Long Term Capital Gains Tax

 What is Long Term Capital Gains Tax (LTCG)?

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.

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.

Overview of Tax On Long Term Capital Gains 

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

• Classification Criteria for Long-Term Assets

  • Listed Financial Assets: Held for more than a year to qualify as long-term.

  • Unlisted Financial Assets and Non-Financial Assets: Need to be held for at least two years to be classified as long-term.

Revised Long-Term Capital Gains Tax Rate in Union Budget 2024 (announced on 23 July 2024)

The 2024 Budget proposes an increase in the long-term capital gains tax rate on specific assets as per Section 112A of the Income Tax Act, 1961:

• Affected Assets: Listed equity shares subject to STT, units of equity-oriented funds, and business trusts.

• Previous Rate: Long-term capital gains on shares were taxed at 10%.

• Revised Rate: The new proposal increases the tax rate on shares to 12.5%.

This adjustment aims to balance fiscal objectives while impacting certain investment categories differently.

Other Changes in LTCG under the Union Budget 2024:

• Non-financial assets now qualify as LTCG after 2 years instead of a longer period.

• The LTCG tax rate on the sale of land, gold, or unlisted shares has been reduced to 12.5% from 20%.

These adjustments aim to balance fiscal objectives while impacting certain investment categories differently.

Illustration:

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

1. Calculation of LTCG Tax Pre- Budget 2024:

   • Exemption Limit=₹1,00,000

   • Capital Gain=₹2,00,000

   • Tax Rate=10%

   • Tax= Capital Gain × Tax Rate = ₹2,00,000 × 10% = ₹20,000

   • Cess (4%) = ₹20,000 × 4% = ₹800

   • Total Tax= ₹20,000 + ₹800 = ₹20,800

   • Net Tax Payable= ₹20,800

2. Calculation of LTCG Tax Post- Budget 2024:

   • Exemption Limit=₹1,25,000

   • Capital Gain=₹2,00,000

   • Tax Rate=12.5%

   • Tax= Capital Gain × Tax Rate= ₹2,00,000 × 12.5% = ₹25,000

   • Cess (4%) = ₹25,000 × 4% = ₹1,000

   • Total Tax= ₹25,000 + ₹1,000 = ₹26,000

   • Net Tax Payable= ₹26,000 

3. Your Savings Before Increase in LTCG Tax under Union Budget 2024:

   • Savings on LTCG = New Net Tax Payable − Old Net Tax Payable

   • Savings= ₹26,000 − ₹20,800 = ₹5,200

Therefore, the revised tax results in a higher tax liability rather than savings due to the increased tax rate and lower exemption limit.

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.

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

The Union Budget 2024 increased the capital gains exemption limit for specified financial assets from ₹1.25 lakhs to ₹ 1 lakh.