The complete guide about Long Term Capital Gains Tax is as follows. Read the full article to know about Long Term Capital Gain Tax Rate, Computation of Long Term Capital Gains tax, etc.
What is ‘Income from Capital Gain’?
There are five heads of income which taxed differently. “Income from Capital Gains” is one of the sources of the income. Under this head, any Income derived from a Capital asset that is immovable or movable is chargeable to tax. In short, we can say that Profits or gains arising from the transfer of a capital asset are called “Capital Gains”. These profits/gains charged to tax under the head “Income from Capital Gains”.
The definition of Capital Asset is a property of any kind held by the taxpayer, whether that asset connected with his business/profession or not. The property may be intangible or tangible. The property may be immovable (fixed) or movable or circulating. For example, Land, Buildings, Vehicles, leasehold rights, tenancy rights, goodwill, patents, trademarks, licenses, etc. comes under Capital Asset.
Capital Asset is of two types they are,
- Short-term Capital Asset.
- Long-term Capital Asset.
To know about Short Term Capital Asset and Gains, Click Here.
Long Term Capital Asset
If any asset held by the assessee/taxpayer for more than 36 months (3 Years) immediately preceding (before) its date of transfer, then that asset is considered as Long-term Capital Asset.
- If assessee/taxpayer hold stocks and units of equity diversified mutual funds for more than a year (12 months), then they are considered as Long-term Capital Gains.
- Similarly, if real estate held by an assessee/taxpayer for 3 years (36 months), then also they are considered as Long-term capital gains. If it was sold before 3 years, then they are considered as Short-term Capital Gains.
Example for Long Term Capital Asset
Let us assume that Mr. Showrya is a salaried employee. In the month of March 2010, he purchased a piece of land and sold the same in November 2015. In this case, the land is a capital asset for Mr. Showrya. He purchased land in March 2010 and sold in November 2015 i.e. after holding it for more than 36 months (3 years). Hence, that land will be treated as a ‘Long Term Capital Asset’.
Let us assume that Mr. Song Joong Ki is a salaried employee. In the month of March 2013, he purchased equity shares of ABC Limited (listed in BSE) and sold that in November 2015. In such case, shares are capital assets for Mr. Song Joong Ki. He purchased shares in March 2013 and sold them in November 2015, i.e., after holding them for more than 12 months (1 year). Hence, those shares will be treated as Long Term Capital Assets.
Let us assume that Mr. Lee Min Ho is a salaried employee. In the month of March 2011, he purchased unlisted shares of ABC Ltd. and sold that in November 2015. In this case, shares are capital assets for Mr. Lee Min Ho and to determine nature of capital gain, a period of holding would be considered as 36 months (3 years) as shares are unlisted. He purchased shares in March 2011 and sold them in November 2015, i.e., after holding them for more than 36 months (3 years). Hence, those shares will be treated as Long Term Capital Assets.
Capital Gain is of two types, they are
- Short-Term Capital Gain
- Long-Term Capital Gain
To know about Short-Term Capital Gain, Click Here. The complete information about Long Term Capital Gain is as follows.
Long Term Capital Gain
The Long Term Capital Gain arises from the transfer of Long Term Capital Asset.
Computation of Long Term Capital Gain Tax
|Full Value of Consideration|
|Less||1. Indexed Cost of Acquisition (ICOA)|
|2. Indexed Cost of improvement|
|3. Expenditure incurred in such a transfer|
|4. Exemptions available, if any|
|Taxable Long Term Capital Gain|
Full Value Consideration: It is the amount for which the transfer/sale of an asset/property made. That transfer may be in cash or kind or a combination of both i.e. in exchange for an asset.
The Cost of Acquisition: It is the amount which the taxpayer has incurred or the price which he has paid for acquiring the asset/property.
The Cost of Improvement: It is a cost or capital expenditure incurred by an assessee/taxpayer in making any improvements/additions to the capital asset.
Indexed Cost of Acquisition (ICOA)
The Concept of Indexation: The rupee value today may differ tomorrow because of inflation. In short, the value of rupee is not same every time. So while paying tax under Capital Gains head, the effect of inflation on the purchase of an asset is included.
For Example: If a taxpayer bought an asset in March 2002 for Rs. 30 lakh and sold it in March 2011 for Rs. 45 lakh; then he doesn’t pay income tax on the Rs. 15 lakh gain. The concept of indexation will be considered by the Income tax authorities, so that you can show a higher purchase cost, lowering the overall profit and reducing the tax you pay on the gain. Using the inflation index, you need to increase the purchase price of the property to reflect the inflation-adjusted true price in the year of sale.
ICOA = Cost of Acquisition * CII (Cost Inflation Index)
Cost Inflation Index (CII) = (Cost Inflation Index (CII) for a year in which asset sold or transferred) / (CII for a year in which asset was bought or acquired).
Example for ICOA
Consider the above example,
The year in which asset transferred or sold is 2011, so (Cost Inflation Index (CII) for 2011 in which asset transferred or sold) = 711
The year in which asset acquired or bought is 2002, so (Cost Inflation Index for 2002 in which asset acquired or bought) = 426.
Therefore, Cost Inflation Index (CII) = 711/426 = 1.67
ICOA (Indexed Cost of Acquisition) = 20,00,000 x 1.67 = Rs. 33,40,000
Hence, Long-term Capital Gain = Full value of consideration – Indexed Cost of Acquisition
LTCG (Long-term Capital Gain) = Rs. 35,00,000 – Rs. 33,40,000 = Rs. 1,60,000
Tax liability with Indexation and without Indexation
In case of Long Term Capital Gain, the tax liability is the lower of the amount arrived at by the two:
- 10 % tax liability arrived at by without using indexation method.
- 20% tax liability arrived at by indexation method.
Considering the above example,
|With Indexation||Without Indexation|
|Tax liability = 1,60,000 x (20/100) = Rs. 32,000||From above example, Capitals Gains = Sale price of asset – Cost of acquisition = Rs. 35,00,000 – Rs. 20,00,000 = Rs. 15,00,000.
Therefore, Tax liability = 15,00,000 x (10/100) = Rs. 1,50,000.
|So, with Indexation, a taxpayer need to pay Rs. 32,000, whereas without indexation a taxpayer has to pay Rs. 1,50,000. So, indexation benefits you in saving taxes.|
Exemptions for Long Term Capital Gains
Under Section 54 and Section 54F, some exemptions are as follows.
- Section 54 gives relief to an assessee/taxpayer who sells his/her residential house (residential property) and from the sale proceeds, he acquires another residential house.
- Not only Section 54 but also Section 54F provides you exemption from the Capital Gains even if your sold property is ‘not a residential property’. But, the new property must be the residential property.