When you sell assets after certain specified time periods, you are subject to Long Term Capital Gains Tax (LTCG). LTCG is 10% for gains in stocks and equity mutual funds. It is 20% for gains in real estate, debt funds and other assets along with the benefit of indexation. Assets hold before the specified holding periods are subject to Short Term Capital Gains Tax (STCG). This is generally imposed at slab rate. There was no LTCG on stocks and mutual funds before 2018, however Budget 2018 introduced LTCG of 10% for these assets. Gains made till 31st Jan 2018 were exempted from LTCG and gains in these assets up to Rs 1 lakh per annum will continue to be exempted.
Table of Contents :
| Asset | Holding Period for LTCG | LTCG Tax Rate |
| Equity Mutual Funds, Stocks | 1 year | 10% |
| Gold, Debt Funds, Misc. Assets | 3 years | 20% |
| Land, Flats, Real Estate | 2 years | 20% |
Note that indexation benefit is given to gold, debt funds, land, flats, real estate and other assets for LTCG calculation but not to equity mutual funds and stocks
LTCG Calculation
While computing LTCG, except for LTCG in stocks/equity funds, indexation is taken into account. Indexation reduces tax liability to take inflation into account. You can get the CII details here. For example assume that you buy a debt fund (growth option) in 2013 for Rs 100 and sell it in 2018 for Rs 150. Since you have sold it after three years, the gain is long term and a tax of 20% with indexation will apply. The Cost Inflation Index (CII) in FY 13 was 200 and the CII in FY 18 was 272. As a result your purchase price for tax purposes will rise to (272/200)*100 = 136 and your taxable gain will be 150 – 136 = 14. The tax payable will be 20% of 14 = Rs 2.8. Hence even though you have made a gain of Rs 50, your actual tax is not 20% of Rs 50 or Rs 10 but rather only Rs 2.8 after applying indexation.
The actual formula for LTCG calculation is as follows:
Long-term capital gain = A-(B+C+D), whereas,
A=Full value of consideration received or accruing
B=indexed cost of acquisition*
C= indexed cost of improvement**
D= cost of expenditure incurred wholly and exclusively in connection with such a transfer
*Indexed cost of acquisition = A X (B / C), wherein
A= Cost of acquisition
B=CII of the year of transfer
C= CII of the year of acquisition
**Indexed cost of improvement = A X (B / C), wherein,
A=cost of improvement
B=CII of the year of transfer
C= CII of year of year of improvement
Cost of transfer is the brokerage paid for managing the deal, cost of advertising plus legal expenses incurred etc.
Set-off and Carry Forward of LTCG
LTCG on one asset can be set off against LTCG or Long Term Capital Loss on another asset. For example if you made a profit of Rs 20 lakh on selling house A but made loss on selling house B, only the net profit is taxed. Long Term Capital Loss can only be set off against Long Term Capital Gain. However short term capital loss can be set off against Short Term Capital Gain and Long Term Capital Gain. Long Term Capital Loss can be carried forward for up to 8 years since the year in which it was incurred. It can be set off against Long Term Capital Gains in future years.
Points to note
- For capital gains to arise, there must be a taxable transfer. Under the Income Tax Act, transfers by way of inheritance, gift between family members and partition of HUF are not taxable transfers.
- For LTCG/STCG to apply, the transfers must not be part of your business and profession. For example, the profit made by a professional stock market traded will be treated as business income rather than capital gains. The asset sold by you must be a capital asset and not ‘stock-in-trade.’ Stock in trade refers to business inventory held by a trader/dealer/manufacturer etc. For example, sale of a flat by a salaried bank accountant will trigger capital gains. However sale of a flat by a professional builder, will be taken as business income. Business income is taxed at slab rate but you can claim various expenses as deduction from it.
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Capital Gains Exemptions
Section 54: If the sale proceeds of a residential property are further utilized to buy another residential property, the capital gains on the sale proceeds are exempt. This is however subject to the following conditions
a)The purchase of property should be done either 1 year prior to selling the property or within two years of the sale.
b) In case of under construction property, the same should be done within maximum three years from the transfer date of the earlier property.
c)The newly acquired property cannot be further sold within 3 years of purchase or construction.
d) The newly acquired property should be located in India.
Section 54F: If you sell any other asset like agricultural land within 10 km of a city or valuable paintings, jewellery, debt funds etc, you can take the benefit of Section 54F. This section grants deduction for purchase of a house property from the proceeds of the sale of any capital asset. The following additional conditions apply:
a)The purchase of property should be done either 1 year prior to selling the property or within two years of the sale.
b) In case of under construction property, the same should be done within maximum 3 years from the transfer date of the earlier property.
c)The newly acquired property cannot be further sold within 3 years of purchase or construction.
d) The newly acquired property should be located in India.
e) The person should not have more than one residential property on the date of the transfer.
f) No other property is purchased within 1 year of the transfer or constructed within 3 years of the transfer
The investor can deposit the sale proceeds in a Capital Gains Account Scheme before the due date for filing returns in order to take the benefit of the above sections even if he has not bought/constructed another property. However he must buy/construct the new property within the time limits specified above and can pay for it by using the money deposited in the Capital Gains Account Scheme.
Section 54EC: Capital Gains Bonds issued by NHAI (National Highways Authority of India) and REC (Rural Electrification Corporation) are eligible for exemption from capital gains tax up to Rs 50 lakh. They have a tenure of 5 years and carry a fixed interest rate (currently 5.25%). The interest on these bonds is taxable. Only capital gains in real estate are eligible for this deduction. For example, if you buy an asset for Rs 10 lakh and sell it for Rs 20 lakh investing the entire Rs 20 lakh in NHAI/REC capital gains bonds, the said transaction would not attract capital gains tax.