Understanding Long-Term Capital Gains: A Quick Guide
7 November, 2024
Synopsis
Long-Term Capital Gains (LTCG) are generated when assets are held for more than a year or 24 months, depending on the type of asset.
Assets like equities and mutual funds qualify as long-term investments when held for over 12 months, while real estate or movable assets like Gold require a 24-month holding period.
Tax exemptions under Sections 54, 54EC and 54F may help reduce LTCG tax liability.
Long-term capital gains are the profits earned from selling assets or investments held for more than a year. Understanding long-term capital gains is important for anyone looking to invest as it helps make informed decisions regarding the acquisition and disposition of assets. Being aware of capital gains can help in the effective management of tax obligations and investment strategies. This article talks about Long-Term Capital Gains (LTCG's) meaning and its importance in helping you optimise your tax liabilities.
What is Long Term Capital Gain?
Long-Term Capital Gains meaning refers to the profit obtained from selling a capital asset that has been retained for more than one year. According to the long term capital gain definition, such assets include equities, mutual funds, immovable assets (real estate) and movable assets (like Gold). Each asset is governed by specific holding periods. Assets like land or gold held for over 24 months are considered long-term capital assets. However, assets like shares or equities held for over 12 months are considered long-term capital assets provided they are listed on a stock exchange in India.
Taxation on Long-Term Capital Gains
In India, the taxation of Long-Term Capital Gains (LTCG) varies based on the asset class and prevailing tax laws. Here is an overview:
Equity Shares and Mutual Funds: If your LTCG exceeds ₹1.25 lakh in a financial year, it will be taxed at a rate of 12.5% without the benefit of indexation.
(Please note that the indexation benefit has been removed by the provision mentioned in Budget 2024.)
Real Estate and Other Assets: Gains from the sale of real estate and other long-term assets are taxed at 12.5% without the benefit of indexation.
How to Calculate Long-Term Capital Gain?
Here is a step-by-step guide to help you compute LTCG:
Determine the Sale Price: Identify the selling price of the asset, which is the amount you receive upon its sale.
Calculate the Cost of Acquisition: This includes the original purchase price of the asset. For real estate, this also encompasses the cost of improvements made to the property.
Adjust for Indexation: For assets like real estate, apply the cost inflation index (CII) to adjust the purchase price for inflation. This indexed cost of acquisition is calculated using the formula:
Indexed Cost of Acquisition = Cost of Acquisition × (CII of the Year of Sale/CII of the Year of Purchase)
Calculate the Long-Term Capital Gain: Subtract the indexed cost of acquisition (for real estate) or the original purchase price (for equities and mutual funds) from the sale price. The formula is:
LTCG = Sale Price − Indexed Cost of Acquisition (or Cost of Acquisition for other assets)
Apply Tax Exemptions: Deduct any eligible exemptions if applicable to reduce the taxable LTCG.
Exemption On Long-Term Capital Gains Tax
Here is a breakdown of key exemptions:
Section 54: It is available for gains arising from the sale of residential property. It exempts LTCG if the proceeds are reinvested in the purchase or construction of a new residential property within specified timeframes.
Section 54EC: It is applicable to gains from the sale of long-term capital assets other than residential property. It provides exemption on LTCG if the amount is invested in specified bonds (like those issued by NHAI or Rural Electrification Corporation) within six months of the sale.
Section 54F: It is available for gains from the sale of any long-term capital asset (other than residential property) if invested in the purchase or construction of a residential property. This section exempts LTCG if the entire sale proceeds are invested in a new residential property.
Section 54B: Exemption on capital gains from the transfer of land used for agricultural purposes. If the land was used for agriculture for at least two years before sale, the exemption is allowed if the gains are reinvested in another agricultural land within two years.
Section 54D: The section offers exemption on capital gains generating from the compulsory acquisition of land and buildings used for industrial purposes. The exemption applies if the gains are reinvested in a new industrial asset within three years of the transfer.
Section 54EE: This section is applicable on capital gains from long-term capital assets if the gains are reinvested in units of a specified fund within six months of the transfer. The maximum exemption is limited to ₹50 lakhs in any financial year.
Section 54G: It is available for capital gains arising from the transfer of assets due to shifting an industrial undertaking from an urban area to a non-urban area. However, to claim the exemption, the gains must be reinvested in specified assets like land, machinery or building within three years.
Section 54GA: This section allows capital gains exemption when an industrial undertaking is shifted from an urban area to a Special Economic Zone (SEZ). The reinvestment must be made in eligible assets like land, buildings or machinery within three years.
Manage Long-Term Gains Easily with HDFC Bank Demat Account
By taking advantage of tax benefits on LTCG, you can enhance your overall financial strategy. To streamline the management of your investments, consider using an HDFC Bank Demat Account. By linking your HDFC Bank Savings Account to your Demat Accounts, you benefit from hassle-free fund transfers.
Open a Demat Account Now.
*Disclaimer: Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing.
