Are you looking to make some long-term investments but worried about the new LTCG tax?
Don’t worry. We have got you covered! This guide will break down everything you need to know about the new LTCG tax, Mutual Funds LTCG, and LTCG tax on the property so that you can make informed decisions about your investments.
You will be able to learn about the different types of investment vehicles available and how the new tax rate of LTCG will impact each one. We will cover what the tax is, how it might affect your business, and what steps you can take to get yourself prepared for it.
With this information, you will be able to invest with confidence and get the most out of your money. So let’s understand this concept in depth!
Learn the Basics- The concept of LTCG tax
Before we get into the details of LTCG tax, it is imperative to understand the concept of a long-term capital asset. In a nutshell, generally, long-term capital assets are those held for more than 36 months, with certain exceptions. For example, an immovable property (such as a building, land, etc.) qualifies as a long-term capital asset if the holding period exceeds 24 months.
Similarly, if you hold the equity shares of a listed company or units of equity mutual funds for more than 1 year, it is deemed as a long-term capital asset. Once you sell your long-term capital asset, the income generated from it will be subject to long-term capital gains tax or LTCG tax in the year in which the income is generated.
Thus, the tax rate of LTCG is imposed on the gain realised from the sale of assets such as stocks, bonds, and real estate, which are held as per the above tenure. The tax rate depends on the asset’s holding period and the taxpayer’s marginal tax bracket. There are various ways to get exemption from the LTCG tax.
For example, investors may be reluctant to sell assets that they have appreciated because of the tax implications. This can lead to sub-optimal portfolio management and investment decisions. So, instead of making quick and wrong decisions, it is important for you to know how you can get exemption from LTCG tax (we will discuss that later in the blog).
· LTCG tax is levied on the income generated on a long-term capital asset sale.
· The LTCG tax is levied in the year the relevant income from the disposal of the long-term capital asset is generated.
· To qualify as a long-term capital asset, the period of holding of such asset is relevant.
· Indexation is an important concept for calculating the applicable LTCG tax.
· The tax rate of LTCG varies between 10% and 20%, depending on the nature of the asset.
When do you become liable for paying LTCG tax?
When you sell an investment that has provided returns for more than 1 year but less than 3, the profits are taxed as “long-term” capital gains. If you have held an investment for three full cycles before transferring it, then the return on your sale will qualify as long term and therefore be taxed at lower rates than regular income. Following are some investments that can be considered as long-term capital gains:
1. Sale of property– Money from the sale of a property can be considered long-term capital gains.
2. Mutual Funds LTCG– Long-term capital gains may arise from investment in equity mutual funds and debt mutual funds. Although, the mutual funds LTCG would vary depending upon whether it is a mutual debt fund or equity mutual fund. Mutual funds will give you great returns if invested for 1 year or more.
3. Stocks- Stocks may be a great way to build your wealth over time, with the potential for higher rates of return than bonds or other asset classes. Stocks are more volatile in price movements but can offer greater opportunities if you’re willing to take risks. The LTCG on listed equity shares above the amount of Rs 1 lakh per financial year is taxable at the rate of 10% and you will not get the benefit of indexation.
4. Sale of Agricultural Land- The income generated from the sale of agricultural land is treated like other income from long-term investments for tax purposes if the said land was held for a minimum of 1 year before being sold. In such a case, the profits generated from the sale will be taxed.
Tax on LTCG on Shares
If you’re an investor in the stock market, you’re probably aware of a tax on LTCG on shares. The tax rate on LTCG on equity shares is 10% over and beyond Rs. 1 lakh. This tax is imposed on any gains made from the sale of shares that have been held for more than one year.
How Do We Calculate Long-Term Capital Gains (LTCG Tax)?
Calculation of long-term capital gains can be complicated, but they are not as difficult to understand when you know the three essential aspects. First, what was the amount invested initially? What was the price at which you disposed of the asset? What is the applicable cost of the inflation index?
We calculate LTCG tax by subtracting the cost basis of an asset from its current market value. The cost basis is usually the original purchase price, plus any improvements made to the asset.
To figure out your LTCG tax, you will need to know both your cost basis and the current market value of the asset in question. You can find the current market value by checking online listings or contacting a professional appraiser.
To calculate capital gains, you will first have to ascertain the indexed cost of acquisition. Simply put, you can ascertain the indexed cost of acquisition of an asset by dividing the consumer inflation index of the year of sale by the consumer inflation index of the year of purchase and multiplying the resultant figure with the asset’s purchase price.
For instance, if “A” bought a house for Rs. 5 lakhs in 2004, 3 years later, he wants to sell the house at Rs. 15 lakhs. Suppose we assume that the consumer inflation index (CII) during the time of buying the house was 220 and at the time of selling the house was 280.
The indexed cost of acquisition will be: 5,00,000 X (280/220) = 636,363
The resulting capital gains will be: 15,00,000 – 636,363 = 8,63,637
Tax on LTCG on Property
The government has created special circumstances to ease the taxes on capital gains. These exemptions can reduce from 20% down to 10% when eligible. The surcharges will remain constant so as not to put any excessive burden on taxpayers. The basic LTCG tax applied by law is twenty percent (20%) with extra fees added whenever applicable, such as education cess or medical expenses, etc.
Exemptions of LTCG Tax
The government understands that in various cases the tax amount to be paid can be a huge amount. To alleviate this stress on taxpayers and make sure everyone pays their fair share of taxes, certain exemptions are provided for either making it easier for the taxpayer or removal from paying any amounts due. These include:
· The first Rs. 2.5 lakhs of capital gains are exempt from tax.
· Gains on the sale of a principal residence are exempt from tax.
· Gains on the sale of certain small businesses and farms are exempt from tax.
Certain assets may be eligible for special treatment or exclusion from tax.
Did you know?
· The short-term capital gains tax is applied to how long you hold onto an asset. If it is sold before qualifying for LTCG tax, then a higher rate of taxes will be imposed on that transaction, but if they’re held longer than one year, they won’t have any additional fees.
· If you plan to sell your house in India and buy a house in another country, no exemption on LTCG will be applicable. To apply for the exemption from LTCG tax, you must buy or construct a new property in India and not in some other country.
· If you are looking to avoid the tax on LTCG on shares, one option is to invest in exchange-traded funds (ETFs) that track indexes. ETFs are not subject to the tax, so you will only owe taxes on your gains when you sell the ETF.
Words to remember
Short-term capital gain- It is the tax that is levied on profits that you get from selling assets that you held as per the government’s prescribed short-term period. The exemption limit for an STCG is Rs. 2,50,000 for resident individuals who are below 60 years. It is Rs. 2,50,000 for NRIs irrespective of their age.
That is a lot of information to absorb, but we hope that this article has helped you understand the basics of LTCG tax. If you have any questions or concerns about your finances, it is recommended to always consult a tax professional; it will help you save taxes plus ensure that you are paying the right amount.
Remember, it is always important to stay up-to-date on the latest changes in the tax code to make informed decisions about your finances.
Thanks for reading!
A. Generally speaking, long-term capital assets are those assets that are held for more than 3 years. Depending on the nature of the asset, an asset may qualify as a long-term capital asset if held for 1-3 years or more.
A. Tax levied on the income generated on the disposal of long-term capital assets is called LTCG tax.
A. Yes, the LTCG tax is levied in the same year in which the income from the disposal of the long-term capital asset is generated.
A. Yes, the rates are different.
A. First, you find out the indexed cost of acquisition of the asset. Then deduct the indexed cost of acquisition from the sale proceeds of the asset.