What are Long Term Capital Gains (LTCG)?
Long Term Capital Gains (LTCG) refer to the capital gains made on an investment in any of the financial instruments (equity or debt) for a long period of time. The holding period for the gains to be considered as LTCG depends on the underlying security.
If you’ve invested in equity of listed companies, or in equity mutual funds, the minimum holding period is more than 1 year, for the gains to be considered as LTCG. For debt securities, or debt mutual funds, this period would be 3 or more than 3 years. The taxation on LTCG also varies for the two investment instruments. Through this article, we’ll understand how the long term capital gains from these two securities are taxed.
How to Calculate Long Term Capital ?
- LTCG from Equity Investment
In the Union Budget announced on February 1, 2018, the key takeaway related to equity investment was the taxation of Long Term Capital Gains. Until then, LTCG from equity investment did not attract any tax. However, from FY 2018-19, Long Term Capital Gains from equity are liable for tax at the rate of 10%.
For equity funds, LTCG upto Rs. 1 lakh are exempted from tax in a financial year. This means, if you have made gains of , say Rs. 1.5 lakh, only 50,000 would be taxed at the rate of 10%. Also, if you held any equity shares, or equity fund units on January 31, 2018, you’re not liable to pay any tax on capital gains accrued till that date. Capital gains made after this date only will be considered for taxation purposes. Let’s understand this with the help of an example.
Mr. X has invested Rs. 2 lakh in an equity fund on June 1, 2015 at the trading Net Asset Value of Rs. 40. Thus, he gets 5,000 fund units. Now, he decides to redeem the units on May 1, 2019. Since the holding period is more than 1 year, the capital gains accrued will be considered as Long Term Capital Gains. The amount for taxation will be at, in the following manner:
NAV on January 31, 2018 = Rs. 55
Thus, Investment amount = 55 x 5000 (fund units) = Rs. 2.75 lakh
NAV on May 1, 2019 = Rs. 85
Thus, investment amount = 85 x 5000 (fund units) = Rs. 4.25 lakh
Value of Capital Gains post to be considered for taxation = Rs. 1.5 lakh
Out of this, Rs. 1 lakh is exempted from tax. Therefore, Rs. 50,000 would be taxed at the rate of 10%, which comes down to Rs. 5000.
- LTCG from Debt Investment
In case of debt investment, if an investor withdraws the investment including capital gains post 3 years of investment, Long Term Capital Gains Tax of 20% is levied, with the benefit of indexation.
Indexation reduces the value of overall Long Term Capital gains to reflect the effect of inflation on your investment.
To calculate the final value of capital gains post indexation, we use government’s Cost Inflation Index (CII) in the following formula:
Indexed cost of Acquisition = Investment Amount * (CII of the year of withdrawal/ CII of the year of investment)
Suppose the investment amount is ₹70,000 in the year 2016 and the withdrawal amount is ₹1 Lakh. The value of capital gains is ₹30,000 before indexation.
Indexed Cost of Acquisition= 70000* (280/254) = 77165.35
Note: CII in the year 2015 = 254
CII in the year 2018 = 280
Final Value of Capital Gains= 100000- 77165.35 = 22834.65
Tax Payable = 20% of 22834.65 = 4566.93