How are Long-Term Capital Gains Taxed Under the Income Tax Act? A 2024 Guide

Have you recently sold a property, shares, or mutual funds that you’ve held for over a year? Congratulations on your profit! Now comes the crucial question: how will these gains be taxed? The income you earn from selling a capital asset is known as a ‘capital gain’, and the tax on it depends heavily on how long you held the asset. This article provides a clear, step-by-step explanation of how long-term capital gains are taxed in India. For a broader overview, you can also refer to our guide on Understanding Capital Gains Tax in India. For salaried individuals and small business owners, understanding long-term capital gains tax in India is essential for smart financial planning and avoiding any surprises when you file your income tax return.

First, What Qualifies as a Long-Term Capital Asset?

Before we dive into the tax rates and calculations, it’s vital to understand what the Income Tax Act considers a “long-term” asset. This classification is the first and most important step, as it determines everything from the tax rate to the potential for tax-saving benefits. The entire framework of capital gains taxation hinges on this simple yet critical distinction.

Defining a Capital Asset

A capital asset is generally defined as any kind of property held by you, whether or not it’s connected to your business or profession. This is a broad definition that includes:

Immovable property like land, buildings, and apartments.
Securities such as shares, bonds, and debentures.
Units of mutual funds.
Precious metals like gold and silver.
Art, sculptures, and archaeological collections.

However, the Act also specifies certain items that are not considered capital assets. These include stock-in-trade (inventory for a business), raw materials, and personal effects like movable property (e.g., cars, apparel) held for personal use, though jewellery is a notable exception and is treated as a capital asset.

The Crucial Role of the Holding Period

The holding period is the length of time you own an asset before selling it. This period decides whether your profit is a Short-Term Capital Gain (STCG) or a Long-Term Capital Gain (LTCG). The required holding period to qualify as “long-term” varies depending on the type of asset.

Asset Type	Holding Period to Qualify as Long-Term
Listed Equity Shares & Equity-Oriented Mutual Funds	More than 12 months
Immovable Property (Land, Building, House Property)	More than 24 months
Debt-Oriented Mutual Funds	More than 36 months
Unlisted Shares	More than 24 months
Gold, Silver, Jewellery, Bonds, and Debentures	More than 36 months

As you can see, the holding period is the gateway to being classified as a long-term capital gain, which directly impacts the tax rate and the benefits you can claim.

How Exactly are Long-Term Capital Gains Taxed in India?

Now we get to the core of the matter. Once you’ve confirmed your profit is a long-term capital gain, the next step is to understand how long-term capital gains are taxed. The tax treatment is not one-size-fits-all; it depends entirely on the nature of the asset you sold.

LTCG on Sale of Listed Equity Shares & Equity Mutual Funds (Section 112A)

This is a common scenario for many investors, especially the long-term capital gains tax for salaried individuals who invest in the stock market.

Tax Rate: The tax rate is a flat 10% on the gains.
Exemption: There’s a significant benefit here. The first ₹1 lakh of such gains in a financial year is completely exempt from tax. The 10% tax is only levied on the portion of the gain that exceeds this ₹1 lakh threshold.
Condition: This tax rate applies only if the Securities Transaction Tax (STT) was paid at the time of both purchase and sale (for shares) or just sale (for mutual fund units).

Example: Mr. Sharma, a salaried employee, invested in some listed shares a few years ago. This year, he sold them and made a long-term capital gain of ₹1,50,000.

Total LTCG: ₹1,50,000
Exemption Limit: ₹1,00,000
Taxable LTCG: ₹1,50,000 – ₹1,00,000 = ₹50,000
Tax Payable: 10% of ₹50,000 = ₹5,000

LTCG on Sale of Immovable Property, Gold, & Debt Funds

For most other long-term assets, including property, physical gold, and debt mutual funds, the tax rate is a flat 20%. However, this 20% is not calculated on the simple profit. The Income Tax Act provides a powerful tool to reduce your tax liability: indexation.

What is Indexation and Why is it Your Best Friend?

Inflation erodes the value of money over time. A property bought for ₹20 lakh in 2005 is worth much more today, not just because of market appreciation but also because the value of ₹20 lakh itself has decreased due to inflation. Indexation is a mechanism that allows you to adjust the purchase price of your asset to account for this inflation. This increases your cost, thereby reducing your taxable profit.

The government releases a Cost Inflation Index (CII) for each financial year. You use this index to calculate the ‘indexed cost of acquisition’.

The formula is:
Indexed Cost of Acquisition = (CII of Sale Year / CII of Purchase Year) * Original Purchase Price

Let’s see how this works with a property sale example:

Mr. Gupta bought a flat in May 2006 for ₹25,00,000.
He sold the flat in October 2023 for ₹80,00,000.
CII for 2006-07 (Purchase Year) was 122.
CII for 2023-24 (Sale Year) is 348.

Without Indexation:

Simple Gain = ₹80,00,000 – ₹25,00,000 = ₹55,00,000
Tax @ 20% = ₹11,00,000 (A huge tax bill!)

With Indexation:

Calculate Indexed Cost: (348 / 122) * ₹25,00,000 = ₹71,31,147
Calculate Taxable Gain: ₹80,00,000 – ₹71,31,147 = ₹8,68,853
Tax Payable @ 20%: 20% of ₹8,68,853 = ₹1,73,771

As you can see, the benefit of indexation reduced Mr. Gupta’s tax liability by over ₹9 lakh!

Actionable Tip: You can find the complete list of CII values on the official Income Tax Department page.

Taxation of LTCG from Other Assets (e.g., Unlisted Shares)

The taxation of long-term capital gains India for other assets like unlisted shares (held for more than 24 months) or foreign stocks follows the 20% rule with the benefit of indexation, similar to property. This ensures that for most non-equity assets held long-term, your taxable gain is inflation-adjusted, providing significant relief.

Smart Ways to Save Tax on Your Long-Term Capital Gains

Making a profit is great, but legally minimizing your tax outgo is even better. The Income Tax Act provides specific exemptions that allow you to reduce or even nullify your long-term capital gains tax India liability, provided you reinvest the proceeds in a specified manner.

Section 54: Reinvesting Gains from Property into a New House

This is one of the most popular tax-saving avenues for individuals selling a residential property. You can learn more from our detailed guide on Section 54: Capital Gains Exemption on Sale of Residential Property.

Condition: You must sell a residential house and use the capital gain amount to buy or construct a new residential house in India.
Timeline: The new house must be purchased either 1 year before the date of sale or within 2 years after the date of sale. Alternatively, you can construct a new house within 3 years from the date of sale.
Capital Gains Account Scheme (CGAS): If you haven’t been able to reinvest the gain before the due date for filing your Income Tax Return (ITR), you can deposit the amount in a CGAS account with a specified bank. This move signals your intention to reinvest and allows you to claim the exemption in your ITR.

Section 54EC: Investing in Capital Gains Bonds

If you don’t want to buy another property, you can save tax on LTCG from the sale of land or building by investing in specific bonds.

Condition: You must invest the capital gain amount in specified 5-year bonds.
Eligible Bonds: These are typically issued by entities like the National Highways Authority of India (NHAI) and the Rural Electrification Corporation (REC).
Timeline: The investment must be made within 6 months from the date of sale.
Investment Limit: You can invest a maximum of ₹50 lakh in these bonds in a financial year.

Section 54F: For LTCG on Assets Other Than a House

What if you made a long-term gain by selling shares, gold, or something other than a house? Section 54F comes to your rescue.

Condition: You must reinvest the entire net sale consideration (not just the capital gain) into a new residential property within the timelines specified under Section 54 (1 year before, 2 years after, or 3 years for construction).
Key Difference: Unlike Section 54, where only the gain needs to be reinvested, Section 54F requires the full sale amount to be reinvested for a complete exemption. If you invest a partial amount, the exemption is granted proportionately.

Reporting and Filing LTCG in Your ITR

Earning capital gains means you have a compliance responsibility. It’s mandatory to report these gains accurately in your Income Tax Return, a task that can seem daunting, especially for the long-term capital gains tax for salaried individuals who are used to a simpler tax filing process.

Choosing the Correct ITR Form

Your regular ITR-1 (Sahaj) form cannot be used if you have capital gains income. You must use:

ITR-2: This form is for salaried individuals and HUFs who do not have income from a business or profession but have capital gains.
ITR-3: This form is for individuals and HUFs who have income from a business or profession, in addition to capital gains.

Mandatory Details for Filing Schedule CG

When you file your ITR, you will need to fill out ‘Schedule CG’ (Capital Gains). Be prepared with the following details:

Full Value of Consideration: The total amount you received from the sale.
Cost of Acquisition: Your original purchase price. For indexed assets, you will need to report both the original and indexed cost.
Cost of Improvement: Any capital expenditure incurred to improve the asset.
Date of Purchase and Sale: These are crucial for determining the holding period.
Details of Exemptions: If you are claiming an exemption under Section 54, 54EC, or 54F, you must provide all the relevant details of your reinvestment.

Importance of Documentation

The Income Tax Department can ask for proof of your calculations and claims. It is absolutely essential to maintain a meticulous record of all documents related to the transaction for at least 7-8 years. This includes:

Purchase Deed / Agreement
Sale Deed / Agreement
Broker’s notes for share transactions
Receipts for any cost of improvement (e.g., renovation bills)
Proof of investment for claiming exemptions (e.g., new property deed, bond certificate)

Conclusion

Navigating the rules for capital gains can seem complex, but breaking it down makes it manageable. The first step is always to check the holding period to see if your profit is long-term. From there, remember that how long-term capital gains are taxed depends on the asset: it’s a 10% tax over a ₹1 lakh threshold for listed equity, and a 20% tax with the powerful benefit of indexation for property, gold, and other assets. Most importantly, tax-saving exemptions under Sections 54, 54EC, and 54F are your best tools for reducing your tax outgo. Proper planning and accurate reporting are essential for managing your income tax on capital gains in India effectively and staying compliant.

Feeling overwhelmed by the calculations and compliance? The experts at TaxRobo are here to help you navigate capital gains tax with ease. Contact us today for a consultation and ensure your tax filing is accurate and optimized.

Frequently Asked Questions (FAQs)

Q1. Can I set off my long-term capital loss against my salary income?
A: No. A long-term capital loss can only be set off against a long-term capital gain. It cannot be set off against any other income like salary or business income. You can, however, carry it forward for up to 8 assessment years to be set off against future long-term capital gains.

Q2. Is the ₹1 lakh exemption for LTCG on shares available every year?
A: Yes, the exemption limit of ₹1 lakh under Section 112A for long-term capital gains from listed equity and equity mutual funds is applicable for each financial year.

Q3. What happens if I sell the new property purchased under Section 54 within 3 years?
A: If you sell the new property within 3 years of its purchase or construction, the LTCG amount that was previously exempted will be deemed as income and become taxable in the year you sell the new property. This is known as a lock-in period to prevent misuse of the exemption.

Q4. As a salaried person, do I need to pay advance tax on my long-term capital gains?
A: Yes. If your total tax liability for the financial year (including the tax on your capital gains) is expected to be ₹10,000 or more, you are required to pay advance tax in quarterly instalments. For a complete overview, refer to our article on Understanding and Managing Advance Tax Payments. You should pay the advance tax in the first instalment that falls due after you make the capital gain.

Q5. How is the cost calculated for a property I inherited?
A: For an inherited property, the ‘cost of acquisition’ is the cost for which the previous owner originally acquired it. The holding period also gets clubbed; meaning, the period for which the previous owner held the asset is included in your holding period to determine if the gain is long-term or short-term. The benefit of indexation will be available from the year the previous owner first held the asset.

Long-Term Capital Gains Taxed: Your Ultimate Guide!