What is Long Term Capital Gains Tax (LTCG) & How to Calculate Long Term Capital Gains Tax 

Long Term Capital Gains Tax (LTCG) is a tax levied on profits earned from the sale of capital assets held for a specified long duration typically more than 12 or 24 months depending on the asset type. In the context of investments like stocks or mutual funds, LTCG helps regulate earnings from long-term wealth creation.

What is Long Term Capital Gains Tax?

Long Term Capital Gain Tax meaning refers to the tax imposed on profits earned from the sale of capital assets like stocks, mutual funds or real estate that are held for a long duration.

For listed equity shares and equity mutual funds in India, LTCG applies when assets are held for more than 12 months. Gains exceeding ₹1.25 lakh in a financial year are taxed at 12.5% without the benefit of indexation.

Budget 2025 Updates on Long Term Capital Gain Tax in India

Budget 2025 introduced significant changes to the long term capital gains tax regime in India. These changes aim to simplify the tax structure and promote long term investment. Here are the main updates:

• Uniform LTCG Tax Rate: A uniform long term capital gains tax rate of 12.5% now applies to all assets, including equity shares, mutual funds and real estate. This replaces the previous regime, under which different asset classes had varying tax rates.
• Increased Exemption Limit: The exemption limit for tax on long term capital gain has been increased from ₹1 lakh to ₹1.25 lakh. This means you can earn up to ₹1.25 lakhs as long term capital gains without incurring any tax liability.
• Removal of Indexation Benefit: The indexation benefit, which allowed adjusting the purchase price of assets for inflation, has been removed for all assets except land and buildings.

These changes significantly impact how long term capital gains tax is calculated and paid. It is essential to stay updated on these revisions to optimise your tax planning strategies.

Factors Influencing Long Term Capital Gains Tax Calculation

Several factors influence the calculation of your tax on LTCG:

• Holding Period: The duration for which you have held the asset determines whether it qualifies for long term capital gain or short-term capital gain treatment.
• Cost of Acquisition: This includes the original purchase price of the asset plus any expenses incurred to acquire it, such as brokerage fees or stamp duty.
• Selling Price: The price at which you sell the asset.
• Expenses Incurred on Sale: This includes any expenses related to selling the asset, like brokerage fees
•  or legal fees.
• Indexation (for land and buildings): Allows adjusting the cost of acquisition for inflation, reducing the taxable gain.

Understanding these factors is important to calculate LTCG tax liability accurately.

How to Calculate Long Term Capital Gains Tax with an Example

Let us illustrate how to calculate long term capital gains tax:

Suppose you purchased 100 shares of a company for ₹50 per share two years ago. You sold these shares today for ₹100 per share. Here is how to find long term capital gains tax liability:

• Cost of Acquisition: 100 shares x ₹50/share = ₹5,000
• Selling Price: 100 shares x ₹100/share = ₹10,000
• Long Term Capital Gain: ₹10,000 – ₹5,000 = ₹5,000

Assuming your total long term capital gains for the year exceed the exemption limit of ₹1.25 lakh, you would pay 12.5% tax on profits above the exemption limit.

How to Calculate LTCG for NRIs

The calculation of long term capital gain for NRIs follows similar principles. Still specific rules and tax rates might apply depending on the Double Taxation Avoidance Agreement (DTAA) between India and the NRI’s country of residence. NRIs must consult with a tax advisor to understand their specific tax obligations.

1. Long Term Capital Gain Tax Rate

The long term capital gain tax rate in India is currently a uniform 12.5% for all assets, including equity shares, mutual funds and real estate (except land and buildings, which are still subject to the 20% rate with indexation). This rate applies to gains exceeding the exemption limit of ₹1.25 lakh.

2. Long Term Capital Gain Tax on Mutual Funds

Long term capital gains tax on mutual funds follows the same rules as equity shares. If you hold equity-oriented mutual funds for more than 12 months, any gains you make on their sale are considered long term capital gain and taxed at 12.5% (above the exemption limit). 

3. LTCG Tax on ELSS with Example

Equity Linked Savings Schemes (ELSS) are tax-saving mutual funds with a lock-in period of 3 years. Gains from ELSS funds held for more than 12 months qualify as long term capital gain.

For example, if you invested ₹1.5 lakh in an ELSS fund and redeemed it after 4 years for ₹2.5 lakh, your long term capital gain would be ₹1 lakh. This gain would be taxed at 12.5% if it exceeds the exemption limit.

4. Long Term Capital Gain Tax on Shares 

LTCG on shares held for more than 12 months is taxed at 12.5% (above the exemption limit). This long term capital gains tax applies to listed shares and units of equity-oriented mutual funds.

5. Long Term Capital Gain Tax on Property

LTCG on property held for more than 24 months is subject to a 20% tax rate with indexation benefit for transfers made on or before July 22, 2024. For transfers made after this date, the long term capital gains tax property rate is 12.5% without indexation.

Exemptions on Long Term Capital Gains Tax

Let’s understand how to avoid paying long term capital gains tax by leveraging certain exemptions:

• Section 54: This LTCG exemption involves exemption on capital gains from the sale of a residential property if the proceeds are invested in another residential property.
• Section 54EC: It offers an exemption on capital gains from the sale of any long term asset if the proceeds are invested in specified bonds.
• Section 54F: This section gives an exemption on capital gains from the sale of any asset (other than a residential house) if the proceeds are invested in a residential home.

Saving Tax on Long Term Capital Gains

Here are some strategies for how to save long term capital gain tax:

• Utilise the exemption limit: Take advantage of the ₹1.25 lakh exemption limit on long term capital gain.
• Invest in tax-saving instruments: Consider investing in instruments like ELSS funds or specified bonds under Section 54EC to claim exemptions.
• Offset losses against gains: Offset capital losses against capital gains to reduce overall tax liability.
• Hold assets for the long term: Holding assets for more extended periods can help you qualify for long term capital gain treatment, which generally has lower tax rates than short-term capital gains.

Advantages of Long-Term Capital Gains (LTCG)

LTCG tax offers favorable treatment for assets held over a longer period. It encourages investors to stay invested and benefit from lower tax rates.

1. Lower Tax Rates: LTCG is taxed at a lower rate compared to short-term gains, encouraging long-term investments.
2. Indexation Benefit: For certain assets like real estate and debt funds, indexation reduces tax liability by adjusting purchase cost for inflation.
3. Tax Exemptions: Gains can be exempt under sections like 54, 54EC and 54F if reinvested in specified assets.
4. Encourages Long-Term Investment: Investors are motivated to hold assets longer, promoting market stability and wealth creation.
5. ₹1.25 Lakh Exemption for Equity: In India, the first ₹1.25 lakh of LTCG on listed equity shares and equity mutual funds is tax-free.

How to Fill Long Term Capital Gain in ITR-2

Individuals and HUFs who have earned long term capital gains must report them in their Income Tax Returns (ITR-2). Schedule CG in ITR-2 is dedicated to capital gains reporting. You’ll need to provide details of the asset sold, the purchase date, the sale date, the cost of acquisition, the selling price and any applicable exemptions.

Conclusion

Understanding long term capital gains tax is essential for effective financial planning. By staying informed about the latest tax laws, utilising available exemptions and implementing tax-saving strategies, you can optimise your investment returns and minimise your tax liabilities.