In India, Long Term Capital Gain (LTCG) refers to the profit made on the sale of a capital asset held for more than one year. The tax on LTCG is governed by the Income Tax Act, 1961, and is a vital component of the Indian taxation system.
The rate of tax on LTCG depends on the type of asset sold and the period of holding. As per the current tax laws, gains arising from the sale of equity shares, equity-oriented mutual funds, and units of business trusts are subject to a flat rate of 10% tax on gains exceeding Rs. 1 lakh. However, gains from the sale of other assets, such as debt-oriented mutual funds, gold, real estate, and non-equity shares, are taxed at 20% after adjusting for inflation.
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| Understanding Long Term Capital Gain Taxation in India |
The period of holding for an asset determines whether it is treated as a long-term or short-term capital asset. For equity shares and equity-oriented mutual funds, assets held for more than 12 months are considered as long-term, while for other assets, assets held for more than 36 months are considered long-term. Assets held for a shorter period are considered short-term, and the gains arising from their sale are taxed at a higher rate.
One of the significant advantages of LTCG in India is that it is taxed at a lower rate than short-term capital gains (STCG). The rate of tax on STCG is as per the applicable income tax slab, which can be as high as 30%. Therefore, holding on to an asset for a more extended period can significantly reduce the tax liability on its sale.
Another advantage of LTCG in India is that the gains are adjusted for inflation. The cost of acquisition of an asset is adjusted for inflation, which reduces the tax liability on its sale. This adjustment is made using the Cost Inflation Index (CII), which is published annually by the Central Board of Direct Taxes. This adjustment is beneficial as it considers the impact of inflation on the cost of the asset and ensures that the tax is levied only on the real gains made.
Moreover, the government provides various exemptions and deductions to reduce the tax liability on LTCG in India. For instance, under Section 54 of the Income Tax Act, if the gains from the sale of a residential property are invested in another residential property, then the tax liability on the gains is waived off. Similarly, under Section 54EC, if the gains are invested in specified bonds issued by the National Highways Authority of India or the Rural Electrification Corporation Limited, then the tax liability on the gains is reduced.
However, there are also some disadvantages of LTCG in India. One of the main disadvantages is that it reduces the liquidity of the asset. Holding on to an asset for an extended period can make it difficult to sell it when required, which may lead to a loss of opportunity or a lower selling price.
Another disadvantage is that the tax laws regarding LTCG in India are subject to frequent changes. The government may change the tax rate, the holding period, or the types of assets eligible for LTCG, which can impact the tax liability of the investor. Therefore, investors need to stay updated with the latest tax laws and plan their investments accordingly.
