Long Term Capital Gains Tax (LTCG) - Exemption and Saving Tax on LTCG

When you sell an asset, such as property, shares, or mutual funds, for a profit, that profit is called capital gain. If you hold the asset for a long time before selling it, the tax you pay on that profit is called Long Term Capital Gains Tax (LTCG). LTCG applies to assets held for more than a year (for stocks and mutual funds) or more than three years (for real estate). In this blog, we will explain LTCG, how it is calculated, exemptions available, and ways to save on LTCG tax.

Open Demat account -  Start investing with a quick setup

What is Long Term Capital Gains Tax (LTCG)?

Long Term Capital Gains Tax (LTCG) is the tax you pay on the profit earned when you sell an asset that you have held for a longer period of time. For example, if you buy shares of a company for ₹1,000 and sell them after 2 years for ₹1,500, the ₹500 profit is considered a long-term capital gain.

LTCG applies to different types of assets, including:

• Stocks and Mutual Funds: Assets held for more than one year.
• Real Estate: Assets held for more than three years.
• Bonds: Assets held for more than one year.

The tax rate on LTCG depends on the type of asset and the rules set by the government. In India, before Union Budget 2024, the tax rate on LTCG for shares and mutual funds was 10% above an exemption limit of ₹1 lakh. However, the Union Budget 2024 has introduced changes, including a new rate of 12.5% with a higher exemption limit.

Calculation of LTCG Tax

Let’s understand how LTCG tax is calculated with a simple example:

Example:

You bought 100 shares of a company at ₹100 per share. After 2 years, you sold them for ₹150 per share. Now, let’s calculate the LTCG.

1. Selling Price: ₹150 * 100 = ₹15,000
2. Cost Price: ₹100 * 100 = ₹10,000
3. Capital Gain: ₹15,000 – ₹10,000 = ₹5,000
4. LTCG Tax (Before Budget 2024): 10% of ₹5,000 = ₹500
5. LTCG Tax (After Budget 2024): 12.5% of ₹5,000 = ₹625

Steps to Calculate LTCG Tax:

1. Determine Selling Price: The amount you get when you sell the asset.
2. Subtract Cost Price: The amount you originally paid for the asset.
3. Calculate the Capital Gain: Selling Price – Cost Price.
4. Apply Exemption Limit: If your gain is below the exemption limit, you don’t have to pay any tax. If it’s above the limit, apply the applicable tax rate.
5. Apply the Tax Rate: Depending on the type of asset and the budget, the LTCG tax rate will apply to the gain above the exemption limit.

Previous LTCG @ 10%; (Exemption – Rs.1 lakh) - Regulation Before Union Budget 2024

Before the Union Budget 2024, the LTCG tax rate was 10% on gains above ₹1 lakh for assets like stocks and mutual funds.

Example (Before Budget 2024):

• If you made ₹1,50,000 in LTCG from selling stocks, you would get an exemption on the first ₹1 lakh.
• The remaining ₹50,000 would be taxed at 10%, so the tax would be ₹5,000.

New LTCG @ 12.5%; (Exemption – Rs.1.25 lakh) - Regulation After Union Budget 2024

After the Union Budget 2024, the LTCG tax rate has increased to 12.5%, and the exemption limit has also increased to ₹1.25 lakh. This means you can earn up to ₹1.25 lakh in LTCG without paying any tax.

Example (After Budget 2024):

• If you made ₹1,50,000 in LTCG from selling stocks, you would get an exemption on the first ₹1.25 lakh.
• The remaining ₹25,000 would be taxed at 12.5%, so the tax would be ₹3,125.

Tax on Long-term Capital Gain

When you sell an asset after holding it for a long period, the government taxes the profit. For example, if you sell a property, mutual fund, or stock, you pay tax on the profit you made. The tax on LTCG is usually lower than the tax on short-term gains because the government wants to encourage long-term investment.

Exemptions on Long-Term Capital Gains Tax (LTCG)

There are several ways to exempt or reduce your Long-Term Capital Gains Tax (LTCG). Let’s look at the different exemptions with examples for each method.

1. Exemption Under Section 54 – Selling One House and Buying Another

Explanation: If you sell a house and use the profits to buy another house, you can exempt the capital gains from the sale of the first house under Section 54 of the Income Tax Act. This is only applicable for residential property.

Example:

• You sold a house and made a capital gain of ₹30 lakh.
• You use the ₹30 lakh to buy a new house within 1 year before or 2 years after the sale.
• The entire ₹30 lakh capital gain is exempt from tax because you used the profit to buy another house.

2. Exemption Under Section 54EC – Investment in Specified Bonds

Explanation: Under Section 54EC, you can invest the capital gains in specific bonds issued by the government, such as NHAI (National Highways Authority of India) Bonds or REC (Rural Electrification Corporation) Bonds. This will allow you to exempt up to ₹50 lakh of your capital gain from tax.

Example:

• You made a capital gain of ₹40 lakh from selling land.
• You invest the ₹40 lakh in NHAI bonds within 6 months of selling the property.
• Since the investment is made in government bonds, the ₹40 lakh gain is exempt from LTCG tax.

3. Exemption Under Section 54F – Selling Land or Property and Buying a Residential Property

Explanation: If you sell any property (other than a residential property) and use the profits to buy a residential property, you can exempt the capital gains under Section 54F. However, you must use the entire sale proceeds (not just the gain) to purchase the new residential property.

Example:

• You sold a plot of land for ₹20 lakh and made a capital gain of ₹10 lakh.
• You use the entire ₹20 lakh (sale proceeds) to buy a new residential house.
• Since you used all the proceeds to buy a residential property, the entire ₹10 lakh capital gain is exempt from tax under Section 54F.

4. Exemption for Capital Gains on Sale of Agricultural Land

Explanation: Agricultural land located in certain rural areas is exempt from capital gains tax under Section 10(37) of the Income Tax Act, provided the land was used for agricultural purposes and the owner was involved in farming.

Example:

• You sold a piece of agricultural land located in a rural area for ₹25 lakh.
• Since the land was used for agricultural purposes, the capital gain is exempt from tax under Section 10(37).

5. Exemption on Reinvestment of LTCG in Bonds – Section 54GB

Explanation: Under Section 54GB, if you sell a long-term capital asset (like property or shares) and reinvest the proceeds in a start-up or small business (in specified bonds), the capital gains are exempt from tax.

Example:

• You sell a piece of land for ₹15 lakh and make a capital gain of ₹5 lakh.
• You invest the ₹5 lakh gain in shares of a start-up that qualifies under Section 54GB.
• As a result, the ₹5 lakh capital gain is exempt from tax because it was reinvested in a small business.

6. Exemption for Investments in Rural Development Bonds (Section 54EC)

Explanation: As mentioned earlier, under Section 54EC, you can invest in Rural Development Bonds within 6 months of selling a property to exempt the capital gains from tax. These bonds are issued by the government to promote rural development.

Example:

• You made a capital gain of ₹10 lakh from selling agricultural land.
• You invest the ₹10 lakh in Rural Development Bonds.
• Since the bonds are eligible for exemption, the ₹10 lakh capital gain is exempt from tax.

7. Tax Deduction Under Section 80C for Certain Investments

Explanation: While Section 80C is generally for income tax deductions, some investments like National Savings Certificates (NSC) and Public Provident Fund (PPF) can be used by investors to reduce their taxable income, thereby indirectly helping them save on capital gains.

Example:

• You sell a stock and make a capital gain of ₹5 lakh.
• You invest part of the gain in a PPF account or buy NSCs.
• This investment qualifies for tax deductions under Section 80C, reducing the overall taxable income, and thus indirectly reducing your capital gains tax.

8. Carry Forward of Losses in LTCG

Explanation: If you have a capital loss from selling an asset, you can carry forward that loss to set off against future capital gains. This means that if you sell assets at a loss this year, you can save tax on future gains by adjusting the loss against those gains.

Example:

• In 2023, you sold shares at a capital loss of ₹3 lakh.
• In 2024, you sell stocks at a capital gain of ₹5 lakh.
• You can carry forward the ₹3 lakh loss from the previous year and adjust it against the ₹5 lakh gain, meaning you only pay tax on ₹2 lakh.

Saving Tax on Long-Term Capital Gain

There are several ways to save tax on your LTCG:

1. Use the Exemption Limit: Ensure that your capital gain is below the exemption limit (₹1.25 lakh for the new rules). If it’s below the limit, you don’t have to pay any tax.
2. Reinvest in a New Property: If you sell a house, you can reinvest the profit in a new property and save tax under Section 54.
3. Invest in Tax-saving Bonds: You can invest in 54EC bonds, which will exempt the gains from tax up to ₹50 lakh.
4. Offset Losses: If you have capital losses from other investments, you can offset them against your gains. This can reduce your taxable income.
5. Holding for Longer: By holding the asset for a longer period, you might be able to make use of exemptions or lower rates, depending on the asset class.

Key Changes Introduced in ITR Forms for (AY) 2025–26

For the assessment year 2025-26, there are some key changes in the Income Tax Return (ITR) forms related to LTCG. The new forms require detailed reporting of:

• The date of acquisition of assets.
• The cost of acquisition and improvements
• The capital gains earned on the sale of assets, whether they are short-term or long-term.

This makes it easier for the government to track long-term gains and apply the correct tax.