You might be aware of the benefits of holding assets for the long term. You get numerous benefits from long-term investing, like compounding and potential inflation-beating returns. As we know, along with returns come taxes. And, for our long-term investments, we must pay an LTCG or a long-term capital gains tax.
The long-term capital gains tax applies to the long-term possession of assets like equities, debt, mutual funds, commodities like gold and silver and commercial and residential real estate property. But, how much long-term capital gains tax do we have to pay? More importantly, when do you have to pay these taxes?
Let’s look at the nitty-gritty of long-term capital gains tax in India in detail.
Consider that you invested in equity shares of a company. Your purchase value of these assets was ₹1 lakh in January 2018, and you sold these shares at ₹5 Lakhs in July 2022. The difference between buying and selling security is more than three years. Therefore, an LTCG tax would apply to the capital gains.
But you have a saviour here, called inflation. Your LTCG will be calculated considering inflation.
So, you can calculate your LTCG tax by following these steps:
Let’s calculate this for our example.
Examine the table below:
Therefore, you will be taxed at 10% because your capital gains are above ₹1 Lakh.
Your LTCG tax on this redemption will be 10% of ₹1.69 Lakhs, which is ₹16,900.
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To calculate the cost of indexation, you can refer to the CII figure for the year of asset sales. Considering indexation can help you calculate the impact of inflation on your returns over your investment period. Deducting the indexation amount from your gains reduces your taxable gains.
If you have made capital gains on selling a residential or commercial property, your tax implications will be 20% plus other charges (20.8%). However, you can get tax benefits through exemptions under Section 54, 54B and 54EC. However, there are certain limits on the reinvestment period and the amount of capital gains for availing of these exemptions.
These tax exemptions are as follows:
These exemptions can be availed only once in a lifetime by you on capital gains through property not exceeding ₹2 crores. Here, you can avail of a tax exemption if you use the capital gains to purchase another property (two or less in numbers). You can avail of this benefit by purchasing a move-in property or undertaking its complete construction within a specified period.
Under this section, you can avail of tax exemption of your profits by reinvesting them in capital gains bonds. These bonds are issued by institutions like the National Highways Authority of India (NHAI) and the REC and have a maturity period of five years. Premature redemption of your investments under these instruments will result in the withdrawal of the tax benefit obtained.
You can also avail of tax exemptions by purchasing agricultural land from the gains through your property sales. However, this land purchase should be completed within a specified period. Also, you will not be able to sell this property for a certain period if you wish to avail of a tax exemption.
You only have to pay capital gains tax on selling an asset. No taxes are applicable on their purchase and during the holding period of any security.
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Different long-term capital gain tax rates apply to different securities in India. While you make investment plans to reach your financial goals, it is essential to make them in advance. This would prevent you from unpleasant surprises while filing tax returns. It is also important to consider the impact of inflation while you are calculating your tax implications. Effective tax planning is an integral part of your financial planning process.
There are different LTCG tax rates for different assets in India. Please refer to the table below for LTCG tax rates applicable in 2022.
No, there are different long term capital gains tax rates for different types of securities in India.
