Understanding Long Term Capital Gain Tax Rate & LTCG exemption limit in India

Last Updated : May 17, 2023, 12:36 p.m.

Have you ever sold or transferred a capital asset and thought if the profits or gains you realised were subject to taxation? You do! Any profits or gains you generate from selling or transferring capital assets are subject to taxation under “capital gains,” according to the Income Tax Act.

Short-term capital gains (STCG) and long-term capital gains (LTCG) are the two types. In this article, we’ll concentrate on India’s taxation of long-term capital gains. We’ll learn what long-term capital gains are, how they’re determined, long term capital gain tax rate and how much tax you will owe. Continue reading to learn more about the financial repercussions of selling or transferring a capital asset in India and the LTCG exemption limit.

What are Capital Gains?

The profit you earn when you sell or transfer your capital assets is a capital gain. These earnings are subject to taxation.

Movable and immovable assets, such as houses, empty lots, stocks, bonds, mutual funds, and more, are considered capital assets.

Depending on the kind of commodity you own, your capital gains may or may not be regarded as “long-term.” If you keep equity investments, such as equity mutual funds, for some time, 12 months or longer, the capital gains will be regarded as long-term and become subject to long term capital gain tax rate. You must keep immovable land for at least 24 months. The holding time for debt mutual funds and movable property is 36 months or longer.

Long Term Capital Gain Tax Rate

The sort of asset you are dealing with determines how to calculate the long term capital gain tax rate. The LTCG for equity and share investments is 10% of profits over Rs. 1 lakh.

Following indexation, the LTCG is taxed at 20% on any profits for debt mutual funds.

Calculating the long term capital gain tax rate can be trickier when it comes to immovable property. You must compute it by deducting all costs you incurred from the total consideration value, such as brokerage or commission, during the sale or transfer of the property. Then, to get the final LTCG, you must subtract the indexed purchase cost and the indexed improvement cost (if any).

The long term capital gain tax rate can be 20% plus any applicable surcharges and Cess, though you occasionally may only pay taxes at a lower 10% rate.

The Long term capital gain tax rate must be on selling listed securities worth more than Rs. 1,00,000 or the transfer of assets like listed securities, mutual fund units (listed or not), and zero-coupon bonds to be eligible for the 10% tax rate.

Assume Mr Verma purchased 500 shares of the ABC Company in January 2019 for Rs. 80 per share. He sold these shares on the National Stock Exchange in May 2023 for Rs. 150 per share. On January 31, 2020, Rs. 120 per share was the most offered.

Mr Verma’s profits will be regarded as long-term capital gains because he owned the shares for over a year. Rule 112A of the Income Tax Act will apply because the shares are listed on a reputable stock market.

You must use the greater of the following to calculate the cost of acquisition- the cost of acquisition, which is equal to Rs. 40,000; the lowest of the highest quoted price, which is equal to Rs. 60,000; or sales consideration. (i.e., Rs. 75,000). As a result, Rs. 60,000 will be deemed the acquisition cost. It implies that Mr Verma will have long-term capital profits of Rs. 15,000 (Rs. 75,000 – Rs. 60,000).

On Rs. 15,000, Mr Verma must pay a 10% tax (amount exceeding Rs. 1,00,000). His tax obligation would be 1500 rupees.

Therefore, Mr Verma must pay Rs. 1500 in taxes on his LTCG.

LTCG Exemption Limit

The LTCG exemption limit is the most money an individual can make from long-term financial gains before paying taxes. The age and residency status of the person determines the LTCG exemption limit in India.

On LTCGs up to Rs. 5,00,000, Indian residents over 80 are exempt from paying any tax. The LTCG exemption limit maximum is Rs. 3,00,000 for Indian residents over 60 but under 80. The LTCG exemption limit for non-resident Indians is Rs. 2,50,000.

The LTCG exemption limit threshold for LTCGs is Rs. 2,50,000 if you belong to a Hindu Undivided Family (HUF). Therefore, no tax will be due if your long-term capital profits are below the LTCG exemption limit threshold.

How to Decrease Tax Burden on Long Term Capital Gain Tax Rate?

Use a few tactics to reduce your long term capital gain tax rate liability.

• First, you can offset your profits from losses incurred during that fiscal year. One of the best methods to lower your tax obligation is by doing this.
• You can also lower your tax obligation by reinvesting the profits in NHAI and RECL bonds under section 54EC.
• You can park these funds in a CAGS scheme or account if you cannot invest your profits in the property. But remember that you must use these funds to purchase or construct real estate within a specific timeframe. (residential).
• You can use provisions 54 and 54F to lower your tax obligation for LTCGs. These are some alternatives that you can consider to lowering your long term capital gain tax rate obligation.

Conclusion

It’s critical to comprehend the long-term capital gains tax implications before selling or transferring capital goods in India. The long term capital gain tax rate varies based on the asset type. The LTCG exemption limit is also influenced by domicile status and age. You can invest in NHAI and RECL bonds under section 54EC to lessen your tax burden or offset your profits with losses accrued during the fiscal year. It is advised to consult a financial specialist to maximise tax planning and minimise the tax liability on long term capital gain tax rate.

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