Long Term Capital Gains

What are Long Term Capital Gains?

Capital gains refer to the profits made on the sale of investment in any asset. These assets can be mutual funds, stocks, real estate, debt bonds, etc. In essence, it is a “gain” on “capital investment”. Long Term Capital Gains (LTCG) are profits made on investment for a long period of time. The definition of what  is considered “long-term” varies for different financial products. Defining the holding period for capital gains is necessary for taxation purposes. The taxation on LTCG is also different for different asset classes.

We will discuss popular investment instruments, and their corresponding holding period, for the  gains to be considered as Long Term Capital Gains.

Long Term Capital Gains from Equity Investment

• Investing in shares of listed companies, or in equity mutual funds is viewed as Equity Investment.
• The minimum holding period for gains from equity investment to be considered as LTCG is 1 year.
• For instance, if you’ve invested Rs. 10,000 in an equity fund or a share, and redeem it  post 1 year of investment at Rs, 12,000. Then the value of LTCG would be Rs. 2000.
• As per the current Income Tax  regime, LTCG upto Rs. 1 lakh from equity investment is exempted from tax in a financial year. Gains over and above Rs. 1 lakh are taxed at the rate of 10%.

To know more about LTCG Taxation, visit: Taxation on LTCG

Long Term Capital Gains from Debt Investment

• Debt investment refers to investment in debt instruments such as bonds, debt mutual funds, certificates of deposit, commercial papers, corporate bonds, etc.
• The minimum holding period for gains from debt investment to be considered as LTCG is 3 years.
• For instance, if you’ve invested Rs. 20,000 in a debt fund, and redeem the fund units post 4 years of investment at Rs. 28,000, your LTCG would be Rs. 8,000.
• LTCG from debt investment is taxed at the rate of 20% with the benefit of indexation. Indexation reduces the value of overall LTCG to reflect the effect of inflation on your investment.

Also Read: Taxation on Debt Funds

Long Term Capital Gains from Real Estate Investment

• Real estate investment pertains to properties such as land, residential house, flat, etc.
• The minimum holding period for the gains from real estate investment to be considered as LTCG is 2 years.
• For instance, if you’ve bought a property  for Rs. 50 lakh and sell it after 3 years of purchase at Rs. 55 lakh your LTCG would be Rs. 5 lakh.
• LTCG from real estate investment is taxed at 20%. In case of real estate too, the final value at the time of sale may be subject to indexation as well as costs incurred for improvement of the property (if applicable). Certain exemptions are also available if the gains are reinvested in residential house or Section 54EC bonds.
• In case a loss is incurred through sale of real estate property, it can be offset against long term capital gains generated from other sources.

Long Term Capital Gains from Gold Investment

• Investment on gold can be of many forms, including physical gold, digital gold, gold funds or gold exchange traded funds.
• The minimum holding period for gains from gold investment to be considered as LTCG is 3 years.
• For example, if you’ve bought a gold biscuit for Rs. 40,000 and sell it after 4 years of purchase at Rs. 50,000, then the value of LTCG would be Rs. 10,000.
• LTCG from gold investment is taxed at the rate of 20% with the benefit of indexation. Indexation reduces the value of overall LTCG to reflect the effect of inflation on your investment. Certain exemptions are also available if the gains are reinvested in residential house or Section 54EC bonds.
• It should be noted that investors would be charged 3% of Goods and Service Tax (GST) at the time of purchase of physical gold.