Long Term Capital Gain Tax. All you need to know about LTCG\r\nOff late one of my relatives has sold some real estate property in his locality. Due to this sale\u00a0transaction, he received a notice from the Income Tax authority asking him to pay\u00a0Long 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\u00a0Long Term Capital Gain Tax. All you need to know about LTCG.\u00a0I 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.\r\nLong Term Capital Gain Tax\r\nTransfer 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.\u00a0\r\n\r\nAs per Section 45(1) of the Income Tax Act, Capital Gain would arise if the following conditions are satisfied:\r\n\r\n\r\n\r\n \r\n\r\n\u2666\u00a0Transfer of Capital Asset (U\/S 2(14). It has to be a Capital Asset;\r\n\r\n\u2666\u00a0Profit or Gain i.e. Capital Gain should arise out of such transaction;\r\n\r\n\u2666 It is charged to tax in the year of transfer i.e. in which year the transaction took place;\r\n\r\n\u2666 This capital gain should not be exempted U\/S 54 of the I.T Act;\r\n\r\n\u2666 No transfer of personal effects such as TV, Laptops, personal cars and etc;\r\n\r\nWhat is Long Term Capital Asset:\r\nAn 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.\r\n\r\nHowever, 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.\r\n\r\nIn 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\u00a0as per Section 2(42A) of the IT Act,\u00a0\u00a0w.e.f F.Y 2017-18\u00a0.\r\nTreatment of Long Term Capital Gain Tax on the sale of property\r\nNow, before going into\u00a0the details, let's just see how to compute LTCG i.e. the format for LTCG computation.\r\n \r\n\r\n\r\nComputation of Long Term Capital Gain\r\n\r\n\r\nParticulars\r\nAmount(INR)\r\nAmount(INR)\r\n\r\n\r\nFull Value Consideration of the property\r\n\r\n*******\r\n\r\n\r\nLess: Expenses on Transfer\r\n\r\n****\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\nNet sale consideration\r\n\r\n*****\r\n\r\n\r\nLess: Indexed cost of acquisition\r\n*****\r\n\r\n\r\n\r\nLess: Indexed cost of improvement\r\n*****\r\n\r\n\r\n\r\n\r\n\r\n*****\r\n\r\n\r\nGross Long Term Capital Gain\r\n\r\n*******\r\n\r\n\r\nLess: Exemptions if any U\/S 54\r\n\r\n****\r\n\r\n\r\nLong Term Capital Gain taxable in the hands of the Assessee\r\n\r\n*****\r\n\r\n\r\n\r\nHere, \r\n\r\n \tFull 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.\r\n \tExpenses on Transfer means the amount of expenses incurred for effecting the transfer process such as\u00a0Advertisement expenditure, Brokerage to an agent, Stamp Duty, Registration fees, and legal expenses.\r\n \tCost of acquisition\u00a0means 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.\r\n \tCost of improvement\u00a0means the amount of money incurred during the ownership of the property for maintenance or improvement of the property.\r\n \tIndexed cost\u00a0means 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\u00a0after giving indexation benefit in 2018.\r\n\r\nYou may also be interested in:\r\n\r\n \tWhat is BSBD account? Basic Savings Bank Deposit account\r\n \tHow to estimate retirement corpus\r\n \tHow to calculate mutual fund returns in excel\r\n\r\nNow, let's just take an example for easy understanding of how Long Term Capital Gain Tax arises and how to calculate it?\r\n\r\nExample 1:\u00a0Mr 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. \r\n\r\nHe 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?\r\nComputation of\u00a0Long Term Capital Gain Tax of Mr Subhas using the above table.\r\n\r\n\r\n\r\nComputation of Long Term Capital Gain\r\n\r\n\r\nParticulars\r\nAmount(INR)\r\nAmount(INR)\r\n\r\n\r\nFull Value Consideration of the property\r\n\r\n57,00,000\r\n\r\n\r\nLess: Expenses on Transfer\r\n\r\n4,20,000\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\nNet sale consideration(A)\r\n\r\n52,80,000\r\n\r\n\r\nLess: Indexed cost of acquisition\r\n1100000*(1125\/305)=40,57,377\r\n\u00a0 \u00a0\u00a0\r\n\r\n\r\nLess: Indexed cost of improvement\r\n80,000*(1125\/426)=2,11,268\r\n\r\n\u00a0 \u00a0 \u00a0\r\n\r\n\r\n\r\n(B)\r\n\r\n42,68,645\r\n\r\n\r\nGross Long Term Capital Gain\r\n\r\n10,11,355\r\n\r\n\r\nLess: Exemptions if any U\/S 54\r\n\r\n0\r\n\r\n\r\nLong Term Capital Gain taxable in the hands of Mr Subhas\r\n\r\nRs.10,11,355\r\n\r\n\r\n\r\nTherefore, Mr Subhas has to pay \u00a0Rs.\u00a02,14,407(1011355*20%)+3% Education\u00a0Cess as\u00a0Long Term Capital Gain Tax.\r\n\r\nLive practical example to eradicate complicacy in understanding and\u00a0 paying Long Term Capital Gain Tax\r\n\r\nNow take another live example of my uncle which I already mentioned at the beginning of this post.\r\n\r\nMy 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.\r\n\r\nLTCG Tax implications\r\n\r\nHere, 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.\r\n\r\nWhat will be his LTCG tax liability\r\n\r\nThis 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.\r\n \r\n\r\n\r\nComputation of Long Term Capital Gain Tax on property\r\n\r\n\r\nParticulars\r\nAmount(INR)\r\nAmount(INR)\r\n\r\n\r\nFull Value Consideration u\/s 50C read with 50D of the I.T Act\r\n(2400 X 1250)\r\n\u20b93,000,000.00\r\n\r\n\r\nFull value consideration for parking lot\r\n(200 X 625)\r\n\u20b9125,000.00\r\n\r\n\r\nTotal sale consideration\r\n\r\n\u20b93,125,000.00\r\n\r\n\r\nLess: Expenses on Transfer\r\n\r\n\u20b90.00\r\n\r\n\r\nNet sale consideration\r\n\r\n\u20b93,125,000.00\r\n\r\n\r\nLess: Indexed cost of acquisition\r\n(10000 X 852\/125)\r\n\u20b968,160.00\r\n\r\n\r\nGross Long Term Capital Gain\r\n\r\n\u20b93,056,840.00\r\n\r\n\r\nLess: Exemptions if any U\/S 54\r\n\r\n\u20b90.00\r\n\r\n\r\nLong Term Capital Gain taxable in the hands of my uncle\r\n\r\n\u20b93,056,840.00\r\n\r\n\r\n\r\nNow, he has to pay long term capital gain tax of Rs.6,11,369(3056840*20%)+3% E. Cess.\r\n\r\nLTCG 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.\r\nHow to avoid payment of Long Term Capital Gain Tax on the sale of land or residential building as per above practical example\r\nPayment 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.\r\n\r\nExemption u\/s 54 of the I.T Act.\r\n \r\n\r\n\r\nExemption from Long Term Capital Gain tax u\/s 54 of the I.T Act\r\n\r\n\r\nNew asset to be acquired\r\nResidential House Property\r\n\r\n\r\nAmount to be invested in new asset\r\nLong term capital gain arose on transfer\r\n\r\n\r\nExemption limit\r\nAmount invested in the new residential house or capital gain whichever is lower\r\n\r\n\r\n\r\nTime limit for investment\r\n1. For purchase: Within one year before or two years after the date of transfer\r\n\r\n\r\n2. For construction: Within 3 years after the date of transfer\r\n\r\n\r\n\r\nUnutilized amount if any\r\n1.If any amount remains unutilized before the due date for filing of the return, it should be kept in Capital Gain Account Scheme.\r\n\r\n\r\n2. Thereafter, this unutilized amount should be utilized within the specified time period.\r\n\r\n\r\n3. 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.\r\n\r\n\r\nHolding period\r\nThe 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.\r\n\r\n\r\n\r\nExemption u\/s 54EC of the I.T Act.\r\n \r\n\r\n\r\nExemption from Long Term Capital Gain tax u\/s 54EC of the I.T Act\r\n\r\n\r\nNew asset to be acquired\r\nBonds redeemable after 5 years issued by National Highway Authority of India (NHAI) or Rural Electrification Corporation Ltd.(RECL).\r\n\r\n\r\nAmount to be invested in new asset\r\nLong 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.\r\n\r\n\r\nExemption limit\r\nAmount invested in bonds or capital gain whichever is lower subject to maximum Rs.50 Lakhs w.e.f F.Y 2018-19.\r\n\r\n\r\nTime limit for investment\r\nWithin 6 months from the date of transfer.\r\n\r\n\r\nOther restriction\r\nIf exemption has been availed u\/s 54EC, investment in this bond cannot be claimed for deduction u\/s 80C.\r\n\r\n\r\nHolding period in bond investment\r\nInvestment 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.\r\n\r\n\r\n\r\nFinal words on Long Term Capital Gain Tax. All you need to know about LTCG\r\n\r\nI 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.