Long Term Capital Gain Tax

Long-Term Capital Gains (LTCG) on shares and equity-oriented mutual funds in India are taxed at a 12.5% rate (plus surcharge and cess) if they reach Rs. 1.25 lakh in a fiscal year. LTCG is defined as profits on the sale of shares or equity-oriented mutual funds held for more than a year. LTCG is taxed at a flat rate of 20% with indexation benefit in case of sale made on or before 22nd July, 2024. For sale made onwards from 23rd July, 2024, the tax rate of 12.5% will be applicable, without indexation benefit.

Profits from selling shares or equity mutual funds held for over a year are considered Long-Term Capital Gains (LTCG). Before the Union Budget 2024 announcement, long-term capital gains were subject to taxation only if they exceeded Rs. 1 lakh in a financial year. The tax rate for LTCG exceeding this limit was 10%, with additional surcharges and cess applicable. However, in the new Union Budget announced, the Finance Minister has hiked the long-term capital gains rate for equity-linked assets while reducing the rate for all other assets.

When it comes to investing in mutual funds and other assets, capital gains play a significant role in determining the returns on investments. Capital gains can be categorised as long term or short-term based on the holding period of the asset.

In this article, we will delve into the world of long term capital gains tax (LTCG), exploring what it is, how it is calculated, the tax rate, and the exemptions available to investors. Understanding LTCG tax can help investors make informed investment decisions and manage their tax liabilities.

What is the current tax rule for LTCG?

As per the new Union Budget 2024, the taxpayers are now liable to pay 12.5% long-term capital gains tax on all financial and non-financial assets. The rate was 10% previously, which has now been raised to 12.5% in the new budget. However, the LTCG tax rate for non-equity assets, which was 20% before, has been lowered to 12.5% in the new budget. Hence, 12.5% is now the flat and uniform rate for taxing long-term capital gains earned by taxpayers on all financial and non-financial assets.

Furthermore, the Finance Minister has also removed indexation benefits, which helped adjust the cost of asset acquisition as per inflation, from all the financial and non-financial assets. Now, taxpayers can not avail of indexation benefits while calculating their long-term capital gains.

Additionally, the Union Budget has changed the basic exemption limit for the long-term capital gains tax. It was Rs. 1 lakh before, but has now been increased to Rs. 1.25 lakh. The Union Budget has also changed the holding periods, which were 12 months, 24 months, and 36 months before. Now, only two holding periods of 12 months and 24 months are applicable on all financial and non-financial assets.

What is long term capital gains tax?

Long term capital gains tax is a tax levied on the profits earned from the sale or transfer of certain long term assets, such as stocks, real estate, mutual funds, or other investments. The tax is applicable only when these assets are held for a specific period, typically more than one year, before they are sold.

When you sell your equity shares after holding them for over a year, you can earn long-term capital gains on mutual funds. If your long-term gains exceed Rs. 1.25 lakh, you will need to pay taxes on them. The tax rate for LTCG on mutual funds is 12.5%, and there is no benefit of indexation.

Here are some key points about long term capital gains tax on Mutual Funds:

• Holding Period: To qualify for long term capital gains treatment, an investor must hold the asset for a minimum period of one year or more in case of equity-oriented funds and three years or more in case of other than equity oriented funds. If the asset is sold before this holding period, the gains are considered short-term and are subject to a different tax rate.
• Tax Rates: Equity oriented schemes are subject to Long term capital gains tax at the rate of 12.5%* and other than equity-oriented schemes are also subject to LTCG at the rate of 12.5% (previously 20%). * The rates mentioned above are exclusive of cess and surcharge if applicable.
• Tax Benefits: Governments often provide lower tax rates on long term gains to encourage long term investment.
• Reporting: Taxpayers are required to report their capital gains on their income tax returns, specifying whether the gains are short-term or long term.

Understanding long term capital gain tax on mutual funds

Long term capital gains in terms of mutual funds typically refer to the profits made on the redemption or sale of mutual fund units held for a duration of more than one year. These gains are subject to taxation, with different rates applied to equity and non-equity mutual funds:

Equity funds

Equity funds are mutual funds designed for investing in equity shares of various companies. They come in two types: tax-saving equity funds and non-tax saving equity funds.

• Tax-saving equity funds (ELSS)
  ELSS, a type of tax-saving equity fund, imposes a lock-in period of 3 years. During this period, investors cannot sell or transfer their funds, leading to long term capital gain tax obligations.
• Non-tax saving equity funds
  Unlike tax-saving equity funds, non-tax saving equity funds do not have a lock-in period. Depending on the holding period, they can attract both long term and short-term capital gain taxes. All equity funds are subject to a 12.5% tax on gains above Rs. 1.25 lakh without indexation benefits after 12 months. However, the capital gains exemption limit has been increased to Rs. 1.25 lakh.

For instance, if Mr. Anil invested Rs. 3 lakh in an equity fund on 1/2/17 and sold it on 31/3/2019 for Rs. 4.5 lakh, his capital gain would be Rs. 1.5 lakh. Consequently, a 12.5% tax would be levied on the Rs. 25,000 exceeding the Rs. 1.25 lakh margin.

These mutual funds invest in both equity and debt funds, with more than 65% of the investment towards equity shares or equity-oriented shares. Hence, they attract a similar long term capital gain tax as equity funds.

Debt funds

Debt mutual funds are used to invest in debt instruments from the market. The long term capital gain tax rate on mutual funds is 12.5% after indexation, which adjusts the acquisition cost for inflation using the Cost Inflation Index (CII).

Example: Mr. Bose invested Rs. 2 lakh in debt funds on 30/4/15 and redeemed it on 1/2/19 for Rs. 3.5 lakh. Since the indexation benefit has been removed, the transaction will result in a long-term capital gain of Rs. 1,50,000.

Debt-oriented balanced funds

These funds reinvest more than 60% of the funds towards debt instruments and are subject to a tax rate of 12.5% without indexation.

It is essential to stay updated with the prevailing tax regulations, as tax rates and rules may change over time.

LTCG tax on ELSS with example

Long-Term Capital Gains (LTCG) tax on Equity Linked Savings Schemes (ELSS) is a tax levied on the profits earned from the sale of ELSS units held for more than one year. ELSS are mutual funds that invest primarily in equity and offer tax benefits under Section 80C of the Income Tax Act, 1961. They have a lock-in period of three years, meaning the investment cannot be withdrawn before three years.

As of the current tax laws in India, LTCG on equity investments, including ELSS, is taxed at 12.5% if the gains exceed Rs. 1.25 lakh in a financial year. This tax is applicable without the benefit of indexation, which means the cost of acquisition is not adjusted for inflation.

Example:

Suppose you invest Rs.1,50,000 in an ELSS on 1st April 2021. After the mandatory lock-in period of three years, you decide to redeem the investment on 1st April 2024. Assume the value of your investment has grown to Rs. 2,10,000.

1. Cost of Acquisition: Rs. 1,50,00
2. Redemption Value: Rs. 2,10,000
3. LTCG: Rs. 2,10,000 – Rs. 1,50,000 = Rs. 60,000

Since the LTCG of Rs.60,000 is less than Rs. 1.25 lakh, it is exempt from tax. If your gains were Rs. 1,45,000 instead, the taxable amount would be Rs. 20,000 (Rs. 1,45,000 - Rs. 1,25,000 exemption), and the tax payable would be Rs. 2,500 (12.5% of Rs. 20,000).

Thus, understanding the LTCG tax implications is crucial for planning investments and optimising returns from ELSS.

LTCG rates, holding period of various mutual funds after Budget 2024

*New rates will come into effect from April 1, 2025

Long term capital gains tax rates

The Long-Term Capital Gains Tax (LTCG) rates vary across different asset classes:

• Equity Asset Classes: For gains from equity mutual funds, the LTCG tax rate is 12.5% without indexation benefits. Profits up to Rs. 1,25,000, however, enjoy an exemption from taxation. Similarly, the sale of listed equity shares attracts a 12.5% tax on gains under LTCG provisions, with an exemption of up to Rs. 1,25,000. Now, gains from the sale of unlisted shares are also taxed at a 12.5% LTCG rate without indexation benefits.
• Debt Assets: For debt instruments such as bonds and mutual funds, the LTCG tax rate is 12.5%, without factoring in indexation benefits.
• Real Estate and Other Assets: LTCG from the sale of real estate assets, gold, and other metals is taxed at a rate of 12.5% without indexation. This uniform rate is applicable to these non-equity asset classes.

Current holding period rules for long-term capital gains

LTCG tax rate after union budget 2024 announcements