Long Term Capital Gain Tax

Long-term capital gains (LTCG) will be taxed uniformly at 12.5% across all asset classes, effective from July 23, 2024. The indexation benefit previously available to investors was removed in the Budget 2024. Previously, some assets were taxed at 20% with indexation and 10% without it, but now the increased LTCG tax applies without indexation.

From July 23, 2024, LTCG exceeding Rs. 1.25 lakh in a financial year will incur a 12.5% tax. For transfers completed by July 22, 2024, the 10% tax rate will still apply. This article will dive into LTCG tax, its calculation, applicable rates, and investor exemptions.

Budget 2024 updates

Here’s a breakdown of the changes introduced in the Union Budget 2024 regarding long-term capital gains (LTCG) tax:

1. Uniform tax rate: Under the new Union Budget 2024, taxpayers are now subject to a uniform long-term capital gains tax rate of 12.5% on all financial and non-financial assets. Previously, the tax rate for such gains was 10%, while non-equity assets faced a rate of 20%. The new budget standardises the LTCG tax at 12.5% for all assets.
2. Removal of indexation benefits: The Finance Minister has eliminated indexation benefits, which previously allowed taxpayers to adjust the cost of asset acquisition according to inflation. As a result, taxpayers can no longer utilise these benefits when calculating their long-term capital gains, leading to potential increases in tax liability.
3. Increased basic exemption limit: The basic exemption limit for long-term capital gains tax has been raised from Rs. 1 lakh to Rs. 1.25 lakh. This change provides some relief to taxpayers, allowing them to earn higher gains without incurring tax.
4. Revised holding periods: The Union Budget has also altered the holding periods required for different asset types. Previously, the holding periods varied between 12, 24, and 36 months. Now, only two holding periods are relevant: 12 months and 24 months, applicable to all financial and non-financial assets. This simplifies the taxation process and provides clarity to investors regarding asset retention.

In summary, the Union Budget 2024 has implemented significant changes to the long-term capital gains tax structure, introducing a uniform tax rate, eliminating indexation benefits, increasing the basic exemption limit, and revising holding periods. Taxpayers will need to adapt to these changes when planning their investments and capital gains strategies.

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.

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 gain tax on shares

Long-term capital gains (LTCG) tax on shares applies to profits made from selling equity shares held for more than one year. Under the current tax regime, gains exceeding Rs. 1.25 lakh in a financial year are taxed at a rate of 12.5%. This change aims to provide a uniform tax structure for all financial assets.

Previously, the LTCG tax was 10% for gains without indexation and 20% for gains with indexation. However, the Budget 2024 removed the indexation benefit, making the tax calculation straightforward. Investors should consider these factors when trading shares to optimise their tax liabilities.

Long-term capital gain tax on property

Long-term capital gains (LTCG) tax on property is applicable when a property is sold after being held for more than two years. The gains are calculated as the difference between the selling price and the indexed cost of acquisition, which accounts for inflation. Under the current regime, LTCG exceeding Rs. 1.25 lakh in a financial year is taxed at 12.5%.

The recent Budget 2024 has removed the indexation benefit, simplifying the calculation for taxpayers. Investors must also be aware of the two-year holding period requirement to qualify for LTCG taxation, as this impacts their overall tax planning strategy.

Current holding period rules for long-term capital gains

LTCG tax rate after union budget 2024 announcements