Long Term Capital Gain Tax

TAX ON LONG-TERM CAPITAL GAINS

Introduction

Gain arising on transfer of capital asset is charged to tax under the head “Capital Gains”.Income from capital gains is classified as “Short Term Capital Gains” and “Long Term Capital Gains”. In this part you can gain knowledge about the provisions relating to tax on Long Term Capital Gains.

Meaning of Capital Gains

Profits or gains arising from transfer of a capital asset are called “Capital Gains” and are charged to tax under the head “Capital Gains”.

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 long-term capital asset.
• However, in respect of certain assets like shares (equity or preference) which are listed in a recognised 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 to be considered is 12 months instead of 36 months.
• Note: Period of holding to be considered as 24 months instead of 36 months in case of unlisted shares of a company and immovable property being land or building or both.

Illustration
Mr. Kumar is a salaried employee. In the month of April, 2015 he purchased a piece of land and sold the same in December, 2023. In this case, land is a capital asset for Mr. Kumar. He purchased land in April, 2015 and sold in December, 2023 i.e. after holding it for a period of more than 24 months. Hence, land will be treated as long-term capital asset.

Illustration
Mr. Raj is a salaried employee. In the month of April, 2022, he purchased a piece of land and sold the same in December, 2023. In this case land is a capital asset for Mr. Raj. He purchased land in April, 2022 and sold it in December, 2023, i.e., after holding it for a period of less than 24 months. Hence, land will be treated as short-term capital asset.

Illustration
Mr. Raj is a salaried employee. In the month of April, 2022 he purchased equity shares of SBI Ltd. (listed in BSE) and sold the same in December, 2023. In this case shares are capital assets for Mr. Raj. He purchased shares in April, 2022 and sold them in December, 2023, i.e., after holding them for a period of more than 12 months. Hence, shares will be treated as long-term capital assets.

Illustration
Mr. Kumar is a salaried employee. In the month of April, 2023 he purchased equity shares of SBI Ltd. (listed in BSE) and sold the same in January, 2024. In this case shares are capital assets for Mr. Kumar. He purchased shares in April, 2022 and sold them in January, 2024, i.e., after holding them for a period of less than 12 months. Hence, shares will be treated as short-term capital assets.

Illustration
Mr. Kumar is a salaried employee. In the month of April, 2022 he purchased un-listed shares of XYZ Ltd. and sold the same in January, 2024. In this case shares are capital assets for Mr. Raj and to determine nature of capital gain, period of holding would be considered as 24 month as shares are unlisted. He purchased shares in April, 2022 and sold them in January, 2024, i.e., after holding them for a period of less than 24 months. Hence, shares will be treated as Short Term Capital Assets.

Illustration
Mr. Raj is a salaried employee. In the month of April, 2014 he purchased un-listed shares of XYZ Ltd. and sold the same in December, 2023. In this case shares are capital assets for Mr. Raj and to determine nature of capital gain, period of holding would be considered as 24 month as shares are unlisted. He purchased shares in April, 2014 and
sold them in December 2023, i.e., after holding them for a period of more than 24 months. Hence, shares will be treated as Long Term Capital Assets.

 

Computation of long-term capital gains

Long-term capital gain arising on account of transfer of long-term capital asset will be computed as follows :

Particulars                                                                                                                        Amount (Rs.)

Full value of consideration (i.e., Sales consideration of asset)                                           XXXXX

Less: Expenditure incurred wholly and exclusively in connection with
transfer of capital asset (E.g., brokerage, commission, advertisement expenses, etc.).     (XXXXX)

Net sale consideration                                                                                                     XXXXX

Less: Indexed cost of acquisition (*)                                                                                  (XXXXX)

Less: Indexed cost of improvement if any (*)                                                                    (XXXXX)

Long-Term Capital Gains                                                                                                 XXXXX

*) Indexation is a process by which the cost of acquisition is adjusted against inflationary rise in the value of asset. For this purpose, Central Government has notified cost inflation index. The benefit of indexation is available only to long-term capital assets.

For computation of indexed cost of acquisition 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 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

The Central Government has notified the following Cost Inflation Indexes:-
Sl. No.     Financial Year        Cost Inflation Index

1             2001-02                  100
2             2002-03                  105
3             2003-04                  109
4             2004-05                  113
5             2005-06                  117
6             2006-07                  122
7             2007-08                  129
8             2008-09                  137
9             2009-10                  148
10            2010-11                  167
11            2011-12                  184
12            2012-13                  200
13            2013-14                  220
14            2014-15                  240
15            2015-16                  254
16            2016-17                  264
17            2017-18                  272
18            2018-19                  280
19            2019-20                  289
20            2020-21                  301
21            2021-22                  317
22            2022-23                  331
23.           2023-24                  348
(provisional)

 

Tax on long-term capital gain

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 option of the taxpayer) charged to tax @ 10% (plus surcharge and cess as applicable).

The benefit of charging long-term capital gain @ 10% is available only in following cases:
1) Long-term capital gains arising from sale of listed securities and it exceeds Rs.1,00,000 (Section 112A);
2) Long-term capital gains arising from transfer of any of the following asset:
a) Any security (*) which is listed in a recognised stock exchange in India;
b) Any unit of UTI or mutual fund (whether listed or not) ($); and
c) Zero coupon bonds

(*) Securities for this purpose 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, 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 of units sold on or before 10-7-2014

Long-term capital gains arising from sale of listed securities

Section 112A provides that capital gains arising from 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 per cent of such capital gains exceeding Rs.1,00,000.
This concessional rate of 10 per cent will be applicable if:
a) in a case of an equity share in a company, securities transaction tax has been paid on both acquisition and transfer of such capital asset; and
b) in a case a unit of an equity oriented fund or a unit of a business trust, STT has been paid on transfer of such capital asset.
The cost of acquisitions of a listed equity share acquired by the taxpayer before February 1, 2018, shall be deemed to be the higher of following:
a) The actual cost of acquisition of such asset; or
b) Lower of following:
(i) Fair market value of such shares as on January 31, 2018; or
(ii) Actual sales consideration accruing on its transfer.

The Fair market value of listed equity share shall mean its highest price 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 on which trading happens in that share shall be deemed as its fair market value.

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

In a case where the capital asset is an equity share in a company which is not listed on a recognised stock exchange as on 31-1-2018 but 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:
a. Avail of the benefit of indexation; the capital gains so computed will be charged to tax at normal rate of 20% (plus surcharge and cess as applicable).
b. Do not avail of the benefit of indexation; the capital gain so computed is charged to tax @ 10% (plus surcharge and cess as applicable).
The selection of the option is to be done by computing the tax liability under both the options, and the option with lower tax liability is to be selected.

Adjustment of LTCG against the basic exemption limit

Basic exemption limit means the level of income up to which a person is not required to pay any tax

Illustration
Mr. Kapoor (age 67 years and resident) is a retired person. He purchased a piece of land in December, 2013 and sold the same in April, 2022. Taxable long-term capital gain on such sale amounted to Rs. 1,84,000. Apart from gain on sale of land, he is not having any other income. What will be his tax liability for the year 2022-23?

For resident individual of age of below 60 years, the basic exemption limit is Rs. 2,50,000. In this case the taxable income of Mr. Kapoor is Rs. 1,90,000 (Rs. 1,84,000 + Rs. 6,000), which is below the basic exemption limit of Rs. 2,50,000, hence, his tax liability will be nil.

Illustration
Mr. Kapoor (age 67 years and resident) is a retired person earning a monthly pension of Rs. 5,000. He purchased gold in December, 2012 and sold the same in April, 2022. Taxable LTCG amounted to Rs. 3,70,000. Apart from pension income and gain on sale of gold he is not having any other income. What will be his tax liability for the year 2022-
23?

For resident individual of the age of 60 years and above but below 80 years, the basic exemption limit is Rs. 3,00,000. Further, a resident individual can adjust the basic exemption limit against LTCG. However, such adjustment is possible only after adjusting income other than LTCG. In this case, he is having pension income of Rs. 60,000 (Rs.5,000 × 12) and LTCG on gold of Rs. 3,70,000. Thus, first we have to adjust the pension income against the exemption limit and the balance limit will be adjusted against LTCG.

The basic exemption limit in this case is Rs. 3,00,000, after adjustment of pension income of Rs. 60,000 from the exemption limit of Rs. 3,00,000 the balance limit available will come to Rs. 2,40,000. The balance of Rs. 2,40,000 will be adjusted against LTCG.

Total LTCG on gold is Rs. 3,70,000 and the available limit is Rs. 2,40,000, hence, the balance LTCG left after adjustment of Rs. 2,40,000 will come to Rs. 1,30,000. The gain of Rs. 1,30,000 will be charged to tax @ 20% (plus health & education cess @ 4%).Thus, the tax liability before cess will come to Rs. 26,000 and after deducting rebate of Rs. 12,500 as per section 87A, he would be liable to pay tax of Rs. 14,040 (including health & education cess @ 4%).

Deductions under sections 80C to 80U and LTCG

No deduction under sections 80C to 80U is allowed from long-term capital gains.