When you sell a capital asset like equity shares, mutual funds or any house property, the profits you earn are categorised as capital gains. However, depending on how long you hold the asset, these profits may be considered short-term or long-term capital gains (LTCG).
How are these long-term capital gains taxed? What is the holding period applicable for different capital assets? And what is indexation in long-term capital gains tax? In this article, we discuss the answers to these questions and more.
Also Read More About What is Capital Gain Tax?
Long-Term Capital Gain (LTCG) Meaning
Long-term capital gains are profits earned from the sale of long-term capital assets. Section 112 and section 112A of the Income Tax Act govern the taxation of LTCG. The latter section covers the following capital assets:
- Listed equity shares
- Units in an equity-oriented mutual fund
- Units of business trusts
All other capital assets are governed under section 112 of the Act.
Calculating Long-Term Capital Gains
The key steps for long-term capital gains are quite similar across different asset classes. You can rely on a long-term capital gains tax calculator to find the profits and the tax thereon. However, it is always advisable to understand how this calculation works. Check out the steps below for more clarity on LTCG computation.
- Step 1: Find the total sale value or gross consideration received for the assets transferred.
- Step 2: Deduct transfer-related expenses to arrive at the net consideration.
- Step 3: Find the cost of acquisition (which is simply the purchase value of the land or building or the amount invested in financial assets).
- Step 4: Deduct eligible exemptions, if any. For example, LTCG from the sale of certain capital assets can be reduced using exemptions u/s 54, 54B, 54D, 54EC and 54F.
- Step 5: The amount that remains after the net consideration is adjusted for the cost of acquisition and the eligible exemptions is the long-term capital gain.
What Is Long-Term Capital Gains Tax?
Long-term capital gains tax is levied on the LTCG earned during a given financial year. This tax must be paid before you file your income tax return (ITR) in the relevant assessment year. The rate of long-term capital gains tax depends on the type of capital asset transferred.
Prior to the Union Budget 2024, long-term capital gains from some capital assets were eligible for the benefit of indexation. However, w.e.f. July 23, 2024, this benefit is no longer applicable to the long-term capital gains from any asset. Let us take a closer look at how LTCG tax works for shares, mutual funds and property.
Long-Term Capital Gains Tax on Equity Shares
Profits from listed equity shares held for more than 12 months are classified as long-term capital gains and taxed at 12.5%. However, LTCG from such transfers is exempt up to ₹1.25 lakh.
Read More About Long Term Capital Gains Tax on Shares
Note: For unlisted equity shares, the gains are considered LTCG only if the shares are sold after 24 months.
Long-Term Capital Gains Tax on Mutual Funds
The long-term capital gains tax rates on mutual funds depend on the type of scheme — whether equity, debt or hybrid. Here is how the LTCG tax rates differ for each category of mutual funds.
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LTCG Tax on Equity Mutual Funds
As per the new rules introduced in the Union Budget 2024, profits from equity mutual funds sold after 12 months are considered long-term capital gains. They are taxed at 12.5%.
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LTCG Tax on Debt Mutual Funds
For debt mutual funds purchased before April 1, 2023, and sold after a holding period of 24 months, the profits are considered LTCG and taxed at 12.5%. However, for debt funds purchased after this date, the profits are always considered short-term gains and taxed at the slab rates.
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LTCG Tax on Hybrid Mutual Funds
The LTCG holding period is more than 12 months for aggressive hybrid funds and more than 24 months for balanced hybrid funds. The long-term capital gains tax rate for both categories is 12.5% and it comes into effect from April 1, 2025.
For conservative hybrid funds, however, the new LTCG tax rates applicable from July 23, 2024, are as follows:
- Funds purchased before April 1, 2023: LTCG arises if the holding period is more than 24 months and is taxed at 12.5%
- Funds purchased after April 1, 2023: Profits are always classified as short-term gains and taxed at slab rates.
Long-Term Capital Gains Tax on Land and Building
Gains from the sale of property and real estate will be considered LTCG if the asset was held for more than 24 months. As per the new rules, the long-term capital gains tax rate for these capital assets has been lowered to 12.5% without indexation from the earlier 20% with indexation.
However, for real estate purchased before July 23, 2024 and sold after this cut-off date, taxpayers can choose to pay long-term capital gains tax either at 20% with indexation or at 12.5% without indexation.
Read More About Long Term Capital Gains Tax on Property
Conclusion
This sums up the rules related to long-term capital gains tax rates in India. With the new amendments introduced in Budget 2024, the blanket rate of 12.5% without indexation applies to most capital assets. Now that you know what they are and what the exceptions include, you can plan your investments, property sales and redemptions accordingly — so you optimise your tax liabilities where possible.
FAQs
When should I pay the long-term capital gains tax due?
Long-term capital gains tax should be paid on or before the due date of filing your income tax returns. For individuals, this is usually July 31 of the relevant assessment year, unless the government offers an extension.
Is the basic exemption limit applicable for LTCG?
Yes, the basic exemption limit applies for income earned as long-term capital gains. If your total income including the LTCG is below the basic exemption limit, you need not pay LTCG tax.
What is the exemption limit for long-term capital gains from equity shares?
As per the new tax rules introduced in Budget 2024, long-term capital gains up to ₹1.25 lakh from equity shares are not taxable. Only any LTCG exceeding this limit will be subject to tax at 12.5%.
Can I reduce the amount of tax payable on my long-term capital gains?
Yes, you can reduce the amount of long-term capital gains tax payable if you are eligible for deductions under sections like 54, 54F and 54EC.
Is indexation benefit on long-term capital gains tax applicable as per the new rules?
No, the indexation benefit on long-term capital gains has largely been removed w.e.f. July 23, 2024. However, it is available as an option for real estate assets purchased before this date and sold after it.
