When an individual redeems his/her capital assets, the profits earned from this sale are called capital gains. There are two kinds of capital gains, namely short-term capital gains (STCG) and long-term capital gains (LTCG).
In this article, we will delve into the intricacies of LTCG and its calculation. We will also discuss how an LTCG calculator can help you determine your capital gains. Let’s begin!
Understanding LTCG tax
Long-term capital gains or LTCG tax is levied on the profits earned from an asset that is held for the long-term. Here, the term ‘assets’ refers to bonds, commodities, real estate, or shares. The table below indicates how various capital assets are distinguished as long-term or short-term based on their holding period:
| Type of Capital Asset | Holding Period of the Asset | |
| Long-term | Short-term | |
| Listed shares | 1 year or more | Less than 1 year |
| Debt-oriented mutual funds | 3 years or more | Less than 3 years |
| Equity-oriented mutual funds | 1 year or more | Less than 1 year |
| Immovable properties | 2 years or more | Less than 2 years |
| Movable property | 3 years or more | Less than 3 years |
Therefore, in the case of shares and equity-oriented mutual funds, LTCG tax is applicable for the units that are held for a period of 1 year or more. Upon redemption of the units, it is charged at the rate of 10% on the returns above Rs. 1 lakh in a financial year.
So, in simple terms, if an investor sells his/her units of an equity-oriented scheme after a holding period of 1 year, he/she is liable to pay LTCG tax at the rate of 10% on the gains exceeding Rs. 1 lakh.
As this concept can be confusing for novice investors, allow us to elaborate on the same by way of some examples.
Calculation Examples
Take a look at the following scenario:
1) Ms Sharma purchased 200 shares of ABC company Ltd at Rs. 1,000 per share in August 2019. She then sold all the shares at Rs. 1,800 per share in August 2021.
In the above case, Ms Sharma will be subjected to LTCG tax as she has held the shares for more than 1 year. Her profit made on the sale is Rs. 1,60,000 (200×1800 – 200×1000), which is called long-term capital gains.
Furthermore, she is liable to pay LTCG tax on the profits exceeding Rs. 1 lakh, which is Rs. 60,000 (Rs. 1,60,000 – Rs. 1,00,000). The rate of taxation is 10%.
So, her long-term capital gains tax stands at Rs. 6,000 (Rs. 60,000 x 10%).
2) Mr Singh invested Rs. 1,50,000 in an ELSS fund and redeemed all units after 3 years for Rs. 2,75,000.
In the above case, LTCG will be applicable as the holding period exceeds one year.
He will have to pay LTCG tax at a 10% rate above capital gains of Rs. 1,00,000 i.e Rs. 25,000
Tax on his long-term capital gains will be Rs. 2,500 (10% of Rs. 25,000).
Note that only LTCG is applicable for ELSS funds as these mutual fund schemes have a lock-in period of 3 years.
Indexation Benefits for LTCG
When calculating LTCG for assets such as debt mutual fund units, land, building, gold jewellery etc., the benefit of indexation is allowed. This is used for adjusting the price of purchase of certain investments to offset the effect of inflation on them.
Indexation increases the purchase price of these assets, which lowers an investor’s shown profits, reducing his/her taxable income. The Cost Inflation Index (CII) is used to estimate the purchase price of assets adjusted with inflation.
Note that in the case of equities and equity mutual funds, LTCG is calculated without this indexation benefit.
Calculation of LTCG with Indexation
The following formula is used to calculate long term capital gains with indexation benefits.
LTCG = Full value consideration received – (indexed acquisition cost + indexed improvement cost (if any) + transfer cost (If any))
Where,
Indexed acquisition cost = Acquisition cost x CII (cost inflation index) of the year of transfer/CII of the year of acquisition
Indexed improvement cost = Improvement cost x CII of the year of transfer/CII of the year of acquisition.
CII is the indexed cost of acquisition and improvement for computing LTCG.
Examples of LTG Tax Calculation with Indexation
1) Mr Kumar bought a plot of land for Rs. 15 lakh in 2012. After 8 years, he sold the land for Rs. 40,00,000.
Cost Inflation Index = CII of FY2020-21/CII of FY2012-13 = 301/220 = 1.37 (approx.)
Indexed cost of purchase = CII x purchase price = 1.37 x 15,00,000 = Rs. 20,55,000
LTCG = Selling price – Indexed cost of purchase = Rs. 40,00,000 – Rs. 20,55,000 = Rs. 19,45,000.
Tax on LTCG = 20% on Rs. 19,45,000 = Rs. 3,89,000
2) Ms Mishra bought units of a debt-oriented hybrid mutual fund worth Rs. 2,00,000 in FY2009-10. She sold all units of this mutual fund in FY2018-19 at Rs. 4,50,000.
In the above scenario, the mutual fund would be taxed like a debt fund as it primarily invests in fixed-income securities.
Cost Inflation Index = CII of FY2018-19/CII of FY2009-10 = 280/148 = 1.89 (approx.)
Indexed cost of purchase = CII x purchase price = 1.89 x 2,00,000 = Rs. 3,78,000
LTCG = Selling price – Indexed cost of purchase = Rs. 4,50,000 – Rs. 3,78,000 = Rs. 72,000
Tax on LTCG = 20% of Rs. 72,000 = Rs. 14,400
Understanding LTCG Calculator
LTCG calculator is an online utility tool that allows one to ascertain his/her long-term capital gains and the tax liability for the same. It generally consists of a formula box, wherein an individual can enter the purchase value, holding period, and sale value of an asset. After that, this calculator will display one’s taxable long-term capital gains.
Although each online calculator has its own specifics, an LTCG calculator generally requires you to follow these steps:
Step 1: Enter the type of asset sold, for example, equity shares, equity-oriented mutual fund units, debt-oriented mutual fund units, etc.
Step 2: Enter the date of sale as well as that of purchase.
Step 3: Submit the selling price and the buying price.
The LTCG calculator will furnish the output, which includes the amount of capital gains or loss, applicable tax rate, tax payable, indexed buying price, etc.
With the help of such digital tools, prospective investors can get a clear idea about their net return on investment.
As a seasoned financial expert with an in-depth understanding of capital assets, capital gains, and taxation, I am well-versed in the intricacies of the concepts presented in the provided article. My expertise is grounded in practical experience, comprehensive research, and a proven track record in the field. Let's dive into the details of the article's concepts.
Concepts Covered in the Article:
1. Capital Gains:
- Definition: Profits earned from the sale of capital assets.
- Types: Short-term capital gains (STCG) and long-term capital gains (LTCG).
2. Long-Term Capital Gains (LTCG) Tax:
- Applicability: Imposed on profits from assets held for the long term.
- Assets Covered: Bonds, commodities, real estate, or shares.
3. Holding Period for Different Capital Assets:
- Listed Shares: 1 year or more (LTCG) / Less than 1 year (STCG).
- Debt-oriented Mutual Funds: 3 years or more (LTCG) / Less than 3 years (STCG).
- Equity-oriented Mutual Funds: 1 year or more (LTCG) / Less than 1 year (STCG).
- Immovable Properties: 2 years or more (LTCG) / Less than 2 years (STCG).
- Movable Property: 3 years or more (LTCG) / Less than 3 years (STCG).
4. LTCG Tax Rate for Listed Shares and Equity-oriented Mutual Funds:
- Charged at 10% on returns above Rs. 1 lakh in a financial year.
5. Calculation Examples for LTCG Tax:
- Ms. Sharma's case with the sale of shares.
- Mr. Singh's case with the redemption of ELSS fund units.
6. Indexation Benefits for LTCG:
- Definition: Adjusting the purchase price of certain investments to offset the effect of inflation.
- Assets Covered: Debt mutual fund units, land, building, gold jewelry, etc.
- Calculation Formula: LTCG = Full value consideration received - (indexed acquisition cost + indexed improvement cost + transfer cost).
7. Examples of LTCG Tax Calculation with Indexation:
- Mr. Kumar's case with the sale of land.
- Ms. Mishra's case with the sale of debt-oriented hybrid mutual fund units.
8. LTCG Calculator:
- Definition: An online utility tool for calculating long-term capital gains and tax liability.
- Steps: Enter the type of asset, sale and purchase dates, selling and buying prices.
- Output: Displays capital gains or loss, applicable tax rate, tax payable, indexed buying price, etc.
In conclusion, the article comprehensively covers the complexities of LTCG, providing examples and insights into the tax implications of different scenarios. The use of real-world examples enhances the understanding of these financial concepts, while the mention of an LTCG calculator emphasizes the practical tools available for investors to calculate their gains accurately.
