Investing in assets such as real estate, stocks, mutual funds, or gold can yield significant returns over time. However, these profits often come with a tax liability known as Long-Term Capital Gains Tax (LTCG). Understanding how LTCG works in India is essential for efficient financial planning and tax saving.
In this article, we’ll break down how to calculate LTCG tax and explore the best legal strategies to save on it.
What Is Long-Term Capital Gains (LTCG) Tax?
Long-Term Capital Gains Tax is levied on profits earned from the sale of a capital asset held for a specified period. The holding period required to qualify as long-term depends on the type of asset:
| Asset Type | Holding Period for LTCG |
| Equity shares, Equity mutual funds | More than 12 months |
| Real estate, Gold, Debt mutual funds | More than 36 months |
| Listed bonds/debentures | More than 12 months |
If an asset is sold before the specified period, the gain is classified as Short-Term Capital Gains (STCG) and taxed differently.
How to Calculate Long-Term Capital Gains Tax
Step 1: Determine the Full Value of Consideration
This is the sale price or the amount received on transferring the asset.
Step 2: Subtract Transfer Expenses
These are costs directly related to the sale, like brokerage, commission, legal fees, etc.
Step 3: Deduct Indexed Cost of Acquisition
Indexation adjusts the purchase price based on inflation using the Cost Inflation Index (CII).
Indexed Cost of Acquisition = (Purchase Price × CII of year of sale) / CII of year of purchase
Step 4: Deduct Indexed Cost of Improvement
This applies if any improvements were made to the asset. Use indexation for improvements made after April 1, 2001.
Step 5: Calculate LTCG
LTCG = Full Value of Consideration – (Transfer Expenses + Indexed Cost of Acquisition + Indexed Cost of Improvement)
Step 6: Apply the Tax Rate
| Asset Type | Tax Rate |
| Equity shares/mutual funds (above ₹1 lakh/year) | 10% (without indexation) |
| Other assets (property, gold, etc.) | 20% (with indexation) |
Example: LTCG Calculation for Real Estate
Let’s say you bought a house in 2010 for ₹30 lakhs and sold it in 2024 for ₹90 lakhs.
- Purchase year CII (2010-11) = 167
- Sale year CII (2024-25) = 363 (assumed for illustration)
- Indexed Cost = (30,00,000 × 363) / 167 = ₹65,27,544
- Capital Gain = ₹90,00,000 – ₹65,27,544 = ₹24,72,456
- LTCG Tax = 20% of ₹24,72,456 = ₹4,94,491
Exemptions and Deductions to Save LTCG Tax
The Indian Income Tax Act provides several exemptions under Sections 54, 54EC, and 54F that can significantly reduce or eliminate your LTCG tax liability.
1. Section 54 – Sale of Residential Property
Applicable if:
- You sell a residential property, and
- Use the capital gains to buy another residential property in India.
Conditions:
- Purchase a new house within 1 year before or 2 years after sale, or
- Construct a house within 3 years
- You cannot sell the new house within 3 years
Exemption:
- Amount of LTCG or cost of new house, whichever is lower
2. Section 54F – Sale of Any Asset Other Than House
Applicable if:
- You sell any capital asset (e.g., land, gold, shares) and
- Invest the entire sale proceeds in one residential house
Conditions:
- No ownership of more than one house on the date of sale
- Investment must be made within the stipulated timeline
Exemption:
- Full exemption if 100% sale proceeds are invested
- Partial exemption if only part of proceeds are invested
3. Section 54EC – Bonds Exemption
Applicable if:
- You invest LTCG (up to ₹50 lakhs) in NHAI or REC bonds
Conditions:
- Investment must be made within 6 months of the sale
- Bonds have a lock-in period of 5 years
Exemption:
- Up to ₹50 lakhs per financial year
Additional Tips to Save LTCG Tax Legally
1. Use of Basic Exemption Limit
If you have no other taxable income or your income is below the basic exemption limit (₹2.5 lakhs for individuals), the LTCG up to this limit can be tax-free.
2. Tax Harvesting for Equity LTCG
To avoid the 10% tax on LTCG above ₹1 lakh, investors can sell and repurchase equity mutual funds or shares each year to reset the cost basis, also known as LTCG harvesting.
3. Gift the Asset to Family Members in Lower Tax Bracket
Gifting a long-term asset to a family member (with no or low income) before selling it may result in lower or no LTCG tax, due to their available basic exemption limit.
Note: Be cautious of the clubbing provisions under the Income Tax Act.
Important Points to Remember
- Indexation is not allowed for equity shares/mutual funds LTCG taxed at 10%.
- Filing ITR is mandatory even if LTCG is exempt but income exceeds the basic exemption limit.
- LTCG must be reported under Schedule CG in your Income Tax Return.
- You can carry forward long-term capital losses for 8 years and set them off against future LTCG.
Common Mistakes to Avoid
- Missing Indexation: Not applying indexation where eligible can lead to higher tax.
- Incorrect ITR Form: Reporting LTCG in the wrong form may lead to processing delays.
- Delay in Investment for Exemption: Most exemptions have strict timelines.
- Assuming All LTCG Are Tax-Free: Only certain types like equity LTCG under ₹1 lakh are tax-free.
Conclusion
Long-Term Capital Gains Tax can take a significant chunk out of your investment returns if not managed smartly. But with a proper understanding of calculation methods, exemptions available under the Income Tax Act, and timely financial planning, you can save a substantial amount legally.
Whether you’re investing in stocks, mutual funds, or real estate, a clear strategy can help you optimize tax and grow wealth efficiently. For high-value transactions, consulting a tax advisor or CA is always advisable.
