Updated: Oct 22, 2020
I am sure most of you have heard about this term, called long term capital gain tax but how many of us are actually well versed on this topic and more so how we can save some of our hard earned money in tax payment though various ways? My guess not many.Reason is simple, unlike income tax which needs to be paid on annual basis, tax liability on Long term capital gain rises only once we sell an asset and make some profit out of it.Of course,since it doesn't happens regualrly for most of us, hence the lack of required knowledge. So in this blog we will first understand this topic in detail and then I will be sharing the effective ways to reduce tax outgo .The article is lengthy as I intended to provide all the necessary details,however I can assure you that once you read it till the end you will have most of your questions answered and doubts cleared.Having said that, if still some questions remain unanswered, pls feel free to raise your queries in the comments or write one to one in Ask Us column of our website.We will be happy to get back.So, without much ado, let's get started.
Defining Long term Capital Gain Tax(LTCG)
"Simply put it is the tax applicable on gain arising on transfer of long term capital asset".
However for a laymen, this definition doesn't gives much clarity, so in order to understand it better, it is important to understand key terms associated with this concept and then understand it in detail and the tax implications.
What is a Capital Asset ?
a) Any kind of movable or immovable property.Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery are a few examples of capital assets whether or not connected with business or profession.
b) Securities held by FII(Foreign Institutional Investors) as per the SEBI act of 1992.
Exclusions :The following do not come under the category of capital asset:
a)Any stock, consumables or raw material, held for the purpose of business or profession
b)Personal goods such as clothes and furniture held for personal use
c)Agricultural land in rural India
d)6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds (1980) issued by the central government
e)Special bearer bonds (1991)
f)Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued under the Gold Monetisation Scheme, 2015
Definition of rural area (from AY 2014-15) – Any area which is outside the jurisdiction of a municipality or cantonment board, having a population of 10,000 or more is considered a rural area.
Points to remember
The capital asset may or may not be connected with the profession or business of the tax payer.Example-For a transporter,bus engaged in the business of carrying passengers will be his capital asset.
Any securities held by FII will always be treated as capital asset and not stock in trade.
What is Long term Capital Asset ?
A capital asset which is held for a period of more than 36 months is termed as long term long term capital asset.However,the time duration of holding the asset varies as per the category of capital asset as under:
With effect from FY 2017-18,the criteria of 36 months has been reduced to 24 months for immovable properties such as land, building and house property.
For instance, if you sell house property after holding it for a period of 24 months, any income arising will be treated as long-term capital gain provided that property is sold after 31st March 2017.
Other capital asstets which include the movable property such as jewellery, debt-oriented mutual funds etc will continue to be classified as a long-term capital asset if held for more than 36 months as earlier.
Some assets are considered long-term capital assets when these are held for more than 12 months. This rule is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase is).These assets include :
Equity or preference shares in a company listed on a recognized stock exchange in India
Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India
Units of UTI, whether quoted or not
Units of equity oriented mutual fund, whether quoted or not
Zero Coupon bonds, whether quoted or not
In case an asset is acquired by gift, will, succession or inheritance, the period for which the asset was held by the previous owner is also included when determining whether it’s a short term or a long-term capital asset. In the case of bonus shares or rights shares, the period of holding is counted from the date of allotment of bonus shares or rights shares respectively.
Long Term Capital Gain Tax Rate for AY 2020-21
Long term capital gain tax is calculated at 20%, except on sale of equity shares/ units of equity oriented fund
Long term capital gain tax is calculated at 10% on sale of Equity shares/ units of equity oriented fund over and above Rs 1 lakh
Computing Long Term Capital Gain
Long term Capital Gain=(Full Value Consideration-Expenditure incurred on the transfer of Asset-Indexed cost of acquisition-Indexed cost of Improvement)
Full value consideration The consideration received or to be received by the seller as a result of transfer of his capital assets. Capital gains are chargeable to tax in the year of transfer, even if no consideration has been received.
Cost of acquisition The value for which the capital asset was acquired by the seller.
Cost of improvement Expenses of a capital nature incurred in making any additions or alterations to the capital asset by the seller. Note that improvements made before April 1, 2001, is never taken into consideration.
NOTE: In certain cases where the capital asset becomes the property of the taxpayer otherwise than by an outright purchase by the taxpayer, the cost of acquisition and cost of improvement incurred by the previous owner would also be included.
Expenditure incurred on transfer
A)In the case of sale of house property below expenses are deductible from the total sale price:
a. Brokerage or commission paid for securing a purchaser
b. Cost of stamp papers
c. Travelling expenses in connection with the transfer – these may be incurred after the transfer has been affected.
d. Where property has been inherited, expenditure incurred with respect to procedures associated with the will and inheritance, obtaining succession certificate, costs of the executor, may also be allowed in some cases.
B)In the case of sale of shares below expenses can be deducted from sale price
(i) Broker’s commission related to the shares sold
(ii)STT or securities transaction tax is not allowed as a deductible expense
C) For jewellery where a broker’s services were involved in securing a buyer, the cost of these services can be deducted.
(Expenses deducted from the sale price of assets for calculating capital gains are not allowed as a deduction under any other head of income tax return, and you can claim them only once)
Indexation is a process by which cost of acquisition is adjusted for the inflationary rise in value of the asset.For calculating indexed cost of acqusition, following points to be considered :
Year of improvement/acquisition
Year of transfer
Cost Inflation index for the year of acqusition/improvement
Cost inflation index for the year of transfer
Indexed Cost of Acquisition/Improvement
Cost of acquisition and improvement is indexed by applying CII (cost inflation index). It is done to adjust for inflation over the years of holding of the asset. This increases one’s cost base and lowers the capital gains.
Indexed cost of acquisition is calculated as
(Cost of acquisition * Cost Inflation Index for the year of transfer of capital asset) / Cost inflation index (CII) for the year of acqusition.
Cost Inflation Index for the year of acquisition is considered for the year in which asset was first held by the seller, or 2001-02, whichever is later.
Indexed cost of improvement is calculated as:
(Cost of improvement * Cost Inflation Index for the year of transfer of capital asset) / Cost inflation index (CII) for the year of improvement.
Cost Inflation Index for the year of improvement is considered for the year in which improvement was done by the seller, or 2001-02, whichever is later.
Govt Notified Cost Inflation Index
Financial Year Cost Inflation Index
Let's understand this with an example
Example :Mr.A purchased a property for Rs 18 lcs in the year May 2010 & sold the same in year 2020 for Rs 42 lcs.Brokerage for the transaction is Rs 40,000.
Computation of the capital gain will be as follows :
Long term Capital Gain=(Full Value Consideration-Expenditure incurred on the transfer of Asset-Indexed cost of acquisition-Indexed cost of Improvement)
Full Value Consideration = 42 lcs
Expenditure on transfer = 40,000
Cost of Acquisition = 18 lcs
Indexed Cost of acquistion=(18,000,00*289)/167=31,14,970
Indexed cost of Improvement = Nil
Long Term Capital Gain =(42,000,00-40000-31,14,970-0)=10,45,030
Long Term Capital Gain Tax=10,45,030*20%= Rs 2,09,006
How to Save Tax On Long Term Capital Gain ?
Having understood the basics of long term capital gain and tax associated with the same, let's look at the various options available to save tax on Long Term Capital Gain.
1.Exemption on Long term Capital Gain tax for Sale of House Property on Purchase of Another House Property-Capital gains exemption under Section 54:-Assessees are eligible for exemption from long term capital gains arising out of sale of house property by investing in maximum up to two house properties against the earlier provision of one house property.The capital gains on the sale of house property must not exceed Rs 2 crores.
The exemption under section 54 is available when the capital gains from the sale of house property are reinvested into buying or constructing two another house properties (prior to Budget 2019, the exemption of the capital gains was limited to only 1 house property).The exemption on two house properties will be allowed once in the lifetime of a taxpayer, provided the capital gains do not exceed Rs. 2 crores. The taxpayer needs to invest the amount of capital gains and not the entire sale proceeds. If the purchase price of the new property is higher than the amount of capital gains, the exemption shall be limited to the total capital gain on sale.
Conditions for availing the exemptions
1. The new property needs to be purchased either 1 year before the sale or 2 years after the sale of the property.
2. The capital gains can also be invested in the construction of a property, but construction must be completed within three years from the date of sale.
3. In the Budget for 2014-15, it has been clarified that only 1 house property can be purchased or constructed from the capital gains to claim this exemption.
4. The exemption can be taken back if this new property is sold within 3 years of its purchase/completion of construction.
2.Section 54F: Exemption on capital gains on sale of any asset other than a house property- Exemption under Section 54F is available when there are capital gains from the sale of a long-term asset other than a house property. Unlike in case of house property sale, in this case entire sale consideration needs to be invested to buy a new residential house property to claim this exemption. The new property should be purchased either one year before the sale or 2 years after the sale of the property. You can also use the gains to invest in the construction of a property. However, the construction must be completed within 3 years from the date of sale.
If the entire sale proceeds are invested towards the purchase of new house, the entire capital gain will be exempt from taxes. However, if only a portion of sale proceeds are invested then the capital gains exemption will be in the proportion of the invested amount to the sale price = capital gains x cost of new house /net consideration.
3.Exemption on Long Term Capital Gain tax for Sale of House Property on Reinvesting in specific bonds-Section 54EC: - Exemption is available under Section 54EC when capital gains from sale of the first property are reinvested into specific bonds.
If you are not keen to reinvest your profit from the sale of your first property into another one, then you can invest them in bonds for up to Rs. 50 lakhs issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).
The money invested can be redeemed after 3 years, but they cannot be sold before the lapse of 3 years from the date of sale. With effect from the FY 2018-2019, the period of 3 years has been increased to 5 years;
The homeowner has six month’s time to invest the profit in these bonds. But to be able to claim this exemption, you will have to invest before the tax filing deadline.
4.Parking funds in Capital Gains Account Scheme- If capital gains have not been invested until the date of filing of return (usually 31 July) of the financial year in which the property is sold, the gains can be deposited in a PSU bank or other banks as per the Capital Gains Account Scheme, 1988. This deposit can then be claimed as an exemption from capital gains, and no tax has to be paid on it. However, if the money is not invested, the deposit shall be treated as short-term capital gains in the year in which the specified period lapses.Capital gain account scheme allows an investor to enjoy tax exemptions without purchasing a residential property. The Government of India allows withdrawal of funds from this account only to purchase houses and plots, and if withdrawn for any other purposes, the funds have to be utilised within 3 years of withdrawal. Otherwise, the total profit amount will be charged in accordance with the long-term capital gain tax rates as applicable.
5. Exemption on Long Term Capital Gain Tax on Sale of Agricultural Land-In some cases, capital gains made from the sale of agricultural land may be entirely exempt from income tax or it may not be taxed under the head capital gains.
a. Agricultural land in a rural area in India is not considered a capital asset and therefore any gains from its sale are not chargeable to tax.
b. If the agricultural land is held as as stock-in-trade or if you are into buying and selling land regularly in the course of your business, in such a case, any gains from its sale are taxable under the head Business and Profession.
c. Capital gains on compensation received for compulsory acquisition of urban agricultural land are tax exempt under Section 10(37) of the Income Tax Act.
If your agricultural land wasn’t sold in any of these cases, you can seek exemption under Section 54B.
6. Exemption on Long term Capital Gain tax on Transfer of Land Used for Agricultural Purpose-Section 54B:Long-term capital gains from transfer of land used for agricultural purposes – by an individual or the individual’s parents or Hindu Undivided Family (HUF) – for 2 years before the sale, exemption is available under Section 54B. The exempted amount is the investment in a new asset or capital gain, whichever is lower. Timeline for reinvestment into a new agricultural land is within 2 years from the date of transfer.The new agricultural land, which is purchased to claim capital gains exemption, should not be sold within a period of 3 years from the date of its purchase.The amount of capital gains can also be deposited before the date of filing of return in the deposit account in any branch (except rural branch) of a public sector bank or IDBI Bank according to the Capital Gains Account Scheme, 1988.
Exemption can be claimed for the amount which is deposited. If the amount which was deposited as per Capital Gains Account Scheme was not used for the purchase of agricultural land, it shall be treated as capital gains of the year in which the period of 2 years from the date of sale of land expires.
7.Exemption under Section112A for Long Term Capital Gain tax on sale of equity shares listed in recognized stock exchange-As per section 112A, long term capital gain on transfer of equity shares or units of equity oriented mutual fund or units of business trust is chargeable at the rate of 10%(without indexation).The tax is applicable only if the capital gain is more than 1 lcs.
The concessional rate of 10% is subject to below mentioned conditions
In case of an equity share in a company, securities transaction tax has been paid on both acquisition and transfer of such capital asset, and
In case of a unit of an equity oriented fundor a unitof business trust, STT has been paid on transfer of such capital asset.
The cost of acquisition of listed equity share acquired before feb 1,2018 should be deemed to be higher of the following:
(i)The actual acqusition cost or
(ii) Lower of the following
Fair market value of such shares as on Jan 31 2018 or
actual sales consideration accruing on its transfer
Fair Market value of listed equity share shall mean its highest price quoted on the stock exchange as on Jan 31, 2018.In case of no trading of the security on Jan 31 2018, then the highest price on date preceding Jan 31, 2018 on which trading was done will be considered.
8.Long Term Capital Gain from transfer of Specified asset-A tax payer who has earned long term capital gain which is not covered under sec 112 A and zero coupon bonds has the following options for making tax payment
a)Avail the benefit of indexation and pay the long term capital gain tax at the normal slab of 20%, or
b) Do not avail the indexation benefit and pay the long term capital gain tax at the reduced rate of 10%.
Tax calculation is done under both the options and lower of the two is selected.
Example:Mr X purchased 100 shares of ABC company listed at BSE in Jan 2015 at the rate of Rs 1000 per share and sold them in April 2019 for Rs 2000 per share.The highest quoted price in stock exchange on Jan 31 2018 for this share was Rs 1500.What will be the applicable LTCG in this case.
The cost of acqusition will be higher of
(i)The actual acqusition cost =Rs 100*1000=100000
(ii) Lower of the following
Fair market value of such shares as on Jan 31 2018=Rs 1500*100=150000,
actual sales consideration accruing on its transfer=100*2000=200000
Thus the cost of acquisition of shares is 150000 and Sale Consideration 200000
The capital gain in this transaction is Rs 50,000 which is less than 1 lcs, hence no tax is applicable.
9.Adjustment of Long term Capital Gain against basic tax exemption limit-Basic exemption limits means the income up to which tax is not payable by the assesee
For resident Indian of age 80 years and above the exemption limit is Rs 5lcs
For resident Indian of age 60 years to 80 years the exemption limit is Rs 3lcs
For resident Indian of age up to 60 years the exemption limit is up to Rs 2.5lcs
For HUF the exemption limit is Rs 2.5lcs
For NRI, irrespective of the age bracket the exemption limit is 2.5lcs.
Now a question rises, whether the basic exemption limit can be adjusted against the long term capital gain ? The answer is that it depends on the residential status of the individual.Only a resident Indian and resident HUF can adjust the long term capital gain against basic exemption limit, NRI entities are not eligible for this benefit.
A resident Indian can claim this benefit, however the adjustment of LTCG against basic exemption limit can be done only after the exemption limit is utilized for income from other sources.Once that is done, only the left over limit can be set-off for LTCG.
Example:Mr. C is a retired Government employee aged 76 years getting a monthly pension income of Rs 10,000.He had purchased a flat in the year 2010 and sold the same in year in 2020.The LTCG in this transaction is 2.5 lcs
The total income for Mr.C is 1.20 lcs per annum and the exemption limit is Rs 3 lcs.Hence, after adjusting for pension income, left over limit is 1.8 lc(3lcs-1.20lcs).
Therefore, the LTCG is applicable on 2.5lc-1.8 lcs=0.70 lcs only.At the rate of 20% it works out to be 14k.
Thank you very much for reading till the end, I hope the time was worth it and you have got some additional insights. As stated earlier, we have tried to cover most of the aspects of Long term Capital Gain tax and the ways to claim exemption.In case of any further queries, you may pls share the same in comments or Ask Us section inthe tab above.
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