How does long term capital gains tax impact you?

Introduction

In India, any income or profit earned is taxable. Just like you pay income tax on any income that you generate, profit from the sale of assets also attracts tax. If you sell shares, mutual fund units, real estate, gold and even artwork, the gains from these assets are subject to tax.

There are two kinds of tax levied on capital gains—short-term capital gains tax and long-term capital gains tax. This article will talk about the latter and its implications on your finances.

What is long-term capital gains tax?

Long-term capital gains tax, or LTCG tax as it is more commonly known, is a tax that you pay for gains earned on assets you hold for a long term. The duration for an asset to be classified as a long-term holding varies from one asset to another.

On stocks and equity oriented mutual funds held for longer than a year, LTCG tax is applicable. For any profit of more than Rs. 1,00,000 for more than a year from equity investments, LTCG tax of 10% is levied.

Additional read: Equity Capital Gains Taxation and Tax Loss Harvesting in Stock Markets

A holding period of more than three years is considered long term for debt mutual funds. Irrespective of the tax bracket you fall under, the LTCG tax on debt mutual funds is 20% after indexation. Indexation adjusts the cost of purchase of debt mutual fund units according to the prevailing inflation rate. This usually reduces your tax liability.

LTCG tax is levied on real estate and land holdings held for more than two years. Like debt mutual funds, the LTCG tax rate is 20% on real estate after indexation.

LTCG tax on gold is 20% after indexation. You must own gold for at least three years before being sold to be considered a long-term holding.

Other moveable assets such as paintings, art and even cars are subject to LTCG tax if held for more than three years. The rate is 20% after indexation.

How Does long term capital gains tax impact you

Impact on your finances

Long-term capital gains tax can impact you if you sell any capital assets and earn a profit on those. For instance, if you sell a house you bought ten years ago, any gains you make from it will attract an LTCG tax of 20%. You will have to declare these gains while filing your income tax returns.

However, any inheritance that you get is exempt from tax. If you inherit property, gold or any other capital asset from a family member, you do not have to pay tax. If you sell inherited assets, you will have to pay LTCG tax.

Avoiding LTCG tax

If you want to avoid paying LTCG tax, there are ways to reduce your outgo. For long-term gains from the sale of property, land or any other immovable asset, you can reinvest the gains in another immovable property or certain bonds sanctioned by the government.

To avoid tax on the sale of other assets, you can reinvest the entire amount in property. Unlike real estate sales, you cannot invest only the gains. You need to reinvest the sale amount. For instance, if you sell debt mutual funds worth Rs. 10,00,000 and earn a profit of Rs. 2,00,000, you must reinvest the entire Rs. 12,00,000 in property to be able to avail of the tax exemption. 

Conclusion

Depending on the capital asset you sell, India’s taxation laws require you to pay long-term capital gains tax. Since this can be a significant amount, there are ways to save this tax. Consult a tax expert to help you plan what to do with your capital gains.