Long Term Capital Gains Tax (LTCG)

What is Capital Gain Tax?

When an individual sells his/her capital assets like residential property, stocks, bonds, etc., a capital gains tax is applicable on the gains from selling the asset. The capital gains tax is applicable to both movable and immovable capital assets. There are two types of capital gains tax which are Long Term Capital Gains Tax (LTCG) and Short Term Capital Gain Tax (STCG).

Let’s have a close look at the applicability of long term capital gains tax.

What is Long Term Capital Gains Tax?

Long Term Capital Gains Tax is applicable on the sale transaction of a capital asset which is done after a period of 12 months to 36 months (depending upon the type of asset) from the date of acquiring.

Long Term Capital Gains Tax is applicable as 20% along with cess and surcharge on the transaction of a capital asset. But on the following capital asset, the long-term capital gain tax is applicable as 10% of the capital gain from the transaction of equity securities and mutual funds done after the 12 months from the date of acquiring is taxed at 10%. Capital gains of more than ₹1,00,000 are applicable for LTCG under section 112A of the Income Tax Act, 1961.

Long Term Capital Gains Tax on Mutual funds

LTCG Tax in Equity Mutual Funds - Long Term Capital Gains from the sale of equity mutual funds after 12 months from the date of investment is applicable for the LTCG tax of 10%. LTCG gives the exemption of ₹1,00,000 means LTCG will be only applicable to the gains which exceed ₹1,00,000. There is no indexation benefit on the equity mutual funds.
LTCG Tax in Debt Mutual Funds - Long Term Capital Gain from the sale of debt mutual funds after 36 months from the date of investment is applicable for LTCG tax of 20% after Indexation. Debt mutual funds give the benefit of Indexation. Indexation is a method in which the value of the investment is adjusted with inflation to bring down the quantum of capital gain. There is no exemption on debt mutual funds.

Calculation of Long Term Capital Gain Tax on Mutual Funds:

On Equity Mutual Funds:

Suppose, if we invested ₹1,00,000 on 1st January 2017 in an Equity mutual fund. And then we sold it on 31st December 2020 after 48 months at the value of ₹2,50,000. Then this transaction will be eligible for the LTCG tax under the Income Tax Act.

The total gain will be ₹1,50,000 (₹2,50,000 - ₹1,00,000). But, the LTCG tax is applicable only on the gains which exceed ₹1,00,000 in a financial year. So, the taxable gain will be ₹1,50,000 - ₹1,00,000 = ₹50,000.

LTCG is 10% of taxable amount= 10% * ₹50,000 = ₹5,000.

On Debt Mutual Funds:

Suppose, if we invested ₹1,00,000 on 1st January 2017 in a debt mutual fund. And then we redeemed our units on 31st December 2020 i.e after 48 months at the value of ₹2,00,000. Then the transaction will be eligible for the LTCG tax under the Income Tax Act.

As LTCG of debt mutual funds is applicable after the benefit of Indexation.

So, the cost of acquiring after indexation will be equal to,

Original Cost of acquiring * (Cost Inflation Index of sale year/ Cost inflation Index of purchase year).

In our example, Cost of acquiring after benefit of Indexation:

= ₹1,00,000 * (301/264) = ₹1,14,015.

The total gain will be ₹85,985 (₹2,00,000 - ₹1,14,015) after indexation benefits. The LTCG tax will be applicable on the total gains. So, the taxable amount will be ₹85,985.

LTCG is 20% of taxable amount= 20% * ₹85,985= ₹17,197.

Frequently Asked Questions (FAQs)

1. What is Capital Gain Tax?

Capital gains tax is applicable when someone gains from the transaction of selling their capital assets like land or property, vehicles, bonds, equity instruments, mutual funds, etc. There are two types of capital gains tax which is Long Term Capital Gain Tax and Short Term Capital Gain Tax.

2. What is LTCG?

LTCG stands for Long Term Capital Gains. LTCG tax is applicable on the sale transaction of capital assets done after a period of 12 months to 36 months (depends upon the type of asset) from the date of acquisition.

3. What is the holding period for equity and equity mutual funds to be taxed as LTCG?

LTCGs are taxed in equity when the investors sell their holdings after a period of 12 months.

4. Is LTCG applicable to the sale of equity?

Yes, LTCG is applicable on the sale of equity shares under section 112A of the Income Tax Act, 1961.

5. What is the LTCG tax rate for equity and equity mutual funds?

LTCG is taxed at the rate of 10% on the gains above Rs.1 lakh in the case of selling of stocks and equity mutual fund units.

6. Is indexation benefit applicable on LTCG?

Yes, the benefit of Indexation is applicable but only in the case of debt mutual funds. The LTCG on debt mutual funds is taxed at the rate of 20% on the gains after the benefit of indexation.

7. Is there any tax exemption on LTCG in equity funds?

Yes, there is an exemption of ₹1,00,000 per financial year under the Income Tax Act, 1961. This exemption is only applicable for equity instruments like equity shares, equity mutual funds, etc. The gains above Rs.1 lakh in that financial year will be taxed with an LTCG tax rate of 10%.