Among Indian investors, there is a lot of confusion and ambiguity when it comes to Long Term Capital Gain (LTCG) and the tax associated with that. Some of the burning questions right now: What is LTCG tax? How to save on LTCG tax on properties, mutual funds, shares, and Gold? Is there any way you can avoid paying this tax by investing in any other asset? What is the current Long Term Capital Gain tax rate?
In the absence of the right information, investors end up paying a considerable amount of tax, thereby eroding profits generated from the investments. We will clear all these doubts and suggest ways to save on LTCG tax efficiently. And we will guide you for getting more in-depth information on topics such as LTCG on mutual funds, LTCG on the property, Long Term Capital Gain on sale of land, and more such tax and investment-related queries.
But first, let’s understand what exactly Long Term Capital Gain is?
Definition of Long Term Capital Gain
Every Indian citizen is liable to pay tax on the income generated within a period. Similarly, the Govt has mandated tax on the income generated from long-term investments such as property, Gold, mutual funds, shares, and more. For example, you buy shares at Rs100, hold it for a considerable amount of time (long term), and then sell for Rs 1000. For Rs 900 generated income, you will be required to pay LTCG tax, as per the prevailing rates.
How Much is the Long Term Capital Gain Tax Rate?
The tax rate on the capital gains depends on the period for which that asset has been held, and the type of asset held.
Let’s break down this question for mutual funds, shares, and properties.
LTCG on Mutual Funds
If an investor buys mutual funds and sells them within 3 years, then the Short Term Capital Gain tax rate is applicable, and if the holding of the mutual funds is beyond 3 years, then the Long Term Capital Gain tax rate for mutual funds is applicable.
As per Section 112 of Income Tax Rules, Long Term Capital Gain Tax rate for mutual funds is 20% with indexation and 10% without indexation. Associated surcharges and cess are applied as well. (indexation means taking into account the inflation factor, and thus, lower tax)
LTCG on Property
Long Term Capital Gain on the property is applicable only when the sale happens after 2 years of acquisition. For under 2 years holding, SGCT is applicable.
As per the latest Govt directives, the LTCG tax of 20% is applicable to the property’s sale, with provisions of indexation wherever applicable.
LTCG on Equity Shares
If shares are sold after 3 years, then Long Terms Capital Gain tax is applicable, and if the sale happens within 3 years, the Short Term Capital Gain tax is imposed.
Now, when it comes to LTCG on shares and equities, the Govt has provided some benefits to the LTCG tax rate. And the catalyst is STT (Securities Transaction Tax).
As per Section 10 (38) of the Income Tax act, there will be no LTCG tax on shares sale (for-profits up to Rs 1 lakh), if those are STT (Securities Transaction Tax) paid shares, listed on a recognized stock exchange. Beyond Rs 1 lakh profit, there is 10% LTCG tax.
In case those are not STT paid shares, then the LTCG tax of 20% is applicable, with a minimum holding period of 3 years.
How to Save Tax On Long Term Capital Gain: 3 Tax Saving Provisions
There are Long Term Capital Gain Exemptions that can be used by the investors and taxpayers to save on LTCG tax.
Mainly, there are three main tax provisions that can help you save on the LTCG tax for different assets:
Section 54 for Saving LTCG Tax on Property by Reinvesting
If the capital gains from the sale of a property are under Rs 2 crore, then it can be re-invested to buy a maximum of 2 houses under Section 54. By re-investing the capital gain, the homeowners can save on Long Term Capital Gain tax on property of 20%, making a huge difference. Home loans are also valid under Section 54, and this tax-saving provision can be availed only once in a lifetime.
Section 54EC for Saving LTCG Tax on Property without Reinvesting
If the investor and homeowner are not interested in re-investing in another property, then they can use Section 54EC for saving Long Term Capital Gain tax on properties. They will need to buy bonds such as the National Highway Authority of India, Rural Electrification Corporation, etc. The lock-in period is now 5 years (up from 3 years), and the maximum amount for investment permitted is Rs 50 lakh.
The catch here is that the investor will only get 5.75% interest from these bonds, and this capital gain from these bonds is also taxable. Only real estate capital gain is allowed for investment under Section 54EC.
Section 54F for Saving LTCG Tax on Gold, Mutual Funds, Shares & other Assets
Under Section 54F, investors can save taxes from the capital gains arising from the sale of Gold, mutual funds, shares, and other non-real estate assets. For utilizing Section 54F, the entire investment needs to be re-invested into real estate. Note here: Not just the capital gains, but the entire capital. For example, you bought Gold for Rs 5 lakh, and after 5 years, you sold the same for Rs 10 lakh.
To avail of tax-saving benefits under Section 54F, you will be required to invest the entire Rs 10 lakh into a real-estate asset. However, there are lots of fine-prints within these provisions to save on Long Term Capital Gain taxes, and you will need an expert tax coach to help you navigate this puzzle.
At MSMEx, you get business mentors and expert guidance right away. MSMEx is a platform of business experts, tax experts, venture capital consultants, funding coaches, and more, who can help you with not only tax-related queries but every aspect of being an entrepreneur.