What is Long Term Capital Gains - Explainer and Calculations

Detailed explanation on Long Term Capital Gains Taxation as per Income Tax Act in India along with definition and case study

What is Long Term Capital Gains - Explainer and Calculations

There are essentially two types of capital gains taxes that we are aware of:

  1. Short-term Capital Gain Tax
  2. Long-term Capital Gain Tax

The tax levied on long-term capital gains is known as the long-term capital gain tax. Long-term Capital Gains are those gains that are determined after selling an asset that has been held for more than three years. Any capital asset that the taxpayer owned for more than three years prior to the transfer date will be regarded as a long-term capital asset.

However, the period of holding to be taken into account is 1 year rather than 3 years in cases of certain assets like equity shares or preference shares that are listed in a perceived stock exchange in India (listing of shares is not required if transfer of such shares happened on or before the date of July 10, 2014), units of equity oriented mutual funds, listed debentures and government securities, units of UTI and zero coupon bonds. The length of holding should be presumed to be 2 years rather than 3 years in the case of unlisted company shares or an immovable asset, such as land or a structure or both.

Long-term Capital Gains technicality, Section 10(38), and Section 112A

Sales of equity shares listed on a simulated stock market that result in long-term capital gains, or long-term capital gains exempt from taxation under section 10(38). (Upto Assessment year 2018-19). In accordance with section 10(38), long-term capital gains resulting from the transfer of equity shares, units of equity oriented mutual funds (defined as mutual funds specified under section 10(23D), and business trust units are not subject to tax in the hands of any person if the following requirements are met:

  • Securities transaction tax should apply to the sale of business trust units, equity-oriented mutual fund units, or equity shares.
  • These shares or units ought to be long-term investments.
  • The transfer was supposed to occur on or after October 1, 2004.

Section 112A states that long-term capital gains resulting from the transfer of equity shares, units of equity-oriented funds, or units of business trusts will be taxed at a rate of 10% without indexation. A surplus of Rs.1 lakh will result in the payment of capital gains tax.

Also read, Detail explanation of Capital gain Tax.

Tax Rate on long-term capital gain

Long-term capital gains are subject to a 20 percent tax rate, plus any relevant surcharges and cess. However, in some unique circumstances, the taxpayer may elect to have the gain taxed at a rate of 10%, plus any relevant surcharges and cess. Only in the following circumstances is it advantageous to charge long-term capital gains at a 10% rate:

  • Long-term capital gains resulting from the sale of securities that are listed on a stock exchange that exceed Rs. 1,000,000 as specified in Section 112A.
  • Long-term capital gains attributable to the transfer of any of the assets listed below: Any security (such as shares, scrips, stocks, bonds, debentures, debenture stocks, or other marketable securities of a similar kind in or of any incorporated firm or other body corporate, Government securities, such other instruments as might be declared by the Central Government to be securities, and rights or interests in securities) that is listed in a reputed stock exchange in India is considered to be a security (As amended by Finance Act, 2020) c) Any unit of a mutual fund or UTI, whether it is listed or not. When it comes to items that were sold on or before October 7, 2014, this option c) Bonds with no coupon

Long-term capital gains arising from the sale of listed securities [Section 112A - effective with the 2019–20 assessment year]

The Finance Act of 2018 adds a new Section 112A, which will take effect in Assessment Year 2019–20. The new clause stipulates that capital gains arising from the transfer of a long-term capital asset, such as an equity share in a corporation, a unit in an equity-oriented fund, or a unit in a business trust, will be subject to taxation at a rate of 10% of such capital gains over Rs. 1,000,000.

Before February 1, 2018, a listed equity share purchased by the taxpayer will be valued at whichever of the following is higher: A) The real cost of the asset's acquisition; or B) The smaller of the following: I The fair market value of the shares as of January 31, 2018; or (ii) The actual sales price paid when the share was transferred.

Gains made over the long period due to the sale of a specific asset

The following two options are available to a taxpayer who has long-term capital gains from the transfer of any listed security, listed or unlisted mutual fund, any unit of UTI, and zero coupon bonds that are not covered by Section 112A:

  • Take advantage of indexation; the capital gains so calculated will be subject to a 20 percent standard tax rate, plus any relevant surcharge and cess.
  • No avail of advantage of indexation; The capital gain estimated is levied at the tax rate of 10% in addition to surcharge and cess as found relevant.

Long-term Capital Gains Adjustment (Exemption)

The term "basic exemption limit" refers to the amount of income below which a person is exempt from paying any tax, implying that there will be no tax responsibility if the taxpayer's income is below the basic exemption limit. For the fiscal year 2019–20, the basic exemption threshold that applies to an individual is as follows:

  • The exemption limit is Rs.5,00,000 for resident individual of the age of 80 years or above.
  • The exemption limit is Rs.3,00,000 for resident individual of the age of 60 years or above but below 80 years.
  • The exemption limit is Rs.2,50,000 for resident individual of the age below 60 years.
  • The exemption limit is Rs. 2,50,000 for non-resident individual regardless of the age of the individual.
  • The exemption limit is Rs.2,50,000 for Hindu Undivided Family (HUF).

Only a resident individual or resident HUF may request a change to the long-term capital gain exemption limit. Therefore, a non-resident individual or HUF was unable to modify the exemption ceiling for long-term capital gains. Short-term capital gains can be adjusted by a resident individual or HUF, although such an adjustment is only possible after other income has been adjusted. In other words, first income other than long-term capital gains would be adjusted against the exemption limit (as modified by Finance Act, 2020) and then the residual limit might be adjusted against LTCG.

Deductions

In accordance with sections 80C to 80U, long-term capital gains are not eligible for deductions.

FAQ’S

1. What does long-term capital gain tax mean?

The tax levied on long-term capital gains is known as the long-term capital gain tax. Long-term Capital Gains are those gains that are determined after selling an asset that has been held for more than three years.

2. Define long-term capital asset?

Any capital asset that the taxpayer owned for more than three years prior to the transfer date will be regarded as a long-term capital asset.

3.Does the Long-term Capital Gains Tax have several tax brackets?

Long-term capital gains are subject to a 20 percent tax rate, plus any relevant surcharges and cess. However, in some unique circumstances, the taxpayer may elect to have the gain taxed at a rate of 10% in addition to any relevant surcharges and cessations.

4.In what circumstances might the 10 percent long-term capital gain tax rate benefit be accessed?

Only in the following circumstances is it advantageous to charge long-term capital gains at a 10% rate:

1) Long-term capital gains resulting from the sale of securities that are listed on a stock exchange that exceed Rs. 100,000 as per Section 112A
2) Long-term capital gains attributable to the sale of a particular asset

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