Long-term Capital Gain Tax:

Long-term-Capital-Gain-Tax

As we understand, Capital Gains Tax are basically of two types:

  • Short-term Capital Gain Tax
  • Long-term Capital Gain Tax

In this article, our focus will be on Long-term Capital Gain Tax. We will try to learn the intricacies of the subject in detail and cover all the vital aspects.

Long-term Capital Gain Tax is the tax imposed on long-term capital gains. Long-term Capital Gains are defined as those gains which are calculated after disposing the assets by holding it for more than the 3 years of time. Any capital asset held by the taxpayer for a time of over three years immediately preceding the date of its transfer will be considered as long-term capital asset. Although, in cases of certain assets like equity shares or preference shares that are listed in a perceived stock exchange in India (listing of shares is not compulsory if transfer of such shares happened on or before the date of July 10, 2014), units of equity oriented mutual funds, listed debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of holding to be considered is 1 year rather than 3 years. An important point to be noted here is that period of holding to be assumed as 2 years instead of 3 years in case of unlisted shares of a firm or an immovable asset being land or building or both of them.

Long-term capital gains emerging on account of sale of equity shares listed in a perceived stock exchange, i.e., Long-term capital gains exempted under section 10(38) (Upto Assessment year 2018-19). According to section 10(38), long-term capital gain arising on transfer of equity share or units of equity oriented mutual fund (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) or units of business trust is not subject to tax in the hands of any person, so long the following conditions are met:

  • The transaction of sale of units of business trust or units of an equity oriented mutual fund or equity shares should be subject to securities transaction tax.
  • Those shares/units should be long-term capital asset.
  • Transfer should have taken place on or after October 1, 2004.

In other language, if Long-term capital gain is provided under section 10(38), then it is exempted from tax. Exemption from long-term capital gains under section 10(38) will be available with effect from April 1, 2017 even where Securities Transaction Tax (STT) is not paid, given that transaction is undertaken on a perceived stock exchange situated in any International Financial Service Centre, and consideration is paid or payable in overseas currency. With effect from the Assessment Year 2019-20, as mentioned in Section 10(38), exemption for long-term capital gains emerging from transfer of listed securities has been revoked by the Finance Act, 2018 and a new section 112A has been inserted in the Income-tax Act.

According to Section 112A, long-term capital gains emerging from transfer of an equity share, or a unit of an equity oriented fund or a unit of a business trust will be taxed at 10% without indexation of such capital gains. The tax on capital gains will be charged in case of a surplus amount of Rs. 1 lakh.

The long-term capital gains are levied at tax rate of 20% in addition to surcharge and cess as found applicable. However, in some special scenarios, the gain could be at the option of the taxpayer levied at the tax rate of 10% in addition to surcharge and cess as found applicable. The advantage of charging long-term capital gain at 10% is available only in the below mentioned scenarios:

  • Long-term capital gains emerging from sale of listed securities and which exceeds Rs. 1,00,000 as provided under Section 112A
  • Long-term capital gains emerging from transfer of any of the following asset: a) Any security (such as shares, scrips, stocks, bonds, debentures, debenture stocks or other marketable securities of a similar kind in or of any incorporated firm or other body corporate, Government securities, such other instruments as might be declared by the Central Government to be securities and rights or interest in securities) which is listed in a perceived stock exchange in India (As amended by Finance Act, 2020) b) Any unit of listed or unlisted UTI or mutual fund. This option is available with respect to units sold on or before 10-7-2014 and c) Zero coupon bonds

With effect from Assessment Year 2019-20, The Finance Act, 2018 inserts a new Section 112A. According to the new section capital gains emerging 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 will be taxed at the rate of 10 per cent of such capital gains above Rs. 1,00,000. This lower tax rate of 10 per cent will be applicable only: a) in a case of an equity share in a company, securities transaction tax has been paid on both transfer and acquisition of such capital asset; and b) in case of a unit of an equity oriented fund or a unit of a business trust, STT has been paid on transfer of such capital asset. The acquisition cost of a listed equity share bought by the taxpayer before February 1, 2018, will be considered to be the higher of following: a) The actual acquisition cost of asset; or b) Smaller of the following: (i) Fair market value of such shares as of date January 31, 2018; or (ii) On its transfer, Actual sales consideration. The Fair market value of listed equity share shall mean its highest price quoted on the stock exchange as of date January 31, 2018. On the contrary, 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 occurs in that share will be considered as its Fair market value. In case of units which are not listed on perceived stock exchange, the net asset value of such units as on January 31, 2018 will be considered as its Fair Market Value. In a case where the capital asset is an equity share in a company which is not listed on a perceived 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 Fair Market Value.

A taxpayer who has earned long-term capital gains from transfer of any listed security or listed or unlisted mutual fund or any unit of UTI, not being provided under Section 112A, and Zero coupon bonds shall have the following two alternatives: a) Avail the advantage of indexation; the capital gains so computed will be levied at normal tax rate of 20% in addition to surcharge and cess as found applicable. b) No avail of advantage of indexation; The capital gain estimated is levied at the tax rate of 10% in addition to surcharge and cess as found relevant. The choice of the alternatives is to be done by calculating the tax liability under both the alternatives, and the alternative with lower tax liability is to be preferred.

Basic exemption limit means the level of income up to which a person is not required to pay any tax which implies that there will be no tax liability if the income of the taxpayer falls below the basic exemption limit. The basic exemption limit applicable in case of an individual for the financial year 2019-20 is as follows:

  • The exemption limit is Rs. 5,00,000 for resident individual of the age of 80 years or above.
  • The exemption limit is Rs. 3,00,000 for resident individual of the age of 60 years or above but below 80 years.
  • The exemption limit is Rs. 2,50,000 for resident individual of the age below 60 years.
  • The exemption limit is Rs. 2,50,000 for non-resident individual regardless of the age of the individual.
  • The exemption limit is Rs. 2,50,000 for Hindu Undivided Family (HUF).

Now suppose if the taxpayer could adjust the basic exemption limit against long-term capital gain. How would that work? The procedure is explained below:

A resident individual and resident HUF only can apply for adjustment of the exemption limit against long-term capital gain. Hence, a non-resident individual/HUF could not adjust the exemption limit against long-term capital gain. A resident individual or HUF can perform the adjustment of the short-term capital gain but such adjustment is feasible only after performing the adjustment of other income. In other language, first income apart from long-term capital gain would (As amended by Finance Act, 2020) be adjusted against the exemption limit and then the residual limit could be adjusted against LTCG.

No deduction under sections 80C to 80U is allowed for long-term capital gains.

  • What is a Long-term Capital Gain Tax?
  • Long-term Capital Gain Tax is the tax imposed on long-term capital gains. Long-term Capital Gains are defined as those gains which are calculated after disposing the assets by holding it for more than the 3 years of time.

  • Define long-term capital asset.
  • Any capital asset held by the taxpayer for a time of over three years immediately preceding the date of its transfer will be considered as long-term capital asset.

  • How 10(38) and 112A is related to Long-term Capital Gain?
  • Long-term capital gains emerging on account of sale of equity shares listed in a perceived stock exchange, i.e., Long-term capital gains exempted under section 10(38) (Upto Assessment year 2018-19). With effect from the Assessment Year 2019-20, as mentioned in Section 10(38), exemption for long-term capital gains emerging from transfer of listed securities has been revoked by the Finance Act, 2018 and a new section 112A has been inserted in the Income-tax Act. According to Section 112A, long-term capital gains emerging from transfer of an equity share, or a unit of an equity oriented fund or a unit of a business trust will be taxed at 10% without indexation of such capital gains. The tax on capital gains will be charged in case of a surplus amount of Rs. 1 lakh.

  • Are there different tax slabs for Long-term Capital Gain Tax?
  • The long-term capital gains are levied at tax rate of 20% in addition to surcharge and cess as found applicable. However, in some special scenarios, the gain could be at the option of the taxpayer levied at the tax rate of 10% in addition to surcharge and cess as found applicable.

  • What are the cases when the benefit of lower tax rate of 10% on Long-term Capital Gain Tax can be availed?
  • The advantage of charging long-term capital gain at 10% is available only in the below mentioned scenarios:

    1) Long-term capital gains emerging from sale of listed securities and which exceeds Rs. 1,00,000 as provided under Section 112A

    2) Long-term capital gains emerging from transfer of specified asset

  • Is there any deduction under section 80C to 80U on Long-term Capital Gain?
  • No deduction under sections 80C to 80U is allowed for long-term capital gains.