Long Term Capital Gains Tax India

Long Term Capital Gains Tax India

When you file the income tax form at the end of the year, there is one section known as “Income from Capital Gains”. So What is it? Let us understand capital gains tax in India better.

What is Capital Gain?

Capital gain (or loss) is a profit (or loss) made while selling a capital asset.

So when you sell any Capital Asset, the profit/loss is known as Capital gain. Say for Example, you have bought 100 shares of Reliance Industries for Rs.1000 per share. So your Total Investment is Rs.1 Lakh right? Now, you sell these shares after 5 years for Rs.1500 per share. So now you have Rs.1.5 lakhs on hand. You have invested Rs.1 lakh before 5 years and now you have Rs.1.5 lakhs. This additional Rs.50,000 is your capital gain by selling your capital asset.

What is Capital Asset?

Capital asset roughly means property – a house, an apartment, office space, factory, go down or a plot of land.

Agricultural land is not considered as a capital asset, unless it is situated within the limits of, or within 8 kilometers of a municipality.

Investments such as shares and bonds are also considered as capital assets.

Capital Gains are of Two Types

01) Long Term Capital Gain (LTCG)

02) Short Term Capital Gain (STCG)

Long Term Capital gains Tax in India

This again divides into two things.

01) Real Estate – House, Apartment, factory, godown, plot of land or any other kind of Real Estate

02) Equity or Equity Related Schemes – Shares, Equity Mutual Funds…etc..

In case of Real Estate,

If the capital asset is held for more than 36 months before selling, the gain arising from the sale is classified as Long Term Capital Gain.

In case of assets other than equity shares or equity MFs, the long term capital gain is taxed at 20%. In other words, 20% of the long term capital gain has to be paid as income tax.

the Reserve Bank of India (RBI) has made our task easy here – for every year (starting in 1980), they have come up with a number. This is called the Cost Inflation Index.

The Cost Inflation Index in itself doesn't convey anything – but the increase in the number from one year to another is a representative of the change in prices (and therefore, inflation) between these years.

The purchase price that needs to be used for calculating the long term capital gains is thus called the Indexed Cost of Acquisition.

Long Term Capital Gain = Sale Price - Indexed Cost of Acquisition

In case of Equity and Equity Mutual Funds,

In case of Equity and Equity mutual funds, if you hold this asset for more than 12 months than this will be considered as the long term capital gains tax.

And in India, right now the long term capital gains tax for equity and equity mutual funds is NIL.

Well, yes. If you hold shares/equity mutual funds for more than 12 months than the long term capital gains tax on these instruments is 100% FREE.