Long term capital gain is the gain (profit) arising from transfer of a capital asset that the assessee was holding for more than 36 months immediately prior to its date of transfer. However, in select cases, the assessee need to hold the asset for 12 months only to treat the asset as long term capital assets. The tax arising on the gain from the transfer of a long term capital asset is called Long Term Capital Gains Tax (LTCG).Gains arising from capital assets held for periods less than 36 months/12 months, as the case may be will be treated as short term capital assets and the gains thereon will be treated as short term capital gains.
Which assets can be treated as capital assets aby holding more than 12 months?
The following assets held for more than 12 months can be treated as long term capital assets.
1) Equity or preference shares in a company (listed in recognised stock exchange in India)
2) Securities (like debentures, bonds, Government securities, derivatives etc.) listed in recognised stock exchange in India
3) Unit of UTI (whether quoted or not)
4) Units of equity oriented fund (whether quoted or not)
5) Zero coupon bonds (whether quoted or not)
Unlisted shares of a company, can be considered as long term asset only if held for a minimum period of 24 months.
Equity oriented mutual fund means a mutual fund specified under section 10(23D) and 65% of its investible funds out of total proceeds are invested in equity shares of a domestic company.
What is the present rate of tax for long term capital gains (LTCG)?
Long term capital gain on transfer of listed shares/ units of equity oriented mutual funds schemes has been exempted from tax, provided securities transaction tax has been paid on such sale w.e.f October 1, 2004 (This provision is proposed to be amended by finance minister in his budget proposals for FY 2018-19 (AY 2020-21). From FY 2018-19 onwards, tax of 10% will be applicable on LTCG of above Rupees one lakh arising from transfer of listed shares/ units of equity oriented mutual fund schemes. )
For assets other than listed shares/units of equity oriented mutual fund schemes, tax is payable in respect of long term capital gains at a flat rate of 20% and the amount of gain has to be adjusted for inflation. This inflation adjustment is known as indexation benefit.
How is long term capital gain calculated?
LTCG on account of long term capital asset can be calculated as shown below:
Full value of consideration (i.e., Sales value of the asset)
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, etc.).
Net Sale Consideration
Less: Indexed cost of acquisition (i.e., the indexed purchase price of the capital asset)
Less: Indexed cost of improvement , if any(i.e., post purchases capital expenses on improvement of capital asset )
Long-Term Capital Gains
What is indexation?
The benefit of indexation is a process allowed to assessee to reduce the impact of inflation while calculating Long Term Capital Gains. Indexation is a process in which the cost of acquisition gets adjusted for inflationary rise in the value of asset. For this purpose, Central Government has notified cost inflation index (CII). The benefit of indexation is applicable only for long-term capital assets.
For computation of indexed cost of acquisition following factors are considered:
• Year of acquisition/improvement
• Year of transfer
• Cost inflation index of the year of acquisition/improvement
• Cost inflation index of the year of transfer
Illustrations for Long Term Capital Gains
1. Mr. John is a salaried employee. In the month of August, 2014 he purchased a piece of land and sold the same in September, 2017. In this case, Mr. John acquired land in August, 2014 and sold in September, 2017, after holding it for a period of more than 36 months. Hence, land will be treated as long-term capital asset.
2. Mr. Kiran, a salaried employee, purchased equity shares of Yes Bank, listed in BSE and NSE on April, 2016 and sold in December, 2017. In this case shares are capital assets for Mr. Kiran as he sold it after holding for a period more than 12 months.
3. Mr. Sha is an employee. He purchased un-listed shares of ABC Ltd on April 15, 2015 and sold the same on June 18, 2017. Since unlisted shares, holding period of more than 24 months are required to treat it as capital asset. Here the sale happened after a period of 24 months and hence the gain is long term capital gain.