What is long-term capital gain tax in India?

What is long-term capital gain tax in India?

What is long-term capital gain tax in India?
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Have you ever invested in real estate or held a property for two years before selling? If you sold it after two years, you must have heard the phrase long term capital gain tax from your accountant. If not, or if you haven't heard of this before, this article will tell you all you need to know about income on long term capital gains and its tax treatment.

To understand this concept, first let us simplify some important terms for you:

Q - What are Capital Assets & Capital Gains?

A. Capital Assets means any kind of property owned by individual whether or not connected with business or profession such as immovable property, jewellery, bonds, stocks, mutual funds, patents, trademarks etc. When we talk about businesses, anything that is not intended for sale in the usual course of business operation and is held for a long term is a capital asset. However, some assets are not classified as capital assets in India – for example, agricultural land in rural India, clothes and furniture held for personal use, certain types of bonds, and so on.

The tax levied on profit or gain earned on selling/transferring such capital assets is called capital gains tax.

Depending on the holding period of capital assets, capital gains tax can be Long term Capital Gains Tax (LTCG) or Short term Capital Gains Tax (STCG). Such holding period can vary for different categories of capital assets as below:

Asset Holding period of Capital Asset
Short Term Long Term
Immovable Property e.g. House property 2 years or Less More than 2 years 2 years or Less More than 2 years
Movable Property e.g. Gold/Jewellery 3 years or Less More than 3 years
Listed Shares 1 year or Less More than 1 year
Unlisted Shares 2 years or less More than 2 years
Equity Oriented Mutual Funds 1 year or Less More than 1 year
Debt Oriented Mutual Fundss 3 years or Less More than 3 years

Capital Assets can be grouped into many different categories. These categories receive a different treatment when taxes are calculated on the profits you earn from them. If you hold an asset for a long term duration, you will be charged what is known as long term capital gain tax on the gains you make from selling/transferring them. However, there are a number of deductions that are permissible when long term capital gain tax is calculated.

Now, let us suppose that you own Rs. 2 lacs worth of stocks. After holding them for 3 years, you sell them for Rs. 3 lacs. The profit you earned from their sale is what can be called capital gains. Same goes for other types of capital assets too. However, capital gains do not refer to the appreciation in prices of your assets. Capital gains are recorded only when you let go (sale/transfer) of your capital assets. Capital Gains are not applicable to an inherited property as there is no sale, only a transfer of ownership. However, if the person who inherited the asset decides to sell it, capital gains tax will be applicable.

How is long term capital gain tax calculated?

Long term capital gain tax rate varies depending on the type of asset. Essentially, when the capital assets are sold, the capital gains earned through its sale are subject to taxation. The tax rate is also affected by the income tax slab that the individual falls under. However, there is one nuance here: the calculation of capital gains is subject to a few deductions:

  • Amount of money spent on the transfer of asset
  • Amount of money spent on the acquisition of an asset – for example, brokerage, commission fees, etc.
  • Any money spent on the improvement – for example, renovation, building expenses, etc.
  • Any exemptions available under Section 54, 54B, 54D, 54EC, 54ED, 54F, 54G

The amount obtained after making the appropriate deductions gives you capital gains.

What are the tax rates on long term capital gain?

The long term capital gain tax rates for the fiscal year 2019-2020 are as follows:

Type Tax Rate
Equity shares 10% on amount above Rs. 1 lac + surcharge and education cess
Property 20.8%

Let us see how this works while calculating long term capital gain tax in an actual scenario. Suppose that an individual whose income for the fiscal year of 2019-20 was 2.5 lacs. They sell a house that they bought in financial year 2013-2014 for 12 lacs for 30 lacs in 2019-20. Now, the tax on capital gains for financial year 2019-20 would be calculated as follows:

Tax on capital gains = (Sale price - Cost price (indexed ))*20.8%

= (30 lacs - (12 lacs * (2.89/2.2))*0.208

= (30 lacs - 15.76 lacs) * 0.208

= 2.96 lacs

The CII is released every year – this is what is used to index the cost price and adjust it according to inflation. So this is how the taxes on capital gains are calculated. All you need to ensure, is that the rates are consistent with the asset category and the fiscal year that you are selling the assets at, and that the purchase price has been adjusted for inflation using the right index. Knowing what taxes your investment might be subject to is the key to financial smartness. And that is exactly why you should know how your long term capital assets will be subject to tax when you sell them. If your goal is to save taxes on your investment, you should consider the Invest 4G Plan from Canara HSBC Oriental Bank of Commerce Life Insurance. It is an investment and insurance oriented ULIP which can help you save upto Rs. 46,800 on taxes.

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