Long Term Capital Gain Tax. All you need to know about LTCG

Long Term Capital Gain Tax. All you need to know about LTCG

Off 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 LTCGI 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 Tax

Transfer 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:

Conditions for Long Term Capital Gain Tax

 

 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 property

Now, 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 Gain
Particulars Amount(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 2010, what would be the current cost after giving indexation benefit in 2018.

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Now, 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 2017 he decided to sell his residential property for 57,00,000. Mr Subhas incurred the following expenses to execute this 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 2001 for his house painting works. Index cost in 1996 was 305, for 2001 was 426 and for 2017 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 Gain
Particulars Amount(INR) Amount(INR)
Full Value Consideration of the property 57,00,000
Less: Expenses on Transfer 4,20,000
Net sale consideration(A) 52,80,000
Less: Indexed cost of acquisition 1100000*(1125/305)=40,57,377     
Less: Indexed cost of improvement 80,000*(1125/426)=2,11,268

     

(B) 42,68,645
Gross Long Term Capital Gain 10,11,355
Less: Exemptions if any U/S 54 0
Long Term Capital Gain taxable in the hands of Mr Subhas Rs.10,11,355

Therefore, Mr Subhas has to pay  Rs2,14,407(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 Tax

Now 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 2013, 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 2013, 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 implications

Here, one point is to be kept in mind that though in the year 2013 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 liability

This 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 property
Particulars Amount(INR) Amount(INR)
Full Value Consideration u/s 50C read with 50D of the I.T Act (2400 X 1250) ₹3,000,000.00
Full value consideration for parking lot (200 X 625) ₹125,000.00
Total sale consideration ₹3,125,000.00
Less: Expenses on Transfer ₹0.00
Net sale consideration ₹3,125,000.00
Less: Indexed cost of acquisition (10000 X 852/125) ₹68,160.00
Gross Long Term Capital Gain ₹3,056,840.00
Less: Exemptions if any U/S 54 ₹0.00
Long Term Capital Gain taxable in the hands of my uncle ₹3,056,840.00

Now, 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 example

Payment 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 Act
New asset to be acquired Residential House Property
Amount to be invested in new asset Long term capital gain arose on transfer
Exemption limit Amount invested in the new residential house or capital gain whichever is lower
Time limit for investment
1. For purchase: Within one year before or two years after the date of transfer
2. For construction: Within 3 years after the date of transfer
Unutilized amount if any
1.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 period The 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 Act
New asset to be acquired Bonds redeemable after 5 years issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation Ltd.(RECL).
Amount to be invested in new asset Long 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 limit Amount 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 investment Within 6 months from the date of transfer.
Other restriction If exemption has been availed u/s 54EC, investment in this bond cannot be claimed for deduction u/s 80C.
Holding period in bond investment Investment in this notified bonds shall be kept for minimum 5 years w.e.f F.Y 2018-19 as introduced from 01.04.2018 in Budget 2018. 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 LTCG

I 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.

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