What is Long-term capital gains tax? All you need to know

Long-term Capital Gain tax or LTCG is levied on the capital you gain from investments over a longer period of time. It is different from short-term capital gains tax. LTCG is levied on gains over Rs 1 lakh if you sell equities that have been held by you for over one year from the date of purchase. For capital assets like property or agricultural land, the LTCG tax is levied if the holding period is over three years. If you are confused about it, here is an explainer about long-term capital gain tax:

What is capital gain?

Capital gain occurs when a person earns a profit by selling capital assets. This is defined as any kind of property held by the individual, jewellery and artwork. “Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992” or “Any ULIP to which exemption under section 10 (10D) does not apply on account of the applicability of the fourth & fifth proviso thereof” also comes under capital gains, according to the Income Tax Department.

Capital gains are divided into two parts- short term and long-term. Short-term capital gain tax is levied on capital assets which have been held for not more than 36 months, or 12 months in case of equities. Long-term capital gains tax is levied on those capital assets which exceed this time frame.

What is the rate of taxation?

For long-term capital assets like property, the LTCG is computed by a process called indexation. This means that the “cost of acquisition is adjusted against inflationary rise in the value of asset.”

The long-term capital gain tax is usually calculated at 20 percent, plus cess and surcharge, as applicable. But in certain cases, the LTCG can be levied at 10 percent on total capital gain, plus cess and surcharge. There are some exemption limits as well.

1. For non-resident individuals and Hindu Undivided Family, Rs 2.5 lakh is the exemption limit.
2. For resident individual aged 80 years and above, the exemption limit is Rs 5 lakh.
3. The exemption limit is Rs 3 lakh for resident individuals between 60-80 years.
4. For resident individuals below 60 years, the exemption limit is Rs 2.5 lakh.

In the 2022-23 Budget, it was proposed that the surcharge on LTCG would be capped at 15 percent for all assets. This was done to reduce the income tax burden for investors.

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