Long term capital gain tax exemption
Understanding Long Term Capital Gain: Budget 2024 Updates and Tax-Saving Tips
In this post, We will discuss the changes to long-term capital gains tax expected in Budget 2024-25. From revised holding periods to new tax rates and exemptions, we’ll discuss the significant changes, how they affect taxpayers, and how to save on LTCG tax.
Let’s take a closer look at these sections:
Budget 2024 Updates on Long Term Capital Gains
Proposed Key Changes for the Financial Year 2024-25:
1.Simplified Capital Asset Holding Periods:
The 36-month holding period has ended.
New holding periods:
- 12 months for securities that are listed.
- 24 months for real estate and all other assets.
2.Asset Classification Updates:
- Listed stocks that have been held for more than a year are now considered long-term capital assets.
- Another type of long-term capital asset is property that has been owned for more than 24 months.
3.Short-Term Capital Gains Tax:
- Individual slab rates continue to apply to STCG on property sales.
What is Long-Term Capital Gain?
A long-term capital gain (LTCG) happens when you sell an asset or investment that you have held for a certain period. This holding period, which determines whether the gain is considered “long-term,” varies depending on the kind of asset.
For example, public stock shares and equity-oriented mutual funds become long-term assets if kept for over a year. In contrast, unlisted shares and real estate, such as buildings or land, must be held for more than 24 months.
The tax rate for long-term capital gains changes by asset category. Gains over ₹1 lakh per year from listed equities shares or equity mutual funds are taxed at 10%. LTCG from other assets is taxed depending on your income tax bracket. These guidelines establish a structured approach to taxing long-term gains from a variety of assets.
Long-Term Capital Gains Tax Rates
Long-term capital gains (LTCG) are generally taxed at 20% (plus surcharge and cess). However, a lesser rate of 10% (plus fee and cess) may be applicable under some conditions.
The 10% tax rate benefit is only possible in the following situations:
- Listed Securities Gains Over Rs. 1,00,000: Section 112A applies to gains exceeding Rs. 1,000,000 from the sale of listed securities.
- Specific Asset Transfers:
- Securities are listed on recognized Indian stock exchanges.
- Units of UTI or mutual funds (listed or unlisted), sold on or before July 10, 2014.
- Zero-coupon bonds.
Understanding Securities
Section 2(h) of the Securities Contracts (Regulation) Act, 1956 defines “securities” as shares, stocks, bonds, debentures, government securities, or other instruments.
Tax Rates for Capital Gains
| Type of Tax | Condition | Tax Rate |
| LTCG Tax | On selling equity shares/units of equity-oriented funds | 10% (on gains exceeding Rs. 1,00,000) |
| LTCG Tax | Other cases | 20% |
| Short-Term Capital Gains (STCG) | If Securities Transaction Tax (STT) is not applicable | As per income tax slab |
| STCG | If STT is applicable | 15% |
Calculation of LTCG Tax
The LTCG tax applies to earnings earned from selling an asset held for more than 24 months. The tax rate varies depending on the asset type and the holding period.
In India, the LTCG tax for equities, mutual funds, and stocks is 12.5% if gains exceed ₹1.25 lakh per financial year. The same 12.5% rate applies to real estate, gold, and debt mutual funds, but with an indexation benefit.
Steps to Calculate LTCG Tax
- Determine the asset’s Sell Value.
- Calculate the cost of acquisition.
- Calculate the indexed cost of acquisition (if applicable).
- Calculate the Long Term Capital Gains (LTCG).
- To apply the tax rate, use the following formula:LTCG Tax = (Gains – Exemption Amount) × Tax Rate
- Gains = ₹15 lakh – ₹1 lakh = ₹14 lakh
- Tax = ₹14 lakh × 10% = ₹1,40,000
- Gains = ₹15 lakh – ₹1.25 lakh = ₹13.75 lakh
- Tax = ₹13.75 lakh × 12.5% = ₹1,71,875
Long Term Capital Gains Exemption
Capital gains up to ₹1.25 lakh per year from equity investments are exempt from tax.
- Long-term Capital Gains (LTCG):
- Equity shares & equity mutual funds: Taxed at 12.5% on gains exceeding ₹1.25 lakh.
- Other assets: Taxed at 12.5%.
Short-term Capital Gains (STCG): Taxed at 15% for equity shares and equity mutual funds.
Saving Tax on Long-Term Capital Gain
Here are some practical ways to save Tax on long-term capital gains:
1. Investing in Residential Property
You can reduce your taxes by purchasing or building a new residential home. Sections 54 and 54F cover this:
- Section 54:
You may be eligible for an exemption if you sell your home and utilize the capital gains to buy or build a new one.- The new home must be purchased within 1 year before or 2 years after the transaction. The construction should be completed within 3 years.
- To obtain the full exemption, you must invest your whole capital gain. If only a portion of it is used, the balance gets taxed.
- The exemption is only valid for purchasing or building one house in India.
- Section 54F:
You can save money on taxes if you sell an asset other than a house and use the proceeds to buy or build another home.- If you want to claim full exemption, you must invest the entire sale price, not just the capital gain. Partial use results in proportional tax.
- Other conditions are similar to Section 54.
2. Investing in Bonds (Section 54EC)
A different way to save tax is to invest the capital gains in bonds issued by NHAI or RECL within 6 months of sale.
3. Capital Gains Account Scheme
- Funds must be used within three years to purchase or build a home.
- If the funds are used for other purposes, they become taxable as long-term capital gains.
FAQs
1. How much capital gain is tax-free on property?
Ans: Section 54 allows individuals to obtain a tax exemption on capital gains. An individual can only use this exemption once in their lifetime, provided that the capital gains do not exceed Rs. 2 crore.
2. Do I have to pay tax on losses in long-term capital gains?
Ans: No. In this situation, the losses can be balanced against the cost of investments for the current financial year. To take advantage of this benefit, however, you must submit taxes.
3. What is the tax rate on long-term capital gains from selling residential property?
Ans: Long-term capital gains from selling real estate are taxed at a set rate of 20%.
4. How may I reduce capital gains taxes on property sales?
Ans: You can avoid capital gains tax on property sales by reinvesting the proceeds in the purchase of a new property.
5. Should I file ITR 1 if my income includes capital gains?
Ans: If the profit falls under capital gains, no ITR should be filed. Details about this can be provided in ITR 2.
