Understanding Long-Term Capital Gains (LTCG)
Long-Term Capital Gains (LTCG) refer to the profit earned from the sale of a capital asset held for a longer duration—typically more than 24 or 36 months depending on the type of asset. For listed equity shares, mutual funds, and zero-coupon bonds, the holding period is more than 12 months. For immovable properties like land or buildings, it is more than 24 months, and for other capital assets like gold, it is more than 36 months. The gain is calculated by subtracting the indexed cost of acquisition and improvement from the sale price. The benefit of indexation helps adjust for inflation, effectively reducing the taxable gain. LTCG plays a vital role in personal and corporate finance, especially in planning asset sales and reinvestments.
Relevant Legal Provisions under the Income Tax Act
The taxation of LTCG is covered under Section 112 and Section 112A of the Income Tax Act, 1961:
- Section 112: It deals with the taxation of LTCG on assets other than listed equity shares and equity-oriented mutual funds. The LTCG is generally taxed at 20% with indexation benefit or 10% without indexation in specific cases.
- Section 112A: Introduced through Finance Act 2018, it applies to LTCG on listed equity shares, units of equity-oriented mutual funds, and units of business trusts. If the total LTCG exceeds ₹1 lakh, it is taxed at 10% without indexation. However, gains up to ₹1 lakh are exempt.
Also, Section 54, 54EC, and 54F provide exemptions from LTCG tax if the gains are reinvested in specified assets like residential property or certain government bonds within stipulated timelines.
Importance and Impact of LTCG Provisions
The treatment of LTCG under Indian tax laws ensures fair taxation of investment profits while encouraging long-term investments. The government provides incentives like indexation and exemption options to ease the tax burden and promote capital formation. For example, selling a property and reinvesting the gains in another house can help avoid tax under Section 54. Similarly, the exemption threshold of ₹1 lakh for LTCG on listed securities encourages small investors to remain in the equity market. LTCG rules are crucial for individuals planning wealth accumulation through investments in shares, real estate, and gold.
Mnemonic :
Mnemonic to Remember LTCG Sections
“**112 Makes You Wise, 112A for Market Prize! 54 Gives Relief, No Tax Surprise!”
- 112 – LTCG on general capital assets
- 112A – LTCG on listed equity shares and mutual funds
- 54/54EC/54F – Exemptions from LTCG tax on reinvestment
