Long‑Term Capital Gains Tax – Full Guide

Investing is crucial for everyone, particularly young adults, as people continually look for opportunities that yield long-term returns. To make well-informed investment decisions, understanding the taxes applicable to these investments, including capital gains, is essential. Capital gains are the profits earned when you sell a personal asset, such as stocks, collectibles, mutual funds, real estate, and other investments.

This guide explains what long-term capital gains (LTCG) tax is, how LTCG taxation works, and other key details about taxing long-term gains.

What is Long-Term Capital Gains Tax?

Long-term capital gains tax is imposed on profits earned from selling or transferring long-term assets, including mutual funds, stocks, real estate, and other investments. To qualify for this tax, you must hold the asset for a specific minimum period, typically at least one year. Once you sell these long-term assets, the resulting gains are considered part of your taxable income and are subject to taxation under the Income Tax Act.

Understanding Capital Assets for LTCG Taxation

A capital asset refers to any significant property owned by an individual or entity. Capital assets are classified into different categories, and each category may attract substantial returns upon sale. For long-term capital gains taxation, Sections 112 and 112A of the Income Tax Act are relevant.

Section 112A applies to:
- Units of a business trust
- Equity shares of a listed company
- Units of an equity-oriented fund
Section 112 applies to all other long-term capital gains not covered under Section 112A.

Common Examples of Capital Assets for LTCG Tax

Let’s explore some typical examples of capital assets in the context of long-term capital gains tax:

Real Estate: Both residential and commercial properties are classified as capital assets.
Collectibles: High-value items such as sculptures, paintings, antiques, and other collectibles fall under this category.
Gold and Jewellery: Valuable assets like gold and other jewellery are considered capital assets.
Shares: Ownership shares in any company are treated as capital assets.
Equity Investments: Bonds, debentures, government securities, and similar instruments are also regarded as capital assets for long-term capital gains if held for more than one year.

Budget 2024 Updates for LTCG Taxation

The changes announced in Budget 2024, effective from 23 July 2024, impact long-term capital gains taxation as follows:

Holding Period: The minimum holding period for assets subject to LTCG has been revised to 24 months. The earlier 36-month period no longer applies.
Exemption Limit and Tax Rate: The LTCG exemption limit for the transfer of equity-oriented and listed equity shares has increased from ₹1 lakh to ₹1.25 lakh. The applicable tax rate on long-term capital gains has also been revised from 10% to 12.5%, now applicable to all types of capital gains.
No Indexation Benefit: Indexation benefits are no longer available for LTCG from the sale of assets.
Real Estate and Land: For real estate transactions, taxpayers can choose between a 12.5% tax rate without indexation or a 20% tax rate with indexation. This provision applies only to properties purchased on or before 23 July 2024.

Long-Term Capital Gains Tax Brackets

Type of Capital Asset	Before Budget 2024	After Budget 2024
Equity Shares (Listed)	10% on gains above ₹1 lakh	12.5% on gains above ₹1.25 lakh
Equity Shares (Unlisted)	20% on gains above ₹1 lakh (with indexation)	12.5% on gains above ₹1.25 lakh (without indexation)
Preference Shares (Listed)	10% on gains above ₹1 lakh (without indexation)	12.5% on gains above ₹1.25 lakh (without indexation)
Preference Shares (Unlisted)	20% on gains above ₹1 lakh (with indexation) OR 10% without indexation	12.5% on gains above ₹1.25 lakh (without indexation)
Mutual Funds (Equity)	10% on gains above ₹1 lakh	12.5% on gains above ₹1.25 lakh (without indexation)
Listed Sovereign Gold Bond	10% on gains above ₹1 lakh (without indexation)	12.5% on gains above ₹1.25 lakh
Other Bonds (Listed)	20% on gains above ₹1 lakh (with indexation)	12.5% on gains above ₹1.25 lakh (without indexation)
Other Mutual Funds (excluding Debt Funds)	10% on gains above ₹1 lakh	12.5% on gains above ₹1.25 lakh (without indexation)
Other Long-Term Assets (Real Estate, Jewellery, Non-Financial Assets)	20% on gains above ₹1 lakh (with indexation) OR 10% without indexation	12.5% on gains above ₹1.25 lakh (without indexation)

How Much Are Long-Term Capital Gains Taxed?

To understand taxation on long-term capital gains (LTCG), it is important to note the following:

Before the Budget 2024 amendments, LTCG rates varied based on the type of asset. Currently, the long-term capital gains exemption limit is ₹1.25 lakh, meaning any gains exceeding this amount are subject to tax. Previously, the exemption limit was ₹1 lakh, and gains above this were taxed at 10%. After the Budget 2024 changes, gains exceeding ₹1.25 lakh are taxed at 12.5%.

Long‑Term Capital Gains Tax – Full Guide

Long-Term Capital Gains Tax on Shares

Listed equity shares and equity-oriented mutual funds have a fixed LTCG exemption limit of ₹1.25 lakh, applicable to transfers after 23 July 2024. For transfers before 22 July 2024, the LTCG rate was 10%. To qualify as long-term capital assets, these shares must be held for more than 12 months.

Example:
In 2018, Mr. Anish purchased 50 shares of XYZ Company at ₹50 each and held them for two years. He sold them in 2020 at ₹150 per share.

Total purchase cost: ₹2,500
Total sale proceeds: ₹7,500
Total capital gain: ₹7,500 − ₹2,500 = ₹5,000

Since the total gain is below ₹1.25 lakh, no tax is payable.

Long-Term Capital Gains Tax on Property

For real estate, LTCG applies only if the holding period is 24 months or more. For sales before 22 July 2024, gains were taxed at 20% with indexation. After 23 July 2024, a flat tax rate of 12.5% applies, without indexation.

Example:
Ms. Meera bought a studio apartment for ₹2 lakh in 2022 and sold it for ₹4 lakh in 2024.

Total purchase cost: ₹2 lakh
Total sale proceeds: ₹4 lakh
Total capital gain: ₹4 lakh − ₹2 lakh = ₹2 lakh

The gain exceeding ₹1.25 lakh will be taxed at 12.5% under the current rules.

Long-Term Capital Gains Tax on Property

For property transactions, long-term capital gains (LTCG) apply only if the holding period is 24 months or more.

Tax Rate:
- For sales before 22 July 2024: 20% with indexation
- For sales after 23 July 2024: 12.5% without indexation

Example:
Ms. Meera purchased a studio apartment for ₹2 lakh in 2022 and sold it for ₹4 lakh in 2024.

Total purchase cost: ₹2 lakh
Total sale proceeds: ₹4 lakh
Total capital gain: ₹4 lakh − ₹2 lakh = ₹2 lakh

Since the gain exceeds the exemption limit of ₹1.25 lakh, the LTCG tax is calculated as:

Taxable Capital Gain = ₹2 lakh − ₹1.25 lakh = ₹75,000
LTCG Tax = 12.5% of ₹75,000 = ₹9,375

Step-by-Step LTCG Calculation Process

Calculate Net Earnings from Sale or Transfer
Determine your earnings by subtracting any sale-related expenses from the final sale price.
Example: If you sell land for ₹7 lakh and incur ₹50,000 in expenses, net earnings = ₹7 lakh − ₹50,000 = ₹6.5 lakh.
Check the Original Purchase Cost
Find out the original cost of the asset.
Example: Land purchased 2 years ago for ₹3 lakh.
Calculate Capital Gains
Use the formula:

Capital Gains = Net Sale Price − Purchase Price − Any Exemptions

Example: ₹6.5 lakh − ₹3 lakh = ₹3.5 lakh

This step-by-step approach helps in determining your long-term capital gains and calculating the tax liability accurately.

Calculating Your LTCG Tax Liability

To determine your long-term capital gains tax, subtract the LTCG exemption limit of ₹1.25 lakh from your total capital gains and apply the applicable tax rate.

Example Calculation:

Capital Gains: ₹3.5 lakh
LTCG Exemption Limit: ₹1.25 lakh
Taxable Income = ₹3.5 lakh − ₹1.25 lakh = ₹2.25 lakh
Tax Rate = 12.5%
Tax Liability = 12.5% × ₹2.25 lakh = ₹28,125

Factors Affecting Long-Term Capital Gains Tax

Asset Category:
The type of asset impacts your LTCG tax. Most long-term capital assets are taxed at 12.5% on gains exceeding ₹1.25 lakh. Indexation benefits are no longer applicable under the Budget 2024 amendments, so it is important to categorize and plan your investments carefully.
Exemption Limit:
Equity-oriented shares and funds have a fixed LTCG exemption limit of ₹1.25 lakh. Non-equity assets do not have a strict exemption limit. Proper planning can help keep capital gains within the exemption threshold.
Holding Period:
Assets must be held for 12–24 months, depending on the type, to qualify as long-term. Assets held for a shorter period are treated as short-term and attract a higher tax rate.
Date of Sale and Acquisition:
- Assets sold before 22 July 2024: exemption limit of ₹1 lakh, tax rate 10%, with indexation benefit.
- Assets sold after 23 July 2024: exemption limit of ₹1.25 lakh, tax rate 12.5%, without indexation.

Exemptions Under LTCG Tax

Section 54EC: Investors can claim exemption up to ₹50 lakh by reinvesting capital gains into specific bonds within six months of the sale. These bonds are typically issued by the Rural Electrification Corporation (REC) or National Highways Authority of India (NHAI).
Section 54: Exemption is available if capital gains from the sale of a residential property are reinvested into another residential property within a prescribed period.

Reducing Your LTCG Tax Liabilities

While exemptions can lower your long-term capital gains (LTCG) tax, it is essential to ensure you meet the eligibility criteria for each section.

LTCG Exemption Limit: Any capital gain below ₹1.25 lakh is exempt from LTCG tax.

How to Save on Long-Term Capital Gains Tax

Maintain a Longer Holding Period: Holding your assets for a longer period can help you benefit from a lower tax rate and potentially higher returns.
Tax-Loss Harvesting: Offset your capital gains by selling assets that have incurred losses before the end of the financial year. This reduces your taxable income and, in turn, your LTCG liability.
Diversify Investments: Reinvest capital gains into bonds or other qualifying assets that offer tax deductions or exemptions to minimize your LTCG tax.

Tips to Reduce Overall Tax Liabilities

Proper planning is key to reducing tax liabilities, including LTCG, and maximizing your earnings. Reviewing deductions available under the Income Tax Act can help you adopt effective tax-saving strategies:

Section 80C: Offers deductions on investments such as life insurance, Public Provident Fund (PPF), Equity-Linked Savings Schemes (ELSS), National Pension System (NPS), and charitable donations.
Section 80TTB (for senior citizens): Provides tax benefits on income from specific retirement savings accounts for senior citizens.
Section 80E: Interest paid on education loans for yourself or your child qualifies for a tax deduction, reducing your overall tax liability.
Section 80D: Premiums paid for health insurance for yourself, your spouse, children, and parents are deductible. For yourself, your spouse, and children, the deduction limit is ₹25,000, and for senior citizens, it is ₹50,000.

Difference Between Short-Term and Long-Term Capital Gains Tax

Feature	Short-Term Capital Gains (STCG)	Long-Term Capital Gains (LTCG)
Tax Rate	15%–20%, depending on the asset type	12.5% on gains exceeding ₹1.25 lakh
Holding Period	12 months or less	More than 12–24 months, depending on the asset
Indexation Benefit	Not applicable	Available at 20% for debt mutual funds
Taxation Basis	Based on applicable income tax slab	Fixed rate for eligible assets

What is Capital Gains Tax in India: Types, Rates, Calculation, Exemptions & Tax Saving

Conclusion

Understanding long-term capital gains tax is crucial for effective financial planning. Investing in capital assets with a long-term perspective is a smart strategy for building wealth, but inadequate planning can lead to higher tax liabilities and lower savings.

There are several ways to manage and reduce your overall tax liability, such as leveraging exemptions, reinvesting gains, and exploring deductions under the Income Tax Act. Additionally, securing your health and savings through health insurance plans offers both protection and potential financial benefits. With features like customizable plans, an easy-to-navigate platform, and affordable premiums, you can safeguard your future while optimizing your finances.

Disclaimer: The content on this website is for informational purposes only and does not constitute legal, financial, or professional advice. Please consult qualified experts before acting on any information. K M GATECHA & CO LLP accepts no liability for errors, omissions, or outcomes from the use of this content. This site is not an advertisement or solicitation.