Long-Term Capital Gains (LTCG): Tax Rates, How to Calculate, Exemptions and Examples

Any profit/gains arising from the transfer of capital assets such as property, shares, bonds, etc., are subject to income tax under the head "Income from Capital Gains." 

Long Term Capital Gains (LTCG) arise from sale of capital assets like stocks, properties etc., held for a period of more than 24 months (12 months in case of listed shared and equity funds).  The tax rate on Long Term Capital Gains is 12.5% for all capital assets. However, for listed equity shares, equity-oriented funds, and units of business trusts, the LTCG exceeding Rs. 1.25 lakh will be taxed flat at 12.5%.

Read this article to learn more about Long-Term Capital Gains and their taxability.

What is Long-term Capital Gain (LTCG)?

• Capital gains/profits arising from the transfer of Long-Term Capital Assets is referred to as Long-Term Capital Gains or LTCG. 
• An asset held for more than 24 months is termed as a long term capital asset.
• For listed equity shares, equity oriented funds, and units of business trust, the holding period is 12 months. (if held for more than 12 months, they are considered long term capital assets)

The Long-Term Capital Gains taxation is divided into two sections: Section 112 and Section 112A. 

Section 112A applies in the case of the following assets:

• Equity share in a listed company
• Unit of equity-oriented fund
• Unit of business trust

Section 112 applies to all other cases of Long-Term Capital Gains not covered under Section 112A.

Long-term Capital Gain (LTCG) Tax Rate 

The following tax rates are applicable to long-term capital gains:

Calculation of LTCG Tax

To calculate the long-term capital gains accurately, follow the steps mentioned below:

Step 1: Determine the Full value of consideration

The total amount received from the transfer of capital assets. It includes the monetary payment received or fair market value in certain specified circumstances.

Step 2: Determine the Net value of Consideration

The net value of consideration is determined by deducting expenses related to transfer such as commission, brokerage, etc.

Step 3: Calculate the Cost of Acquisition 

The purchase price of the asset is to be determined, and in the case of assets which get indexation benefits (like immovable property), we have to adjust the cost of acquisition using the Cost Inflation Index, which the government notifies every year. Indexation benefit has been removed for transfer made after 23rd July, 2024.

The formula for calculating the indexed cost of acquisition is:

Indexed cost of acquisition = Cost of acquisition x (CII of the year of transfer / CII of the year of acquisition)

Note: The benefit of indexation is available only for individuals and HUF on sale of land and building.

Step 4: Deduct exemptions under section 54/54B/54D/54EC/54F

Certain types of long-term capital gains may be eligible for exemptions under specific conditions (e.g., reinvestment in certain assets like residential property).

Step 5: Long-Term Capital Gains chargeable to tax

The long-term capital gains chargeable to tax formula is:

LTCG chargeable to tax = Net sale consideration - Cost of Acquisition - Cost of Improvement - Exemptions under Section 54/54B/54D/54EC/54F.

Step 6: Long Term Capital Gains Tax

12.5% tax rate is applied on LTCG amount chargeable to tax. If the indexation benefit is applied, 20% tax rate is applied. If listed equity shares, equity oriented mutual funds are sold, Rs. 1.25 lakhs exemption can be applied.

Calculation of LTCG in a Table Format

For Sale Before 23rd July 2024

For Sale On or After 23rd July 2024

The computation of long-term capital gain can be best understood through the following table:

* Indexation benefit removed for sale made from 23rd July, 2024  - but made available only for land and building by resident individuals and HUF.

Long-term Capital Gain Tax Exemptions

• There are various exemptions available under the Income-tax Act that help reduce the LTCG chargeable to tax if the capital gain amount is reinvested in certain specific assets or instruments. 
• Certain conditions have to be fulfilled to claim deductions against capital gains.

One of the popular exemptions is investment in notified bonds under Section 54EC. This exemption is available on Long Term Capital Gain on any asset.

Long-term Capital Gain Example (With Indexation)

John bought a house in 2005 for Rs. 20 lakhs. He sold it in August 2024 for Rs. 65 lakhs. Now he has an option of choosing the tax rate of 12.5% without indexation or 20% with indexation. The Cost Inflation Index (CII) for 2005-06 is 117 and for 2024-25 is 363. 

The Long-Term Capital Gains will be calculated as follows:

As indexation benefit has been considered in the above example, the tax on said transfer will be applicable at the rate of 20%.

Long-term Capital Gain Example (Without Indexation)

John bought a house in 2005 for Rs. 20 lakhs. He sold it in August 2024 for Rs. 65 lakhs. The Long-Term Capital Gains without indexation will be calculated as follows:

Since the indexation benefit has not been availed, the capital gain of Rs. 45,00,000 will be taxed at 12.5%. 

Long-Term Capital Gains Exemption

The exemption on Long-Term Capital Gains (LTCG) can be claimed under the following Sections:

Capital Gains Account Scheme

• The amount should be invested in the new capital asset within the due date of filing the return or the return filing date, whichever is earlier.
• If the taxpayer is unable to invest the amount in the manner prescribed, he can park those funds in the Capital Gains Account Scheme.
• Deposit should be made within the due date of filing of return or the return filing date, whichever is earlier.

LTCG Tax on Specific Assets

Long-term Capital Gain Tax on Shares

• Listed equity shares qualify as Long-Term Capital Assets if held for at least 12 months. It is determined by subtracting the purchase price from the sale price of shares held for over a year.
• In contrast, gains from unlisted equity shares are categorized as Long-Term only if the holding period is a minimum of 24 months.
• The gain reflects the investor's net profit from the sale of the shares.

Long-term Capital Gain Tax on Property

• Long-Term Capital Gain arises from selling property held for more than 24 months. 
• As mentioned above the rates will be 20% if the transfer is made on or before 22nd July 2024 after indexation benefit. For subsequent transfers, the tax rate shall be 12.5% without the indexation benefit. 
• There are certain exemptions available to further reduce your LTCG chargeable to tax.
• In case of a sale of land and building made after 23rd July 2024, the taxpayer will have the option to pay tax at 20% with indexation benefit and at 12.5% without indexation benefit if such land/building had been acquired on or before 22nd July 2024.

Clarifications on Treatment of Certain Assets

• It was clarified that ULIPs with premiums exceeding 10% of the policy’s sum assured, alongside those with annual premiums above Rs. 2.5 lakh  - the maturity proceeds should be treated as capital gains.
• It is proposed to amend Section 2(14) to clarify that securities held by investment funds under Section 115UB, will be treated as capital assets.

How to Fill Long-term Capital Gain in ITR-2?

The details of capital gains during the year are to be filled in the Schedule CG of Part A of Form ITR-2. The total amount of capital gains shall be filled in the Part B - Total income which will be auto-populated from the details you filled in the other schedules.

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