Long Term Capital Gain Tax. All you need to know about LTCGOff late one of my relatives has sold some real estate property in his locality. Due to this sale transaction, he received a notice from the Income Tax authority asking him to pay Long Term Capital Gain Tax for Rs.30 Lakhs. I helped him to the best of my ability and made a compliance with the provision of law. That incident prompted me to write a blog post on Long Term Capital Gain Tax. All you need to know about LTCG. I will try to bring forth every aspect of LTCG before you with very easy examples so that this post helps others in some complicated tax matters.Long Term Capital Gain TaxTransfer of Capital Asset generates two types of Capital Gains viz; Long Term and Short Term. Today I will discuss only on Long Term Capital Gain.As per Section 45(1) of the Income Tax Act, Capital Gain would arise if the following conditions are satisfied:? Transfer of Capital Asset (U/S 2(14). It has to be a Capital Asset;? Profit or Gain i.e. Capital Gain should arise out of such transaction;? It is charged to tax in the year of transfer i.e. in which year the transaction took place;? This capital gain should not be exempted U/S 54 of the I.T Act;? No transfer of personal effects such as TV, Laptops, personal cars and etc;What is Long Term Capital Asset:An asset is called long term capital asset if it is held for more than 36 months. This period of 36 months has been reduced to 24 months in case of immovable properties such as land, building and house property w.e.f F.Y 2017-18.However, for some movable assets, the holding period is still 36 months and not 24 months such as jewellery, paintings, antiques, Bonds, Govt. securities and Debt oriented mutual funds.In case of listed equity shares or stocks, units of equity oriented mutual funds and debentures, if they are held for more than 12 months, they will be termed as long term capital asset. For unlisted securities or shares the holding period is 24 months for long term capital asset as per Section 2(42A) of the IT Act, w.e.f F.Y 2017-18 .Treatment of Long Term Capital Gain Tax on the sale of propertyNow, before going into the details, let's just see how to compute LTCG i.e. the format for LTCG computation.Computation of Long Term Capital GainParticularsAmount(INR)Amount(INR)Full Value Consideration of the property*******Less: Expenses on Transfer****Net sale consideration*****Less: Indexed cost of acquisition*****Less: Indexed cost of improvement**********Gross Long Term Capital Gain*******Less: Exemptions if any U/S 54****Long Term Capital Gain taxable in the hands of the Assessee*****Here,Full Value Consideration means the amount of consideration received or to be received either in full or partial on such transfer of capital asset. This should also be kept in mind that here Sale means the actual transfer or Deemed transfer.Expenses on Transfer means the amount of expenses incurred for effecting the transfer process such as Advertisement expenditure, Brokerage to an agent, Stamp Duty, Registration fees, and legal expenses.Cost of acquisition means the actual amount of money the assessee has paid to acquire the original capital asset. In simple terms, the actual purchase price of the property transferred or to be transferred. But if any capital asset is owned by a person from inheritance i.e. in case of the ancestral property the cost of acquisition in the hands of the assessee is nil.Cost of improvement means the amount of money incurred during the ownership of the property for maintenance or improvement of the property.Indexed cost means adjustment of the previous cost with inflation rate or index rate. To be precise, if Rs.100 was incurred in 2024. what would be the current cost after giving indexation benefit in 2018.You may also be interested in:What is BSBD account? Basic Savings Bank Deposit accountHow to estimate retirement corpusHow to calculate mutual fund returns in excelNow, let's just take an example for easy understanding of how Long Term Capital Gain Tax arises and how to calculate it?Example 1: Mr Subhas had acquired a residential property for Rs. 11,00,000 in the year 1996. In 2024 he decided to sell his residential property for 57,00,000. Mr Subhas incurred the following expenses to execute this Belgrade Airport Shuttle Taxi Transfer.RS.8000 for Advertisement exp. Rs.57000 as brokerage fees. Rs.330000 as registration fees and Rs. 25000 as Legal expenses.He also incurred Rs.80,000 in 2024 for his house painting works. Index cost in 1996 was 305, for 2024 was 426 and for 2024 it was 1125. Now, just calculate how much Long Term Capital Gain Tax Mr Subhas will have to pay in 2018?Computation of Long Term Capital Gain Tax of Mr Subhas using the above table.Computation of Long Term Capital GainParticularsAmount(INR)Amount(INR)Full Value Consideration of the property57,00,000Less: Expenses on Transfer4,20,000Net sale consideration(A)52,80,000Less: Indexed cost of acquisition1100000*(1125/305)=40,57,377Less: Indexed cost of improvement80,000*(1125/426)=2,11,268(B)42,68,645Gross Long Term Capital Gain10,11,355Less: Exemptions if any U/S 540Long Term Capital Gain taxable in the hands of Mr SubhasRs.10,11,355Therefore, Mr Subhas has to pay Rs. 2,14,407(1011355*20%)+3% Education Cess as Long Term Capital Gain Tax.Live practical example to eradicate complicacy in understanding and paying Long Term Capital Gain TaxNow take another live example of my uncle which I already mentioned at the beginning of this post.My uncle had purchased one plot of land in the year 1984 for Rs. 10000 only. This land had three co-owners including my uncle with equal share each. In the year 2024. all the co-owners decided to assign a promoter to construct residential flats on that land and executed one power of attorney in the name of the developer. It was decided in the agreement to share the total revenue in 70:30 ratio between the developer and the co-owners. In the year 2024. the Fair Market Value of that land was fixed at Rs. 2.10 Crores by the Income tax authority. Out of the total commutable area, my uncle's share was around 2400 square feet only and 200 Sq. feet for a parking garage. As per the I.T valuer, the fair market valuation was fixed at Rs.1250/Sqr ft. for flat and 50% i.e. Rs.625 for the parking garage for the year 2013.LTCG Tax implicationsHere, one point is to be kept in mind that though in the year 2024 my uncle did neither receive any consideration nor any sale transaction was made. But then why the Income Tax authority sent LTCG tax notice. It's because of deemed transfer. This means at the time of entering into the agreement with the developer of flats, it was provisioned as a sale transaction since the ownership of the capital asset was transferred in the ratio of 70:30.What will be his LTCG tax liabilityThis is needless to mention that his deemed sale consideration will not be Rs.70 lakhs(2.10 Cr/3). Since it was not a sale of a land transaction rather building a residential complex on our behalf. In that case, the long term capital gain tax is to be computed as below.Computation of Long Term Capital Gain Tax on propertyParticularsAmount(INR)Amount(INR)Full Value Consideration u/s 50C read with 50D of the I.T Act(2400 X 1250)?3,000,000.00Full value consideration for parking lot(200 X 625)?125,000.00Total sale consideration?3,125,000.00Less: Expenses on Transfer?0.00Net sale consideration?3,125,000.00Less: Indexed cost of acquisition(10000 X 852/125)?68,160.00Gross Long Term Capital Gain?3,056,840.00Less: Exemptions if any U/S 54?0.00Long Term Capital Gain taxable in the hands of my uncle?3,056,840.00Now, he has to pay long term capital gain tax of Rs.6,11,369(3056840*20%)+3% E. Cess.LTCG tax rate: LTCG tax as fixed by the IT Act is 20% + 3% Education Cess. However, if the assessee does not have any other taxable income, out of the total capital gain basic exemption limit of Rs.250000 or Rs.300000 for senior citizen only would be exhausted first and LTCG tax would be applicable on the balance LTCG. This means the IT Act provides some relief for those who do not have any other income or has income below the basic exemption limit.How to avoid payment of Long Term Capital Gain Tax on the sale of land or residential building as per above practical examplePayment of LTCG tax can be avoided in the following two ways or in other words, there are exemptions u/s 54 and 54 EC of the I.T Act.Exemption u/s 54 of the I.T Act.Exemption from Long Term Capital Gain tax u/s 54 of the I.T ActNew asset to be acquiredResidential House PropertyAmount to be invested in new assetLong term capital gain arose on transferExemption limitAmount invested in the new residential house or capital gain whichever is lowerTime limit for investment1. For purchase: Within one year before or two years after the date of transfer2. For construction: Within 3 years after the date of transferUnutilized amount if any1.If any amount remains unutilized before the due date for filing of the return, it should be kept in Capital Gain Account Scheme.2. Thereafter, this unutilized amount should be utilized within the specified time period.3. If any amount could not be utilized, it shall be treated as Long Term Capital Gain in the previous year in which the specified time period expires.Holding periodThe new residential house property so acquired should be held for 2 years(w.e.f F.Y 2017-18) from the date of acquisition or construction.Exemption u/s 54EC of the I.T Act.Exemption from Long Term Capital Gain tax u/s 54EC of the I.T ActNew asset to be acquiredBonds redeemable after 5 years issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation Ltd.(RECL).Amount to be invested in new assetLong term capital gain arose on transfer. The maximum amount that can be invested by a person in a financial year is Rs. 50 Lakhs. And from F.Y 2014-15 aggregate of maximum investment in this bond is restricted to Rs.50 Lakhs irrespective of financial year.Exemption limitAmount invested in bonds or capital gain whichever is lower subject to maximum Rs.50 Lakhs w.e.f F.Y 2018-19.Time limit for investmentWithin 6 months from the date of transfer.Other restrictionIf exemption has been availed u/s 54EC, investment in this bond cannot be claimed for deduction u/s 80C.Holding period in bond investmentInvestment in this notified bonds shall be kept for minimum 5 years w.e.f F.Y 2018-19 as introduced from 1.04.2024 in Budget 2024. Otherwise, exemption availed of u/s 54EC shall be treated as LTCG in the year of such sale of a new asset.Final words on Long Term Capital Gain Tax. All you need to know about LTCGI hope I have done enough justice on this blog post. I have tried to keep all the discussions very simple and lucid so that everyone can take advantage of this learning. If you like my work kindly share with others for the benefit of all.
