Understanding LTCG tax calculations with practical examples
Long-term Capital Gains (LTCG) are the profits an investor earns from selling capital assets, such as shares, after holding them for a specified period, usually more than a year in the case of equity shares. Any profits made from trading above a certain limit are taxed under the Income Tax Act in India. This article will help us understand what are long term capital gains, how are long-term capital gains taxed, amendments in tax provisions for LTCG and how to calculate it.
Long-term capital gains are the profits earned by selling shares or other securities after holding them for more than 12 months. When the sales price is above a certain range, it is considered LTCG.
LTCG is calculated by deducting the cost of acquisition as well as any expenses related to it from the total value of the sale. For instance, if someone buys shares of Rs. 1,00,000 and after two years he sells them for Rs. 1,50,000 then LTCG would be Rs. 50,000.
In 2024 the Union Budget brought changes to the LTCG tax. The tax rate for LTCG on the sale of equity shares and mutual funds, which remains at 12.5%, is applicable only on gains exceeding Rs. 1.25 lakh annually. The budget also puts a cap on the benefit of indexation (adjustment for inflation) to an asset acquired before 23rd July 2021. Assets purchased after this date will not be allowed indexation.
LTCG tax is calculated at a rate of 12.5% on profits exceeding Rs. 1.25 lakh. The following table illustrates the tax liabilities for various levels of LTCG:
Total LTCG (Rs) | Exemption (Rs) | Taxable LTCG (Rs) | Tax Rate | Tax Payable (Rs) |
1,50,000 | 1,25,000 | 25,000 | 12.5% | 3,125 |
2,00,000 | 1,25,000 | 75,000 | 12.5% | 9,375 |
2,50,000 | 1,25,000 | 1,25,000 | 12.5% | 15,625 |
The exemption limit is one of the most significant parts of LTCG tax. In a financial year, no tax is to be paid on LTCG up to Rs. 1.25 lakh. On profit above Rs. 1.25 lakh, there is a 12.5% tax. For example, if your LTCG for the year was Rs. 1.50 lakh, you would only pay tax on Rs. 25,000 at 12.5%.
For assets such as real estate, unlisted shares etc., a period of more than 24 months is considered as LTCG. The 2024 Union Budget allows indexation benefits only for assets acquired before July 23, 2024. For properties bought before this, an assessee can choose indexation or pay a standard LTCG tax rate.
Suppose you purchased a mutual fund in 2010 worth Rs. 1,00,000 and you sold it for Rs. 2,50,000 in 2024. In this case, the LTCG would be Rs. 1,50,000 (Sale Price – Cost of Acquisition). So, the taxable LTCG would be Rs 25,000 which, after the Rs. 1.25 lakh exemption would be Rs. 3,125 at the rate of 12.5%.
Suppose that you purchased land in 2010 for Rs. 10,00,000 and sold it in 2024 for Rs. 25,00,000. Using indexation, the purchase price, adjusted for inflation, brings the indexed cost of acquisition to Rs. 21,73,652. Therefore, the LTCG will be Rs. 3,26,348. After a 20% tax deduction, the payable tax would be Rs. 65,269.
Understanding how long-term capital gains tax is calculated is vital to optimise investments and reduce liabilities. Different asset classes are taxed at different rates, so keeping up-to-date with recent updates like the new flat rate of 12.5% for properties acquired before July 2024 helps plan taxes better and make more informed financial decisions. There are many avenues to read about index funds and detailed information regarding the same. Bajaj Finance mutual fund platform provides such information to meet diverse financial goals for those who wish to invest in mutual funds effectively. You can choose from various mutual fund schemes and resources that make investing in mutual funds easy and hassle-free.
In real estate, long-term capital gains are achieved if a property is held for more than 24 months.
LTCG upto Rs. 1.25 lakh in a financial year is tax-exempt.
There are no indexation benefits available for mutual funds. A 12.5% flat tax rate is used
For properties, the LTCG tax rate is 20% with indexation applied only to assets bought before July 23, 2024.
No. The Rs. 1.25 lakh exemption is limited to each financial year, you cannot carry it forward.
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