Long Term Capital Gain (LTCG)

Type of Capital Asset: Short Term and Long Term

Type of Capital Asset

Holding Period of the Asset

Short Term

Long Term

Listed shares

Less than 1 year

1 year or more

Equity-oriented mutual funds

Less than 1 year

1 year or more

Debt-oriented mutual funds

Less than 3 years

3 years or more

Unlisted shares

Less than 2 years

2 years or more

Immovable properties

Less than 2 years

2 years or more

Movable property

Less than 3 years

3 years or more

Computation of Long Term Capital Gain (LTCG):

Full Value of Consideration = A

Brokerage / commission/ advertisement expense) = B

Indexed Cost of Acquisition = C

Indexed Cost of Improvement = D

Long Term Capital Gain (G) = A-B-C-D

Indexation is a process by which the cost of acquisition is adjusted against inflationary rise in the value of asset. For this purpose, Central Government has notified cost inflation index. The benefit of indexation is available only to long term capital asset.

Indexed Cost of Acquisition = (Cost of Acquisition x Cost inflation index of the year of transfer)/ Cost inflation index of the year of Acquisition. 

Indexed Cost of Improvement = (Cost of Improvement x Cost inflation index of the year of transfer)/ Cost inflation index of the year of Improvement. 

Tax on long-term capital gain

Generally LTCGs are charged to tax at 20%. But certain special cases gain may be charged to tax at 10%. The benefit of charging LTCG at 10% in some cases discussed below.

The concessional rate of 10% will be applicable:

  • LTCG arising from sale of listed securities and it exceeds Rs. 100000 (U/S 112A)
  • LTCG arising from transfer of any of the following asset:
    1. Any security which is listed in a recognized stock exchange in India;
    2. Any unit of UTI or mutual fund (whether listed or not) units sold on before 10.07.2014 and
    3. Zero coupon bonds

Long-term capital gains arising from sale of listed securities

Section 112A provides that capital gains arising from transfer of a long term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust shall be taxed at the rate of 10% of such capital gains exceeding Rs. 100000. It is applicable if Securities Transaction Tax (STT) has been paid on both acquisition and transfer for equity share and on transfer for equity oriented fund.

The Cost of Acquisitions of a listed equity share before February 1, 2018 shall be higher of the following:

(A) Actual Cost of Acquisition

(B) Lower of the following:

                  a. Fair Market Value (FMV) as on January 31, 2018

                  b. Actual Sales of Consideration on transfer.

N.B.: How to get Fair Market Value (FMV)?

 If there is no trading in such shares on January 31, 2018 the highest price of such share on a date immediately preceding January 31, 2018 on which trading happens in that share shall be deemed as its FMV.

In case of units which are not listed on recognized stock exchange, the net asset value of such units as on January 31, 2018 shall be deemed to be its FMV.

In a case where the capital asset is an equity share in a company which is not listed on a recognized stock exchange as on 31-1-2018 but listed on the date of transfer, the cost of unlisted shares as increased by cost inflation index for the financial year 2017-18 shall be deemed to be its FMV.

Long-term capital gains arising from transfer of specified asset

A taxpayer who has earned long-term capital gains from transfer of any listed security or any unit of UTI or mutual fund (listed or not), Zero coupon bonds not being covered under Section 112A, shall have the following two options:

  • Avail of the benefit of indexation: The capital gains so computed will be charged to tax at normal rate of 20%.
  • Do not avail of the benefit of indexation: The capital gain so computed is charged to tax at the rate of 10%.

The selection of the option is to be done by computing the tax liability under both the options, and the option with lower tax liability is to be selected.

Calculation of tax with example (AY 2023-2024 FY 2022-2023):

Ex.1 Mr. X is a salaried employee. He purchased 100 shares of ABC Ltd. in the month of January, 2016 Rs. 1400/share from BSE. These shares were sold through BSE in April, 2023 at Rs. 2600/share. The highest price of ABC Ltd. share quoted on the stock exchange on January 31, 2018 was Rs. 1800/share. What will be the nature of capital gain in this case?

Here holding period is more than 12 months and hence, the gain will be Long Term Capital Gain (LTCG). Shares are sold through recognized stock exchange and the transaction is liable to STT. Therefore, section 112A is applicable in this case.

The Cost of Acquisition of ABC Ltd. shares shall be of:

(A) Actual Cost of Acquisition = Rs. 1400 x 100 = Rs. 140000

(B) Lower of:

                  a. Highest price quoted as on 31.01.2018 is Rs. 1800 x 100 = Rs. 180000

                  b. Actual Sales of Consideration is Rs. 2600 x 100 = Rs. 260000

Thus, the Cost of Acquisition of shares shall be Rs. 180000. Hence, LTCG is Rs. (260000 – 180000) = Rs. 80000.

Since LTCG doesn’t exceed Rs. 100000, nothing is taxable.

Ex.2 Mr. A is a salaried employee. He purchased 100 shares in the month of July, 2017 of XYZ Ltd. at Rs. 2,000/share from BSE. These shares were sold through NSE in June, 2023 at Rs. 4900/share. The highest price of XYZ Ltd. share quoted on the stock exchange on January 31, 2018 was Rs. 3800/share. What will be the nature of capital gain in this case?

Explanation: LTCG and U/S 112A applicable.

Thus the Cost of Acquisition of shares shall be Rs. 380000. LTCG is Rs. (490000-380000) = Rs. 110000

Since LTCG exceeding Rs. 100000, therefore tax liability on Rs. 10000.

Tax liability is Rs. 10% Rs. 10000 = Rs. 1000/- (excluding cess).

EX.3 Mr. Y (a non resident) purchased equity shares (listed) in December 1995 for Rs. 28100. These shares are sold (outside recognized stock exchange) in April, 2022 for Rs. 500000. He does not have any other taxable income in India. What will be his tax liability?

In this situation, Mr. Y has following two options:

Particulars

Option 1 (Avail Indexation)

Option 2 (Don’t avail Indexation)

Full Value of Consideration

500000

500000

Indexed Cost of Acquisition

28100×331/100 = 93011

————————

Cost of Acquisition

————————-

28100

Taxable Gain

406989

471900

Tax @20%

81398

————————

Tax @10%

————————-

47190

From the above computation, it is clear that Mr. Y should exercise option 2.

Tax liability is Rs. 47190/-(excluding cess).

Adjustment of LTCG against the basic exemption limit:                                          

The basic exemption limit applicable in case of an individual resident for the F.Y. 2022-2023 (A.Y. 2023-2024) as follows:

Below 60 years age is Rs. 250000/-, age of 60 years to 80 is Rs. 300000/-, above 80 years is Rs. 500000/-

Only a resident individual/HUF can adjust the exemption limit against LTCG. Such adjustment is possible only after making adjustment of other income. And then the remaining limit (if any) can be adjusted against LTCG.

Deduction U/S 80C to 80U and LTCG:

No deduction U/S 80C to 80U is allowed from long term capital gains.

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