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Understanding Long Term Capital Gains Tax

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A comprehensive guide to the long term capital gains tax.

Description: An illustration of a person looking at a graph showing the long-term capital gains tax rate.

Long-term capital gains taxes can be a confusing and complicated topic. It is important to understand the different types of capital gains, how they are taxed, and what exemptions and deductions are available. This article will provide an overview of long-term capital gains taxes, including when they are applicable, how they are calculated, and what exemptions and deductions are available. It will also discuss recent changes to the tax code that may impact long-term capital gains.

Capital gains are profits earned from selling an asset, such as stocks, bonds, real estate, or other investments. Any profits earned from selling an asset are considered a capital gain, regardless of the amount of time the asset was held. Capital gains are further broken down into long-term and short-term capital gains. You receive short-term gains on investments held for less than one year and long-term gains on investments held for more than one year.

Generally, long-term capital gains will have favorable (lower) tax treatments when compared to the taxes owed on short-term capital gains. For instance, if a shareholder holds an equity share for longer than a year, the capital gain is considered long-term and is taxed at 10%; but, if the shares are held for less than a year, the tax rate is 15%.

Recent changes to the tax code have been proposed that may affect long-term capital gains. For instance, the Union Budget 2021 proposed an additional surcharge on long-term capital gains above a certain threshold. The balance capital gains, ie above ₹10 crore, will now be taxed at a flat rate of 20% (with indexation). It may be noted that the maximum surcharge rate was 15% earlier.

In addition, the Union Budget 2021 proposed changes to the taxation of long-term capital gains on equity-oriented mutual funds. Under current rules, individual investors need not pay tax if the long-term capital gains on stocks and equity mutual funds do not exceed Rs 1 lakh in a financial year. However, under the new proposal, the gains in excess of Rs 1 lakh will be taxed at 10%.

Another change proposed in the Union Budget 2021 is the capping of deductions from capital gains on investment in residential houses. For better targeting of tax concessions and exemptions, I propose to cap deduction from capital gains on investment in residential houses under section 54 and 54F of the Income tax Act at Rs 2.5 lakh.

It is a very untidy system. The whole capital gains story in India is the way that it is counted and equity goes long term at one year, real estate goes long term at three years, and gold goes long term at three years. This creates a lot of confusion and complexity when it comes to taxes, and investors need to understand the various rules and regulations to ensure they are paying the right amount of taxes.

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