable). Whereas, under some special conditions, 10% of the tax rate is applicable. These conditions are as:
- Long-term capital gains earned by selling listed securities of more than Rs 1,00,000. (According to Section 112A of Income Tax of India)
- Returns earned by selling securities listed or recognized on the stock exchange of India.
- Zero-coupon bonds, mutual funds, UTI that have sold on or before 10th July 2014.
Exemptions of LTCG Tax
There are certain exemptions applicable on an individual’s earning if the annual income is below the predetermined limit as:
- Residents of India (above 80 years of age) will exempt if their annual income is below Rs 5,00,000.
- Residents of India (between 60 to 80 years of age) will exempt if their annual income is below Rs 3,00,000.
- For individuals (below 60 years), the exemption limit is Rs 2,50,000 per year.
- Hindu Undivided Family (HUF) will exempt if the family income is under Rs 2,50,000.
- For non-residential Indians (NRI), the exemption limit is Rs 2,50,000 for any age group.
Also, individuals are not liable to get any tax deduction under Section 80C to 80U from LTCG tax in India. In such a case, 20% of the tax rate is applicable for the entire profit from long-term capital assets.
How to save tax on LTCG?
- Invest in residential property:
Under Section 54 and Section 54F, an individual or Hindu Undivided Family (HUF) will exempt from paying LTGC tax if-
They sell a built house and use that money to purchase a residential property. But, the new property will purchase before 1 year or after 2 years of the sale of the existing property. To construct a new property, the time available is 3 years.
The entire capital gain will invest to buy the new property if an individual wants tax exemption. The excess amount which has not utilized for this purpose is completely taxable under the Income Tax Act of India.
2. Investing in bonds:
Under Section 54EC, an individual gets tax exemption by-
Transferring the capital gain amount to acquire the bonds issued by NHAI and RECL. The complete list of such bonds is available on the Income Tax Department of India’s website.
3. Capital Gain Account Scheme:
This scheme allows an individual to avail of tax exemption benefits without purchasing any residential property or bond. Under the capital gain account scheme, the government of India allows the withdrawal of funds to purchase houses or plots. If withdrawn for any other purpose the fund will utilize within 3 years of withdrawal. Otherwise, the total profit on capital tax will be taxable
Conclusion
Capital Gain Tax structure in India has faced several changes after its introduction in 1997. To understand capital gain, an individual first try to understand the theory of capital assets. Also how they affect individual income. There are certain techniques available to get complete tax exemption on the capital gain. Whether it boosts up the foreign investment portfolio and helps the economy to grow. On the other hand, will it hamper the growth of the economy?
Frequently Asked Questions
If the asset is sold before its maturity period, say less than a year, then the asset will qualify as a short-term capital asset and the tax applicable will also be short-term capital gain.
No, the tax exemption is available in the new property will be purchase or constructed in the domestic country only.
No, in such case the losses can be set off against the cost of investment for the particular year.
Long-term capital gain = full value of consideration – (indexed cost of acquisition + indexed cost of improvement + cost of transfer)
Where, Indexed cost of acquisition = (cost of acquisition X Cost of inflation index of sales year)/Cost of inflation index of the purchase year.
One can avoid long-term capital gain tax by investing in any residential property, retirement plan, offset the capital gain with capital losses or opt capital account scheme.
