Introduction to Long-Term Capital Gains (LTCG)
The main reason why people invest is to realize gains or make a profit from such investment. Some of the investments will bear fruits quickly while others will do so over time. Long term returns which are to say long term capital gain (LTCG) are the proceeds from the assets invested in.
Tax on Long-Term Capital Gains LTCG implies taxation of profit on the sale of capital assets with such assets consisting of properties, securities and security oriented investments held for a period not less than one year after purchase.
What is Capital Gains and Capital Gain Tax?
When a homeowner or bondholder sells a capital asset such as a house or a car and makes money out of them, it is considered as land or any other barter trade which is why they often sell and make a profit.
The two main types of categories are short term capital gain tax STCG and long term capital gain tax LTCG. A profit accruing to an investor upon the sale of a capital asset becomes part of his income. Consequently, any amount that is received is liable to Capital Gain Tax.
The Long Term Capital Gain (LTCG) Tax
The default long-term capital gain tax threshold is 20%, and all applicable surcharges and levies are to be added to that. However, there are cases wherein a person is subject to neither tax on capital gains nor to a tax rate exceeding 10%.
Gains from the transfer of equity shares of a listed company up-to INR 1,000,000 in any of the financial years are governed by Section 112A of the Indian Income Tax Act. Equity shares in a company, units of equity-oriented funds and business trusts and investments in listed companies are some of the assets covered under Section 112A. LTCG Tax also applies to the sale of shares of a company listed with an Indian government recognized stock exchange, units of mutual funds or unit trusts, and zero coupon bonds where the sale took place prior to July 10, 2014.
Taxation of Gains on Sale of Commercial Property
No matter the holding period for a commercial property utilized in the course of business, the sale of such property is taxed as short term capital gains if there are no other properties of the same asset class except for the sold one. However, an exemption from tax under section 54F can be claimed if the net proceeds from sale are reinvested in residential house property for more than two year period, alternatively, one can also hope to claim section 54EC exemption after reinvesting the capital gains in the specified financial instruments.
The real estate that was leased out will be sold and the sales proceeds will be accounted for aim capital gains. However, should the property be held for more than two years, it is classified as long term and the tax will be 20% regardless of value.
In a bid to reduce their tax burden, taxpayers can consider investing a portion of their funds either in residential property whereby they can qualify for a Section 54F investment or they can use the capital gains bonds provided ‘54E provides. The properties held for more than twenty-four months are deemed short-term capital gains, and net income from the houses shall be taxed at normal rates.
Long Term Capital Gain (LTCG) Tax Categories
LTCG is applicable only if the profits from the sale of property are more than a basic exemption limit. This basic limit is defined every year in the financial budget.
- Not Compliant Conditions for a Resident Indian above 80 years of age and resident who earns below 500000 annually.
- Annual Income of Resident Population between 60 and 80 years of age is capped at 300000.
- In the case of people aged below 60 years, they can earn annual errand up to 2,50,000 and avail of the exemption.
- Hindu Undivided Families who earn less than INR 2,50,000 annually.
Ways To Save Tax on Long-Term Capital Gains
1) Purchase of New House (Sections 54 and 54F)
There is also the option to avoid any taxation on long-term capital gains by acquiring new residential property. The tax-law provisions, which provide such exemptions, are sections 54 and 54F.
In case the taxable person, or the Hindu Undivided Family, has sold a built-up house and bought or constructed another house out of the proceeds of the sale, then subject to the provisions of section 54, there is no LTCG tax liability. The new property must, however, be purchased not less than one year prior to or two years following the sale of the old property. Where the seller of the existing property desires to construct a new dwelling house, the house is required to be constructed within three years after the transfer date.
Also, a new property has to be acquired or constructed to claim tax exemption and in any other case, the LTCG tax will be levied on the unused amount that is not utilized towards the completion of the new property. Moreover the amount should be utilized for purchasng or constructing only one property in India.
If a person or HUF disposes a capital asset which is not an asset in the nature of a “residential house”, and the capital gain arising out of such sale is utilized for purchasing or constructing a house, in such a case the portion of the gain is eligible for exemption under section 54F For such capital gains to be tax exempted, however, it is not enough to just invest the capital gain amount but rather the total amount received upon sale of the asset should be invested. Otherwise, such amount will be taxed proportionately.
2) Investment in Bonds (Section 54EC)
Under section 54EC, there is a capital gain exemption available for the sale of real estate for a property that was acquired to purchase RECL and NHAI bonds. The particulars of these bonds can be obtained from the official website of the income tax department of India.
Section 54EC of the Income Tax Act of 1961 shields an assessee from the payment of long-term capital gains (LTCG) tax only on the condition that such assessee both sells his property and reinvests his proceeds in the specified assets within a period that does not exceed six months. The limit for this exemption is up to an amount of 50 lakhs in a financial year.
3) Real Estate Investment Trust
A taxpayer owning a capital gain account is able to avoid the restrictive requirements and obligations that are imposed by residential real estate investing in India. The Government of India only allows withdrawals from this account to purchase homes and plots of land, all other withdrawals can be made in three years after the first withdrawal to spend the money. Otherwise, the total profit amount over the original cost will attract LTCG tax.
The Bottom Line: Everything You Need to Know
LTCG tax is levied on an individual’s long term capital gains earned as a result of portfolio diversification as introduced by the Union Government during the 2018 Union Budget. For every individual, selling the capital assets above INR 1 lakh, LTCG tax is computed as tax on long-term net capital gain on the asset sale. The LTCG is charged at a base rate of 20% plus any applicable other charges of surcharge and cess. The government has provided regulation to a few exceptions under special circumstances with the aim of reducing the burden that comes with high prevalence of taxes.
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