Exploring Long-Term Capital Gains Tax (LTCG): What It Is & How It Works?

Long-term capital advantage (LTCG) tax is an important part of the Indian taxation structure, which affects the benefits from the sale of assets such as shares, real estate and bonds for long -term. The Union Budget 2024 brought several changes in the rules of LTCG tax, affecting the tax capacity and investors' financial plan.

What is Long-Term Capital Gains (LTCG)?

Capital gains are the profits you earn from selling a valuable asset. These gains are divided into two types:

1. Short-term Capital Gains (STCG) : Benefits from selling a property within a short holding period.

2. Long-term Capital Gains (LTCG) : Benefits from selling a property after placing it for a long period.

The holding period required to qualify as LTCG depends on the type of asset. Here is an observation:

The difference in holding periods is designed to encourage long-term investments, promoting stability in the financial markets.

How is LTCG Taxed in India?

LTCG tax rates in India vary depending on the asset type:

1. Listed Financial Assets (Equity Shares and Equity-Oriented Mutual Funds) : As of 2025, long-term capital gains (LTCG) on the sale of listed shares and equity-oriented mutual funds are charged at 12.5% on amounts in excess of ₹1.25 lakh for a financial year, without availing indexation relief. The modification, operative from July 23, 2024, supersedes the earlier tax rate of 10% for gains in excess of ₹1 lakh.

2. Debt-oriented mutual funds and bonds are now taxed at slab rates, with no indexation benefits.

Filing Long-Term Capital Gains in ITR-2

Long-term capital gains (LTCG) need to be reported while filing your income tax returns. For individuals and Hindu Undivided Families (HUFs) who do not have business or professional income, the correct form to file is ITR-2.

1. Choose the Correct ITR Form : If you have LTCG from the sale of shares, mutual funds, or real estate, you must file ITR-2.

2. Filling out Schedule CG (Capital Gains) : Start by giving details about the asset you sold. Include the purchase price, sale price, and the date of the sale. If you have any deductions or exemptions, like the ones under Sections 54, 54EC, and 54F, be sure to mention those too.

3. Now, for Part B - Total Income : The total capital gains you calculated in Schedule CG will automatically show up here. This number helps decide your taxable income for the year.

4. Declare Exemptions in the Right Place : If you’ve reinvested your capital gains and want to claim exemptions, include those details where needed.

5. Pay the Tax You Owe : Make sure to pay any taxes before you file your return. This helps you avoid extra fees. Just a heads-up: If your LTCG goes over ₹1.25 lakh on listed securities or mutual funds, it’s taxed at 12.5% (according to the 2024 Budget).

Capital Gains Account Scheme (CGAS)

The Capital Gains Account Scheme (CGAS) helps you claim LTCG exemptions even if you haven’t bought a new asset yet. You can put your gains into a special bank account until you’re ready to reinvest.

How CGAS Works:

If you can’t reinvest your capital gains by the time your income tax return is due, just deposit them into a CGAS account.

You have to use this money in a certain time frame:

• For Section 54 (Buying Residential Property): Use it within 2 years for a purchase, or 3 years if you're building.

• For Section 54EC (Investing in Specific Bonds): Use it within 6 months after the sale.

Types of CGAS Accounts:

1. Type A (Savings Account) : Works like a normal savings account, allowing withdrawals.

2. Type B (Term Deposit Account) : Fixed deposit-like account with a lock-in period and interest.

What Happens If You Don’t Utilize the Funds?

• If the amount in CGAS is not used within the prescribed time, it is treated as taxable capital gains in the financial year after the deadline.

• The unused funds will then be added to your taxable income and taxed as per LTCG rates.

Tip: If you plan to reinvest your gains but need more time, CGAS helps you secure tax exemptions legally.

Detailed Exemptions Under Various Sections

While Sections 54, 54EC, and 54F are well-known, several other sections offer capital gains exemptions for different scenarios.

Section 54 – Exemption on Sale of Residential Property

• If you sell a residential property and reinvest the gains in another residential property within 2 years (or construct within 3 years), the capital gains are exempt from tax.

• The new property must be located in India.

Section 54EC – Exemption by Investing in Specified Bonds

• If you invest in notified bonds (e.g., NHAI, REC bonds) within 6 months of the sale, you can claim up to ₹50 lakh exemption.

• These bonds have a lock-in period of 5 years and cannot be sold before maturity.

Section 54F – Exemption on Sale of Any Capital Asset (Except Residential Property)

• If you sell land, commercial property, or gold and reinvest the entire sale consideration in a residential house, you get full exemption.

• If only a part of the amount is reinvested, exemption applies proportionally.

Other Important Sections:

• Section 54B: Exemption on sale of agricultural land if reinvested in agricultural land within 2 years.

• Section 54D: Exemption if capital gains arise from compulsory acquisition of land or building for industrial use, and reinvestment is made in acquiring another land or building.

Tip: Choose the right exemption based on the asset sold to reduce tax liability.

Impact of Budget 2024 on Indexation Benefits

Indexation adjusts the purchase cost of an asset for inflation, reducing taxable capital gains. However, Budget 2024 has removed indexation benefits for certain assets sold after July 23, 2024.

Effect of Indexation Removal

• Earlier, indexation lowered taxable capital gains by adjusting the purchase price.

• Without indexation, investors must pay tax on full gains, increasing tax liability.

• Real estate and unlisted shares are affected the most as their holding periods are long.

Tip: Consider staggered sales or reinvestment options (under Sections 54 and 54EC) to minimize tax impact.

Impact on Different Asset Classes

The changes in LTCG tax rules impact various asset classes differently. Here's how:

Example of LTCG Tax Calculation

Let’s consider an example to understand how the new LTCG tax rules work:

An investor sells a residential property on August 1, 2024, for ₹1 crore. The property was purchased on June 1, 2018, for ₹50 lakh, and ₹1 lakh was spent on transfer expenses.

In this example, the investor’s LTCG is ₹49 lakh, and the tax payable at the rate of 12.5% is ₹6,12,500. The removal of indexation benefits increases the taxable amount compared to previous rules.

Exemptions and Deductions

There are various means of lowering LTCG tax burden by availing exemptions and deductions:

Section 54:

Exemption of LTCG on sale of residential property if gains are invested in another residential property within two years from the sale date.

Section 54EC:

Exemption of LTCG up to ₹50 lakh if invested in notified bonds (e.g., National Highways Authority of India bonds) within six months from the sale date.

Section 54F:

Exemption on LTCG on the sale of any capital asset (except a residential house) where the amount of consideration received is invested in a residential house.

These exemptions support reinvestment in property and infrastructure bonds and, thus, contribute to economic growth.

How to Minimize LTCG Tax Liability?

1. Invest in Residential Property or Specified Bonds : Utilize exemptions under Sections 54 and 54EC by reinvesting your capital gains.

2. Strategic Sale Planning : Split the sale of assets across multiple financial years to take advantage of the increased exemption limit.

3. Gifting to Family Members : Transfer assets to family members in lower tax brackets to reduce the overall tax liability.

4. Utilize Carry Forward of Losses : Set off capital losses against gains or carry them forward for up to eight years to reduce taxable gains.

Pros and Cons of LTCG Tax Changes

Conclusion

The changes to the LTCG taxation laws in Budget 2024 are to usher in comfort and simplicity in taxation while encouraging long-term investing.A flat rate of 12.5% across the board and changed holding periods bring in a simplified route, but removal of indexation relief could hurt long-term investors.

Such changes need to be made aware to the investment decision-making process. Strategic planning and maximization of available exemptions can reduce tax burdens.