Long Term Capital Gain Tax
20 May, 2025
Synopsis
LTCG tax rates and indexation rules vary by asset type and sale date.
Exemptions under Sections 54, 54F, and 54EC can reduce tax liability.
Mutual funds, shares, and property have specific LTCG conditions and rates.
Strategic reinvestment and timing can significantly optimise tax savings.
Long-term capital gains tax can significantly impact your returns if you're not prepared. From shifting indexation rules to updated exemption thresholds, staying informed is key. Whether you're investing in shares, mutual funds, or property, timing and strategy matter.
This article explains LTCG rules, rates, exemptions, and tax-saving strategies.
What is Long-Term Capital Gain (LTCG)
Long-Term Capital Gain (LTCG) refers to the profit earned from the sale of a capital asset held for a specific minimum period. For listed equity shares, equity-oriented mutual funds, and units of a business trust, the period is more than 12-months.
For other assets like real estate, unlisted shares, and gold, it is more than 24-months. Such gains are taxable under the Income Tax Act, and the applicable long-term capital gain tax rate varies depending on the nature of the asset and the date of sale.
Step-by-Step Guide to Calculating Long-Term Capital Gains (LTCG) Tax
Calculating Long-Term Capital Gains (LTCG) tax requires a clear understanding of the sale transaction and applicable tax rules. Here's a step-by-step breakdown of how to compute LTCG:
Determine Full Value of Consideration: This refers to the actual sale price or fair market value received upon transferring the capital asset.
Subtract Expenses on Transfer: Deduct expenses directly related to the sale, such as brokerage fees, legal charges, commission, and other associated costs.
Compute Cost of Acquisition: For certain assets like land or buildings sold before July 23, 2024, you may adjust the original purchase price using the Cost Inflation Index (CII) to reflect inflation, reducing taxable gains.
Deduct Cost of Improvement: If improvements were made to the asset over time, these costs (if applicable) can also be adjusted using CII for sales before the cut-off date.
Apply Exemptions: Taxpayers can reduce their tax liability by claiming exemptions under Sections 54, 54EC, 54F, etc., depending on reinvestment choices and asset type.
Calculate LTCG using this formula:
LTCG = Sale Consideration – Indexed Cost of Acquisition – Indexed Cost of Improvement – Exemptions
For assets sold after July 23, 2024, indexation benefits are discontinued, and LTCG is calculated based on the original acquisition cost without inflation adjustment.
Exemptions on Long-Term Capital Gains Tax
Long-Term Capital Gains (LTCG) tax can be reduced or avoided if certain reinvestment conditions are met under the Income Tax Act. Here are key exemptions available:
1. Section 54 – Reinvestment in Residential House
This exemption applies when you sell a residential property and reinvest the gains in buying or constructing another residential house in India. The new property must be purchased within one year before or two years after the sale, or constructed within three years.
2. Section 54F – Sale of Non-Residential Asset
If you sell any long-term capital asset other than a house, and reinvest the entire sale proceeds into one residential property, Section 54F offers relief. However, you must not own more than one house on the date of transfer to qualify.
3. Section 54EC – Investment in Notified Bonds
You can claim exemption by investing your LTCG into specified bonds like NHAI or REC within six months from the date of transfer. These bonds have a mandatory five-year lock-in period.
To claim these exemptions, specific timelines and conditions must be met.
Long-term Capital Gain Tax on Mutual Fund
Mutual funds are taxed based on the type of scheme:
Equity-oriented mutual funds: If held for over 12 months, LTCG ₹1 lakh annually is taxed at 12.5% without indexation.
Debt mutual funds: Gains after 36 months were earlier taxed at 20% with indexation. However, for units acquired on or after April 1, 2023, all gains are treated as short-term and taxed as per income slab.
Long-term Capital Gain Tax on Shares
LTCG from listed equity shares is applicable when held for more than 12 months. As per the latest provision, if the sale of such shares results in a gain of more than ₹1,25,000 in a financial year, it is taxed at 12.5% without indexation.
Unlisted shares, on the other hand, must be held for at least 24-months to qualify as long-term capital assets and are taxed under Section 112.
Long-term Capital Gain Tax on Property
Real estate properties held for over 24 months qualify for LTCG. Taxpayers selling such assets after July 23, 2024 have two options:
Pay 20% tax with indexation (if acquired before July 22, 2024)
Pay 12.5% tax without indexation
Properties sold before July 23, 2024 are taxed at 20% with indexation. Exemptions under Section 54 and Section 54F can reduce the tax liability if reinvestment is made into specified avenues.
How to Save Tax on Long-Term Capital Gains?
Here are some legal strategies to reduce or avoid LTCG tax:
Reinvest gains in residential property or specified bonds under Section 54 or 54EC.
Time the sale of assets carefully to make full use of indexation benefits.
Split the asset ownership between family members to utilise multiple exemption limits.
Utilise capital losses to offset gains from other capital assets.
Effective tax planning can ensure substantial savings while staying compliant.
Long-term capital gain tax is an essential aspect of personal finance, especially for investors and property holders. Knowing the holding periods, applicable tax rates, and exemptions available can help manage tax liabilities effectively. Proper planning and awareness of changes in tax laws ensure one can maximise returns and minimise taxes legally.
FAQs
1. Is indexation benefit still available for real estate sales?
Yes, but only if the sale takes place before July 23, 2024. Post that, indexation is optional only if the property was purchased before July 22, 2024.
2. What is the threshold exemption limit for LTCG on equity shares?
LTCG on listed equity shares and mutual funds is exempt up to ₹1,25,000 per annum.
3. Are mutual fund LTCGs taxed the same as shares?
Only equity-oriented mutual funds follow similar rules. Debt mutual funds now attract slab-wise taxation regardless of holding period.
4. What if I reinvest my gains in agricultural land?
Exemption under Section 54B applies only when gains from the sale of agricultural land are reinvested into new agricultural land.
5. What is the current LTCG tax rate for property sales?
For sales after July 23, 2024, it's 12.5% without indexation. For sales before that, it's 20% with indexation.
*Disclaimer: Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not an investment recommendation. Investments are subject to market risks and other risks.
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