Long-Term Capital Gains Tax: Its Calculation, Tax Rates And Other Details

Normally, long-term capital gains face a 20 per cent tax rate (plus surcharge and cess). However, in specific situations, taxpayers can opt for a 10 per cent tax rate (plus surcharge and cess).
Long-Term Capital Gains Tax
Long-Term Capital Gains Tax

Investments that yield returns over a more extended period, at least three years, are known as long-term capital gains (LTCG). These gains can come from various sources like mutual funds and government bonds. If someone owns a capital asset for more than 36 months before selling it, it's considered a long-term capital asset. However, certain assets, such as listed equity on an Indian stock exchange (when listing isn't mandatory before July 10, 2014), mutual funds, debentures, government securities, Unit Trust of India (UTI) units, and zero-coupon bonds, are treated as long-term assets if held for 12 months instead of 36 months. Unlisted company shares and immovable property like land or buildings are treated as long-term capital assets if held for 24 months instead of 36 months.

Certain investments that can lead to LTCGs include:

Property Sale: When you sell a property held for at least a few years, the money from the sale is considered long-term capital gains.

Agricultural Land Sale: Similar to property, selling agricultural land after holding it for one to three years results in long-term capital gains.

Mutual Fund Investments: Investing in mutual funds and holding them for about a year classifies the returns as long-term capital gains.

Stocks: Returns from investments in stocks and bonds also qualify as LTCGs when held for extended periods.

What's The Process For Calculating LTCG?

Determining LTCGs is a straightforward process. You purchase an asset at today's value, which is your expense. Later, when you sell it for a price higher than the purchase cost, you might think the entire excess amount is your capital gain, but it's not that simple.

To calculate the gain, you need three things: the initial investment cost, the selling price, and the cost inflation index. This index, published by the government, reflects inflation affecting the asset's price.

The calculation method is as follows:

Step 1: Purchase price X (CII of year of purchase/CII of year of sale) = Indexed cost of acquisition

Step 2: Sale price – Indexed cost of acquisition= Actual gain

What's The Tax Rate For LTCG?

The usual tax rate for LTCGs is 20 per cent, with an additional surcharge and cess. However, in specific cases, taxpayers can opt for a 10 per cent tax rate (plus surcharge and cess).

This 10 per cent tax rate applies when:

LTCG from the sale of listed securities exceeds Rs 1,00,000 (Section 112A).

LTCGs arising from the transfer of:

a) Securities listed on a recognized Indian stock exchange.

b) Units of a UTI or mutual fund (whether listed or not).

c) Zero coupon bonds.

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