Long-term capital gain is the profit earned from selling an asset that has been held for more than a year. LTCG, commonly found in stocks, real estate, and mutual funds, is known for having lower tax rates, making it an attractive option for long-term investment strategies.
Long Term Capital Gain Meaning
Long-term capital gains refer to the profit made from selling an asset that has been held for more than one year. These gains are usually taxed at a lower rate than short-term capital gains.
Long-term capital gains are important in financial planning and investment strategies.
They apply to various assets like stocks, bonds, real estate, and mutual funds. Long-term gains typically benefit from lower tax rates, encouraging longer-term investment strategies. For example, if an investor buys and sells shares after holding them for more than a year, the profit from this sale is considered a long-term capital gain subject to LTCG tax rates.
Long Term Capital Gain Example
An example of a long-term capital gain would be purchasing shares for ₹50,000 and selling them two years later for ₹80,000, resulting in a gain of ₹30,000.
To illustrate, suppose an investor buys 100 shares of a company at ₹500 each (total investment ₹50,000) and sells them two years later when the share price is ₹800 (total selling price ₹80,000). The profit of ₹30,000 (₹80,000 – ₹50,000) qualifies as a long-term capital gain since the shares were held for over a year. This gain is then subject to LTCG tax per prevailing tax laws.
How To Calculate Long Term Capital Gain?
The formula for calculating long-term capital gains is LTCG = Sale Price – Indexed Cost of Acquisition.
Indexation adjusts the purchase price for inflation, reducing the taxable gain.
- Determine the Sale Price: The total amount received from selling the asset.
- Calculate Indexed Cost of Acquisition: Adjust the original purchase price for inflation using the Cost Inflation Index (CII).
- Apply the Formula: Subtract the indexed cost from the sale price to find the LTCG.
- Consider Exemptions: LTCG may be reduced by certain exemptions under tax laws.
- Account for Expenses: Deduct any expenses directly related to the sale.
Suppose an investor bought property for ₹20 lakhs in 2010 (CII 711) and sold it for ₹50 lakhs in 2020 (CII 1181). Indexed cost = ₹20 lakhs × (1181/711) = ₹33.18 lakhs. LTCG = ₹50 lakhs – ₹33.18 lakhs = ₹16.82 lakhs. This is the taxable long-term capital gain.
Difference Between Short Term And Long Term Capital Gain
The primary distinction between long-term and short-term capital gains is that the period for short-term gains is less than one year, while the period for long-term gains is longer than one year.
| Criteria | Short-Term Capital Gains | Long-Term Capital Gains |
| Holding Period | Less than 1 year | More than 1 year |
| Tax Rate | Higher, as per income tax slab | Lower, specific rates |
| Asset Types | Stocks, real estate, etc. | Same as STCG, but held longer |
| Tax Benefits | Limited | Preferential tax treatment |
| Investment Strategy | Short-term trading | Long-term investing |
| Impact of Market Volatility | More susceptible | Less affected |
| Calculation Complexity | Simpler | More complex due to indexation |
What Qualifies as Long-Term Capital Gains?
Long-term capital gains apply to profits from the sale of assets held for over a year, such as real estate, stocks, bonds, and mutual funds. The essential factor is the holding period, which must exceed one year.
Long Term Capital Gain Tax On Shares
Long-term capital gains tax on shares is charged when stocks are sold after being held for more than a year. The rate is 10% for gains over ₹1 lakh at the moment. Long-term capital gains of up to ₹1 lakh are not taxed.
For example, if an investor makes a profit of ₹1.5 lakhs from selling shares held for more than a year, LTCG tax is charged on ₹50,000 (₹1.5 lakhs – ₹1 lakh).
What Is Long Term Capital Gain Tax On Mutual Funds
Long-term capital gain tax on mutual funds varies based on the type of fund and the period for which the units are held. Here are the tax rates before and after 31 March 2023:
- Equity Mutual Funds, Arbitrage Funds, and Other Funds with at least 65% in equity: If you hold these for more than 12 months, any gains over ₹1 lakh are taxed at 10%, without the benefit of adjusting for inflation (indexation).
- Debt Mutual Funds and Floater Funds: For these funds, if you hold your investment for more than 36 months, the tax rate shifts from 20% with indexation (adjusting for inflation) to your applicable income tax rate.
- Conservative Hybrid Funds and Other Funds with 35% or less in equity: Long-term gains from these funds, when held for more than 36 months, were taxed at 20% with indexation before 31 March 2023. After this date, they’re taxed according to your income tax slab.
- Other Funds with 35% to less than 65% in equity, and Balanced Hybrid Funds (40%-60% equity, 60%-40% debt): The LTCG tax remains at 20% with indexation, not changing even after 31 March 2023.
- Aggressive Hybrid Funds (65%-80% equity, 35%-20% debt): Long-term gains are taxed at 10% without indexation, which hasn’t changed post-31 March 2023.
To understand the topic and get more information, please read the related stock market articles below.
Long Term Capital Gain Meaning – Quick Summary
- Long-term capital gain refers to the profit earned from the sale of an asset held for over a year, applicable to assets like stocks, real estate, and mutual funds, often taxed at a lower rate.
- Long-term capital gains are significant for financial planning and investments, involving assets like stocks, bonds, and real estate, and benefiting from lower tax rates, encouraging longer investment strategies.
- An example of a long-term capital gain is purchasing and selling shares after two years, resulting in a profit that qualifies as a long-term gain and is subject to LTCG tax.
- To calculate long-term capital gains, use the formula LTCG = Sale Price – Indexed Cost of Acquisition, adjusting for inflation using the Cost Inflation Index (CII), deducting related expenses, and considering exemptions.
- The key difference between short-term and long-term capital gains lies in the holding period, with short-term gains for assets held less than a year and long-term for those held longer.
- Qualifying assets for long-term capital gains include stocks, mutual funds, bonds, and real estate, with the essential factor being a holding period exceeding one year.
- Long-Term Capital Gains Tax on shares is charged at 10% on any gains above ₹1 lakh. The first ₹1 lakh of gain is tax-free.
- The tax on gains from mutual funds depends on the type of fund and how long you’ve held it. Equity funds held over a year are taxed at 10% for gains exceeding ₹1 lakh. Debt funds held over three years see their tax rate change from 20% with indexation to your income tax slab rate after 31 March 2023.
- The tax on hybrid mutual funds depends on their mix of equity and debt. For those with higher equity (more than 65%), long-term gains are taxed at 10% for amounts over ₹1 lakh.
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Long Term Capital Gain – FAQs
What Is Long Term Capital Gain Tax In India?
In India, long-term capital gain tax is levied on profits from assets held for over a year. The rate varies: 10% for equity shares and equity-oriented mutual funds (over ₹1 lakh gain), and 20% with indexation for debt funds and property.
What Is the Limit of LTCG Tax Free?
In India, the first ₹1 lakh of long-term capital gain from equity shares and equity-oriented mutual funds is tax-free. Gains beyond this limit are taxed at 10%.
How Is LTCG Calculated?
LTCG = Sale Price – Indexed Cost of Acquisition. Indexed cost is calculated using the Cost Inflation Index (CII) to adjust for inflation.
How Much Is Long-Term Capital Gains Tax on Shares?
In India, the tax on long-term capital gains on shares is 15%, and it applies to gains that are greater than ₹1 lakh during a given fiscal year.
How Is Long-Term Capital Gains Tax Calculated on Mutual Funds?
For equity-oriented mutual funds, LTCG tax is 10% on gains exceeding ₹1 lakh. For debt funds, it’s 20% with indexation benefits, considering a holding period of over three years.
How Do I Avoid LTCG Tax on Mutual Funds?
Avoiding LTCG tax on mutual funds can involve using the ₹1 lakh exemption, harvesting gains strategically, investing in tax-saving options, or balancing between equity and debt funds for tax efficiency.
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