What is Long Term Capital Gain (LTCG)?

What Qualifies as Long-Term Capital Gains?

In general, an asset is considered to be of long term capital gains if it is sold after the period of prescribed holding. Key points include: 

• If equity shares are held for more than 12 months, they are deemed to be long term assets. 
• Mutual funds with an equity orientation gain a long-term status after investing in them for more than 12 months. 
• There may be varying rules and/or requirements for the different listed securities, depending upon the applicable tax provisions. 
• Immovable property is considered as a long-term capital asset when it is held for a period of more than 24 months. 
• Capital assets, such as gold, jewellery and other assets, usually qualify as long-term assets if the asset has been held for over 24 months. 
• The tax treatment will vary according to asset type, and according to the provisions of the Income Tax Act at the time.

How to Calculate Long Term Capital Gain?

Long term capital gain is the profit from the sale after deducting eligible costs and expenses. Follow these steps to calculate LTCG:

• Calculate the total sale consideration received from selling the asset. 
• Deduct any cost of acquisition or indexed cost, if indexation benefits apply. 
• Deduce the cost of improvement (where allowed for under the tax rules). 
• Subtract costs associated with the transfer that are only incurred when the asset is transferred, like brokerage fees or legal fees. 
• The balance is the long-term capital gain which will be taxable.

Formula: Long-Term Capital Gain = Sale Consideration − Cost of Acquisition − Cost of Improvement − Transfer Expenses

Tax on Long-Term Capital Gains

The long-term capital gains tax on equity shares and equity-oriented funds over and above Rs 1 lakh is 10%. This category includes LTCG earned by selling securities of more than Rs 1 Lakh under Section 112A of the Income Tax Act of India, as well as returns from zero coupon bonds, UTI, or Mutual Funds sold on or before July 10, 2014.

The rate of LTCG tax is 20% for other capital assets. A surcharge and cess are also levied on the abovementioned rates. Certain exemptions are allowed to ease the burden of taxes under particular conditions.

Exemptions on LTCG Tax

Under some conditions, the tax liability can be reduced by claiming exemptions for the LTCGs on a particular asset.

• Section 54 provides exemption on gains from the sale of a residential property if the proceeds are invested in another eligible residential property. 
• Section 54F applies when gains from assets other than residential property are invested in a residential house. 
• Section 54EC provides exemption when the eligible capital gains are invested into bonds issued by the government within the time frame mentioned. 
• There is a special exemption under Section 112A of the Income Tax Act, 1961, for the long-term capital gains in case of listed equity shares and equity-oriented mutual funds.

Exemptions are only available when all of the conditions listed in the various sections are met.

What are Long-Term Capital Gains on Equity-Oriented Funds?

Long-term capital gains on equity-oriented funds are profits from the sale of fund units that has been held for 12 months or more. Key points include:

• Gains occur when the amount received on the sale is greater than the original amount of money invested plus the holding period. 
• Mutual funds that invest in equity shares and equity funds held for over 12 months are taxed as long-term capital gains. 
• Gains which can be eligible for tax is governed by Section 112A of the Income Tax Act. 
• In general, tax is only paid on amounts in excess of the exemption limits for the financial year. 
• The tax regime provides incentive for long-term investment and is more tax friendly than short-term capital gains.

Conclusion

This blog discussed the long term capital gain definition, how to calculate LTCG, the examples of the same, among other aspects. To sum up, long term capital gain can be understood as the profit or loss which results from the sale of an investment that has been in possession of an organisation or an individual for more than a year, at the time. These can include examples such as properties, houses, land, etc.