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Chapter 14 What is LTCG Tax? How is it calculated?

Gains or profits arising from the transfer of capital assets are charged to tax under the head ‘Capital Gains’. The key condition here is that it should entail the transfer of a capital asset and only then it qualifies as a capital gain.

Capital gains are further divided into short-term (STCG) and long-term (LTCG). This classification is based on the period of holding and this definition varies from asset to asset as we shall later learn in this chapter.

Remember, when you sell a capital asset, it can either result in gains or in losses. In this chapter, we shall only discuss capital gains and not capital losses. Even within capital gains, the focus will entirely be on LTCG (long-term capital gains) only.

Let us quickly revisit the idea of capital gains and capital assets before we go ahead with our discussion on LTCG and the taxation of LTCG.

Meaning of Capital Gains and Capital Assets

Profits or gains arising from the transfer of a capital asset are called ‘capital gains’ and are charged to tax under the head ‘capital gains’. But what exactly is a capital asset? Where it becomes hard to define this, the Income Tax Act lays out some clearly defined definitions of capital assets and also lays out some clear exceptions as under:

A capital asset is defined to include:

  • Any kind of property held by an assessee, whether or not connected with his business or profession.
  • Any securities held by an FII, who has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.

    However, the following items are excluded from the definition of ‘capital asset’:

    i. Any stock-in-trade (other than securities referred to in (b) above), consumable stores, or raw materials held for the purposes of his business or profession.

    ii. Personal effects, i.e., movable property (including clothing apparel and furniture) held for personal use by the taxpayer or any member of his family dependent on him, but excludes:

    a. Jewelry;

    b. Archaeological collections;

    c. Drawings;

    d. Paintings;

    e. Sculptures; or

    f. Any work of art.

    Here, ‘jewelry’ includes:

    a. ornaments made of gold, silver, platinum, or any other precious metal, or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stones, and whether or not worked or sewn onto any wearing apparel;

    b. precious or semi-precious stones, whether or not set in any furniture, utensil, or other article or worked or sewn into any wearing apparel;

  • Agricultural land in India but not being land-situated:

    a. Within the jurisdiction of a municipality, notified area committee, town area committee, cantonment board, and which has a population of not less than 10,000;

    b. Within the range of the following distance measured aerially from the local limits of any municipality or cantonment board:

    i. not being more than 2 KM, if the population of such area is more than 10,000 but not exceeding 1 lakh;

    ii. not being more than 6 KM, if the population of such area is more than 1 lakh but not exceeding 10 lakh; or

    iii. not being more than 8 KM, if the population of such area is more than 10 lakh. Population is to be considered according to the figures of the last census, of which, relevant figures have been published before the first day of the year.

    iv. 61/2% gold bonds,1977, or 7% gold bonds, 1980, or National Defence Gold Bonds, 1980, issued by the Central Government;

    v. Special Bearer Bonds, 1991;

    vi. Gold deposit bonds issued under the Gold Deposit Scheme, 1999, or deposit certificates issued under the Gold Monetization Scheme, 2015.

Distinction between capital assets and business assets

Let us understand the distinction between a business asset and a capital asset as that will determine whether the income will be treated as a business income or as capital gains. This distinction is very important from the tax perspective and it depends on whether it is part of the regular business or it is an investment?

Illustration 1:

Mr. Jayesh purchased a residential house in Delhi in January 2015 for Rs.90,00,000. He sold the house in April 2017 for Rs.1,10,00,000. Will this classify as a capital asset or as a business asset?

In this case, a residential house is a capital asset of Mr. Jayesh as it is part of his investment. Hence, the gain of Rs.20,00,000 arising on account of sale of the residential house will be charged to tax under the head ‘Capital Gains’.

Illustration 2:

Chandresh is a property dealer in Navi Mumbai. He purchased a flat for resale in January 2016 for Rs.65,00,000 and sold in April 2018 for Rs.98,00,000. Will this be considered as a capital asset or a business asset?

In this case, Chandresh is involved in the business of dealing in properties and this is a part of his normal business. Hence, the flat he purchased would form part of the stock-in-trade of the business, which he would look to hive off to another customer at an appropriate date and price. In other words, for Chandresh, the flat is not a capital asset and, hence, the gain of Rs.33,00,000 arising from the sale of the flat will be charged to tax as business income and not as capital gain. Here, buying the property was not a personal investment but was a stock-in-trade in his real estate dealing business.

Meaning of short-term capital asset and long-term capital asset

For the purpose of taxation, capital assets are classified into two categories as given below:

  • Short-term capital asset
  • Long-term capital asset

Any capital asset held by the taxpayer for a period of more than 36 months immediately preceding the date of its transfer will be treated as a long-term capital asset.

However, in respect of certain assets like shares (equity or preference), which are listed on a recognized stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity-oriented mutual funds, listed securities like debentures and government securities, units of UTI, and zero-coupon bonds, the period of holding is to be considered at 12 months instead of 36 months. This means that such assets will be long-term capital assets if held for more than 12 months.

There have been some modifications to the period of holding definition in the last two budgets. The period of holding for long-term capital assets is to be considered at 24 months instead of 36 months in the case of unlisted shares of a company or an immovable property being land or building or both.

Any capital asset held by the taxpayer for a period of more than 36 months (except in the case of some exceptions explained above) immediately preceding the date of its transfer will be treated as long-term capital assets. Accordingly, they will be subject to the long-term capital gains tax at the applicable extant rates at that point in time.

Illustration 3:

Karan is a salaried employee in ABC Ltd. In the month of April 2010, he purchased a piece of land and sold the same in December 2018. Will this be considered a long-term asset or a short-term capital asset?

In this case, the land in question is a capital asset for Karan, since he is not in the business of real estate dealing. He purchased the land in April 2010 and sold it in December 2018, i.e. after holding it for a period of more than 24 months. Hence, the land will be treated as a long-term capital asset.

Illustration 4:

Palak is a salaried employee in a pharmaceutical firm. In the month of April 2017, she purchased a piece of land and sold the same in December 2018. Will this qualify as a long-term asset for Palak?

In this case, the land is a capital asset for Palak as dealing in real estate is not her principal business. She purchased the land in April 2017 and sold it in December 2018, i.e., after holding it for a period of less than 24 months. Hence, this transaction will be treated as a short-term capital asset and will be subject to short-term capital gains.

Illustration 5:

Shankar is a salaried employee with a private limited company. In the month of April 2017, he purchased equity shares of SBI Ltd. (listed on the BSE and the NSE) and sold the same in December 2018. Will this be a long-term or a short-term capital asset for him?

In this case, shares are a capital asset for Shankar as it is not his primary business. He purchased the shares in April 2017 and sold them in December 2018, i.e., after holding them for a period of more than 12 months. Hence, the shares will be treated as a long-term capital asset. Remember, these shares were bought through the stock exchanges and the securities transaction tax (STT) was paid on them. Hence, it qualifies as a long-term capital asset.

Illustration 6:

Mr. Kumar is a salaried employee. In the month of April 2018, he purchased equity shares of Sundaram Fasteners Ltd. (listed on BSE) and sold the same in January 2019. Will it qualify as a long-term capital asset?

In this case, the shares are a capital asset for Mr. Kumar. He purchased them in April 2018 and sold them in January 2019, i.e., after holding them for a period of less than 12 months. Hence, the shares will be treated as short-term capital assets and short-term capital gains will be applicable to them.

Illustration 7:

Mr. Pujara is a salaried employee at Sundaram Finance in Chennai. In the month of April 2017, he purchased un-listed shares of Chandra Syringes Ltd, a company floated by his distant relative. He sold the same in July 2019 at a profit. How will the capital gains be treated?

In this case, the shares are capital assets for Mr. Pujara and to determine the nature of the capital gain, the period of holding would be considered at 24 months as the shares are unlisted. This is based on the modifications made in the last Union Budget, where such holding period for unlisted equity was reduced from 36 months to 24 months. He purchased the shares in April 2017 and sold them in July 2019, i.e., after holding them for a period of more than 24 months. Hence, the shares will be treated as long-term capital gains and will be taxed accordingly.

While the definition of long-term and short-term assets is fairly clear from the above illustrations, there is one exception that investors need to be conscious of. For e.g., gains on depreciated assets are always taxed as a short-term capital gain only.

Computation of long-term capital gains

Long-term capital gains arising from the transfer of long-term capital assets will be computed as follows:

Particulars Amount Explanation
Full value of consideration (i.e. sales consideration of asset) XXXXX This is the total value of the realized sale
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g. brokerage, commission, ads, etc.) XXXX These are incidental expenses that can be deducted from the value of the sale
Net sale consideration XXXXX This is the net realized value after incidental expenses
Less: Indexed cost of acquisition (*) Purchase price is indexed by the cost inflation index (CII)
Less: Indexed cost of improvement if any (*) Improvement costs can also be indexed using CII
Long-Term Capital Gains Profits on which tax is payable at the extant rate
(*) Indexation is a process by which the cost of acquisition is adjusted against inflationary rise in the value of asset.

Understanding Cost Inflation Indexation (CII) in detail

For this purpose, the central government has notified cost inflation index (CII). The benefit of indexation is available only to long-term capital assets. For computation of indexed cost of acquisition, the following factors are to be considered:

  • Year of acquisition/improvement
  • Year of transfer
  • Cost inflation index of the year of acquisition/improvement
  • Cost inflation index of the year of transfer

Indexed cost of acquisition is computed with the help of the following formula:
{Cost of acquisition × (Cost inflation index of the year of transfer of capital asset/Cost inflation index of the year of acquisition)}

Indexed cost of improvement is computed with the help of following formula:
{Cost of improvement × (Cost inflation index of the year of transfer of capital asset/Cost inflation index of the year of improvement)}

CII: How to rework long-term capital gains?

Cost Inflation Indexation (CII) is a technique to reduce tax payments by employing a price index which adjusts for inflation. In other words, indexation is the process that takes into account inflation from the time you bought the asset to the time you sold it. The purchase date and the sale date are considered as the two data points for the purpose of indexation. The way this works is that it allows you to inflate the purchase price of the asset to take into account the impact of inflation. The end result is that you get the benefit of lowering your tax liability. Inflation erodes the value of the asset over time as we explained earlier and so the tax department gives you a benefit of reducing your capital gains for tax purposes by inflating your cost of acquisition in line with inflation.

There is a practical problem here. If the Income Tax Department were to allow individuals to apply the rate of inflation, then different individuals would apply different rates of inflation. For example, somebody may apply the inflation recorded in June that year, another may apply the May inflation, while somebody could even apply rural inflation, and so on. Similarly, some may apply CPI inflation while others may apply WPI inflation. The need of the hour is to standardize the entire process and that is what the Income Tax Department does through the announcement of annual Index numbers for the purpose of tax calculation.

Check the table on index numbers below:

Index Values announced by Income Tax Department (Base is 2001-12)
FY 2001-02 FY 2002-03 FY 2003-04 FY 2004-05 FY 2005-06 FY 2006-07
100 105 109 113 117 122
FY 2007-08 FY 2008-09 FY 2009-10 FY 2010-11 FY 2011-12 FY 2012-13
129 137 148 167 184 200
FY 2013-14 FY 2014-15 FY 2015-16 FY 2016-17 FY 2017-18 FY 2018-19
220 240 254 264 272 280

The index numbers mentioned above are the guide that all individuals paying capital gains must use for indexing. When you buy an asset in a particular year and sell it the next, you must multiply the original cost of acquisition by the selling year’s index number and divide by the value the buying year’s index number. The result will be the indexed cost of acquisition, which will be higher than the original cost of acquisition. You only need to pay capital gains tax on the indexed value of capital gains which is the difference between the selling value and the indexed cost of acquisition.

Let us see how this works.

Illustration 8:

If you purchase a property in September 2010 for Rs.64 lakh and sell it for Rs.127 lakh in September 2017, then how will your capital gain on this asset be calculated for tax?

Particulars Amount Indexation Amount
Cost of Purchase Rs.64 lakh Actual Capital Gain Rs.63 lakh
Month of Purchase Sept 2010 Indexed Cost of Buy
{63x (272/167)
Fiscal Year FY2010-11 Rs.103 lakh
Sale Value Rs.127 lakh Sale Value Rs.127 lakhs
Month of Sale Sept 2017 Indexed Capital Gain Rs.24 lakhs
Fiscal Year FY2017-18 Taxed at 20% Rs.4.80 lakh

In the above illustration, you are liable to pay LTCG as the property was held for seven years. However, due to indexation, which increases the cost of acquisition from Rs.64 lakh to Rs.103 lakh, the taxable capital gain comes down from Rs.63 lakh to Rs.24 lakh, and hence, the tax paid is just Rs.4.80 lakh. The effective tax paid on LTCG on the sale of this house property, therefore, works out to just 7.6% on Rs.63 lakh. This is the benefit that indexation proffers to the investor when calculating the capital gains tax.

Illustration 9:

Vishal purchased a piece of land in Surat in May 2004 for Rs.84,000 and sold the same in April 2017 for Rs.10,10,000 (brokerage Rs.10,000). What will be the taxable capital gain for Vishal?

Firstly, this asset has been held for 13 years and will classify as long-term capital gains. Here is how the computation of the tax on capital gain will pan out:

Full value of consideration (i.e., Sales consideration of asset) Rs.10.10 lakh
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (brokerage) Rs.10,000
Net sale consideration Rs.10 lakh
Less: Indexed cost of acquisition (Ref Note) Rs.2.02 lakh
Less: Indexed cost of improvement, if any Nil
Long-Term Capital Gains Rs.7.98 lakh

(Note) The cost inflation index notified for the year 2004-05 is 113 as per the IT Department table and for the year 2017-18 it is 272. Hence, the indexed cost of acquisition, i.e., the inflated cost of acquisition will be computed as follows:

Cost of acquisition × (Cost inflation index of the year of transfer of capital asset/Cost inflation index of the year of acquisition) = Rs.84,000 × (272/113) = Rs.2,02,195

Long-term equity gains on equity and equity funds

Long-term capital gains on equity and equity mutual funds were entirely exempt from tax till FY2017-18. That was because, in the Union Budget of 2004, the government had made long-term capital gains on equities tax-free and instead imposed the securities transaction tax (STT) on all transactions in equity, equity funds, futures and options.

However, the Union Budget 2018 announced on February 01, 2018, reintroduced the long-term capital gains tax at a flat rate of 10%. What this flat rate means is that the tax will be imposed at 10% without the benefit of indexation. It does not matter whether you hold the shares for a period for 12 months or for 120 months. You will still pay a flat rate of tax at 10% on the net profits made. Unlike debt funds, which give you the added benefit of indexation, this facility is not available for equity and equity funds. However, there will be a basic blanket exemption of Rs1 lakh each financial year from your total long-term capital gains on equity and equity funds.

Some key conditions pertaining to LTCG tax on equities

Long-term capital gains arising on account of sale of equity shares listed on a recognized stock exchange, i.e., LTCG exempt under Section 10(38) [up to AY2018-19], and those arising on transfer of units of an equity-oriented mutual fund* or units of business trust is not chargeable to tax in the hands of any person, if the following conditions are satisfied:

  • The transaction, i.e. the transaction of sale, should be liable to STT.
  • Such shares/units should be a long-term capital asset.
  • The transfer should have taken place on or after October 1, 2004.

*Equity-oriented mutual fund means a mutual fund specified under Section 10(23D), where 65% of the scheme’s investible funds are invested in equity shares of a domestic company.

In other words, if LTCG is covered under Section 10(38), then it was fully exempt from tax till March 31, 2018.

Exemption from long-term capital gains under Section 10(38) shall be available w.e.f. April 1, 2017, even where STT is not paid, provided that,

  • the transaction is undertaken on a recognized stock exchange located in any International Financial Service Centre, and.
  • the consideration is paid or payable in foreign currency.

Exemption for long-term capital gains arising from the transfer of listed securities as referred to in Section 10(38) has been withdrawn by the Finance Act, 2018, with effect from AY2019-20 and a new Section 112A was introduced in the Income Tax Act.

As per Section 112A, long-term capital gains arising from the transfer of an equity share, or a unit of an equity-oriented fund or a unit of a business trust shall be taxed at 10% (without indexation) of such capital gains. The tax on capital gains shall be levied in excess of Rs.1 lakh.

Taxation on different types of equity shares

Generally, long-term capital gains are charged to tax @20% (plus surcharge and cess as applicable), but in certain special cases, the gain may be (at the choice of the taxpayer) charged to tax @10% (plus surcharge and cess as applicable). However, the benefit of charging long-term capital gain @10% is available only in the following cases:

  • LTCG arising from the sale of listed securities, which exceeds Rs.1,00,000 (Section 112A)
  • LTCG arising from the transfer of any of the following asset:

    a. Any security* that is listed on a recognized, Indian stock exchange

    b. Any unit of UTI or mutual fund (whether listed or not)^; and

    c. Zero coupon bonds#.

*Securities, in this context, means “securities” as defined in Section 2(h) of the Securities Contracts (Regulation) Act, 1956. This definition generally includes shares, scrips, stocks, bonds, debentures, debenture stocks, or other marketable securities of a like nature in or of any incorporated company or other body corporate, government securities, and such other instruments as may be declared by the central government to be securities and rights or interest in securities.

^This option is available only in respect to units sold on or before July 10, 2014.

#Zero-coupon bonds are issued at a discount and redeemed at face value

Long-term capital gains arising from sale of listed securities [Section 112A (w.e.f. AY2019-20]

The Finance Act, 2018, inserted the new Section 112A with effect from AY2019-20. As per the new section, capital gains arising from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity-oriented fund or a unit of a business trust shall be taxed at the rate of 10% over the cap of Rs.1 lakh.

This concessional rate of 10% will be applicable…

  • in the case of an equity share in a company, if STT has been paid on both acquisition and transfer of such capital asset
  • in the case of a unit of an equity-oriented fund or a unit of a business trust, if STT has been paid on the transfer of such capital asset at the point of sale.

The cost of acquisition of a listed equity share acquired by the taxpayer before February 1, 2018 (Union Budget Day), shall be deemed to be the higher of following:

  • The actual cost of acquisition of such asset.
  • Lower of following:
    • Fair market value of such shares as on January 31, 2018; or
    • Actual sales consideration accruing on its transfer.

The fair market value (FMV) of listed equity share means the highest price it quoted on the stock exchange as on January 31, 2018. However, if there is no trading in such shares on January 31, 2018, the highest price of such share on a date immediately preceding January 31, 2018, where trading happened shall be deemed as its fair market value.

In the case of units of a mutual fund which are not listed on a recognized stock exchange, the net asset value of such units as on January 31, 2018, shall be deemed to be its FMV.

In the case where the capital asset is an equity share in a company which is not listed on a recognized stock exchange as on January 31, 2018, but is listed on the date of transfer, the cost of unlisted shares as increased by cost inflation index for the financial year 2017-18 shall be deemed to be its FMV.

Long-term capital gains arising from transfer of specified asset

A taxpayer who has earned long-term capital gains from transfer of any listed security or any unit of UTI or mutual fund (whether listed or not), not being covered under Section 112A, and zero-coupon bonds shall have the following two options:

  • Avails the benefit of indexation: The capital gains so computed will be charged to tax at a normal rate of 20% (plus surcharge and cess as applicable).
  • Does not avail the benefit of indexation: The capital gain so computed is charged to tax @10% (plus surcharge and cess as applicable).

The option should be selected after computing the tax liability under both scenarios, and the option with lower tax liability is to be selected.

Let us see how to practically go about making this decision?

Illustration 10:

Pradeep is a salaried employee with a public limited company. In the month of January 2014, he purchased 100 shares of Paras Chemicals Ltd. @Rs.1,400 per share from the BSE. These shares were sold through BSE in April 2018 @Rs.2,600 per share. The highest price the share quoted on the exchange on January 31, 2018, was Rs.1,800 per share. How will his taxable capital be calculated?

The shares were purchased in January 2014 and sold in April 2018, i.e., after being held for a period of more than 12 months, and hence, the gain will be a long-term capital gain (LTCG).

In the given case, the shares were sold after being held for a period of more than 12 months, were sold through a recognized stock exchange, and the transaction was liable to STT. Therefore, Section 112A is applicable in this case.

The cost of acquisition of shares shall be higher of (a & b):

a. Cost of acquisition, i.e., Rs.1,40,000 (Rs.1,400*100);

b. Lower of:

  • Highest price quoted as on January 31, 2018, i.e., Rs.1,80,000 (Rs.1,800*100);
  • Sales consideration, i.e., Rs.2,60,000 (Rs.2,600*100)

Thus, the cost of acquisition of shares shall be deemed to be Rs.1,80,000 in this case. Accordingly, long-term capital gains in hands of Pradeep would be Rs.80,000 (Rs.2,60,000 minus Rs.1,80,000). Since long-term capital gains don’t exceed the basic LTCG exemption limit of Rs1 lakh, nothing is taxable in the hands of Pradeep. Of course, here we are assuming that Pradeep does not have any other capital gains from equity shares/equity funds. etc. The exemption of Rs1 lakh is a total exemption for all equity gains.

Illustration 11:

Saurabh is a salaried employee working with Harith Crankshafts Ltd. In the month of July 2016, he purchased 100 shares of Ripe Motors Ltd. @Rs.2,000 per share from the BSE. These shares were sold through the NSE in June 2018 @Rs.4,900 per share. The highest price of the share quoted on the stock exchange on January 31, 2018, was Rs.3,800 per share, from where the share price had crashed with a lot of other mid-cap stocks. What will be the nature of capital gains in this case?

The shares were purchased in July 2016 and sold in June 2018, i.e., after being held for a period of more than 12 months, and hence, the gain will be a long-term capital gain (LTCG). Furthermore, the shares were sold through a recognized stock exchange and the transaction is liable to STT. Therefore, Section 112A is applicable in this case.

The cost of acquisition of shares shall be higher of:

a. Cost of acquisition, i.e., Rs.2,00,000 (Rs.2,000*100);

b. Lower of:

  • Highest quoted price as on January 31, 2018, i.e., Rs.3,80,000 (Rs.3,800*100);
  • Sales consideration, i.e., Rs.4,90,000 (Rs.4,900*100)

As per the above, the cost of acquisition of shares shall be Rs.3,80,000. Accordingly, long-term capital gains taxable in hands of Saurabh would be Rs.1,10,000 (i.e., Rs.4,90,000 minus Rs.3,80,000). Since the long-term capital gain exceeds Rs.1,00,000, hence, a flat tax of 10% on the capital gain exceeding the cap of Rs.1 lakh will be payable. Thus, Saurabh will pay an LTCG tax of Rs.1,000 (Rs.10,000*10%) in this case.

Illustration 12:

Pranay Kumar, a non-resident Indian (NRI), purchased equity shares (listed) of Tridib Ltd. in December 1995 for Rs.28,100. These shares were sold (outside a recognized stock exchange) in April 2017 for Rs.5,00,000. He does not have any other taxable income in India. What will be his tax liability?

Since Pranay sold these outside the purview of the stock exchanges, no STT was involved. In this situation, he has the following options:

  • Pay tax at a flat rate of 10% on the capital gains.
  • Pat tax at 20% of the indexed value of the capital gains.

He will have to calculate the tax under both options and opt for the one that is more economical. Let us evaluate these options:

Opt to avail indexation

Full value of consideration: Rs.5,00,000

Less: Indexed cost of acquisition (Rs.28,100 × 272/100): Rs.76,432

Taxable Gain: Rs.4,23,568

Tax at 20% of indexed gains = Rs.84,713

Opt to pay tax at flat rate of 10%

Full value of consideration: Rs.5,00,000

Less: Cost of acquisition: Rs.28,100

Taxable Gain: Rs.4,71,900

Tax at 10% of gains = Rs.47,190

From the above computation, it is clear that Pranay should exercise the second option to pay tax at flat 10% of capital gains, since the tax liability (excluding cess as applicable), in this situation, comes to Rs.47,190, which is less than indexed tax liability (excluding cess as applicable) of Rs.84,713 under option 1.

Illustration 13:

Sankalp, a non-resident Indian (NRI), purchased a piece of land in December 2004 for Rs.50,000 and sold the same in April 2017 for Rs.5,00,000. Can he claim the option of not availing indexation and paying flat tax @10% on the capital gain?

In this situation, land is the asset being transferred, and hence, the two options of 10% vs. 20% are not available in this scenario and the gain will be computed after computing indexation and the resulting gain will be charged to tax @20% (plus surcharge and cess as applicable). Hence, the computation will be as follows:

Full value of consideration: Rs.5,00,000

Less: Indexed cost of acquisition: (Rs.50,000*272/113): Rs.1,20,354

Long-term capital gain: Rs.4,32,361

Tax (@20% on Rs.3,79,646) = Rs.75,929

Add: Health & education cess @4% = Rs.3,037

Total Tax payable = Rs.78,966

Impact of LTCG tax on your financial plans

You will end up paying 10% LTCG tax when you redeem your equity fund corpus. This is important because when you redeem your long-term equity funds, it will predominantly be a capital gain and a very small portion will be the principal amount invested. As such, you will have to pay the flat 10% tax on the gains.

The calculation is on the assumption that LTCG tax will still be in existence at that point in time.

Let us understand the impact with a comparison:

Pre-LTCG Tax Amount Post-LTCG Tax Amount
Retirement SIP monthly Rs.10,000 Retirement SIP monthly Rs.10,000
Tenure of SIP 25 years Tenure of SIP 25 years
Invested in Equity Funds Invested in Equity Funds
CAGR returns 14% CAGR returns 14%
Amount contributed Rs.30,00,000 Amount Contributed Rs.30,00,000
Final Corpus Rs.2,72,72,777 Final Corpus Rs.2,72,72,777
Long-Term Capital Gain Rs.2,42,72,777 Long-Term Capital Gain Rs.2,42,72,777
Basic Exemption N.A. Basic Exemption Rs.1,00,000
Taxable LTCG N.A. Taxable LTCG Rs.2,41,72,777
Tax on LTCG Nil Tax on LTCG at 10% Rs.24,17,278
Net corpus on hand Rs.2,72,72,777 Net corpus on hand Rs.2,48,55,499

The final corpus in the post-LTCG scenario is lower by over Rs.24 lakh. Obviously, the exemption of Rs.1 lakh is too small when we consider the massive capital gains that will result in equities over a period of time. Additionally, this gets more pronounced as there is no indexation benefit available to the investor. Effectively, if the investor had a corpus of Rs.2.72cr in mind, then it is essential to reduce that figure down to Rs.2.48cr. How do you adjust your financial plan accordingly? If you are not comfortable with a reduced corpus for retirement, then the other option is to increase your corpus contribution accordingly.

But the question is by how much?

If you have just started your SIP in the last three-five years, then the thumb rule is to increase your monthly contribution to the SIP by 10%. That means; you can increase your monthly SIP from Rs.10,000 per month to Rs.11,000 per month to ensure that your final corpus is not impacted. While in CAGR yield terms, the impact of LTCG may not be much, it will surely take away a good chunk of your corpus, and hence, you need to build safety net accordingly.

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