Whether you invest in gold, real estate, stocks, or mutual funds, knowing the taxation for each asset class is necessary to invest wisely
Long-term Capital Gains (LTCG) tax is an important factor which investors need to consider when they sell their assets to book profits. This tax is levied on the gains earned through the sale of assets that have been held for a long period of time, which is typically over 3 years. LTCG tax can influence your tax liability differently depending on the type of asset you have invested in. Here is how LTCG tax affects some common assets such as gold, real estate, mutual funds, and shares.
LTCG tax is applied when equities or equity mutual funds are sold after being held for over a year. Presently long term gains from sale of such assets are taxed at 12.5 per cent if the total gain exceeds Rs 1.25 lakh in a financial year. Tax is applied on the amount above this limit. The tax is calculated on the portion of the gain that exceeds Rs 1.25 lakh in total during the year.
Investments in real estate are also subject to LTCG tax. In case an investor sells a property, which has been held for over two years, the profits earned from such a sale attract LTCG tax. Real estate LTCG tax is charged at 20 per cent with indexation benefits, and 12.5 per cent without indexation. Indexation allows you to reduce the capital gains tax as it adjusts the initial purchase price according to inflation.
The government removed indexation benefits from the calculation of long-term capital gains tax on the sale of immovable properties in Budget 2024. However taxpayers were still allowed to choose between the new option which taxed LTCG at 12.5 per cent with no indexation benefits or the old 20 per cent tax rate which factored in indexation. For a property bought prior to July 23, 2024, the option for availing of indexation can be taken; However for those acquired after that date, indexation is not applicable, and a 12.5 per cent rate will apply instead.
For instance, if you bought a property for Rs 50 lakh and sold it for Rs 80 lakh after holding it for more than two years, the profit of Rs 30 lakh would be subject to LTCG tax. However, after applying indexation, the cost of the property will be adjusted for inflation, reducing the taxable profit. The final taxable gain will be taxed at 20 per cent, significantly lowering the amount.
You can also take avail an exemption under Section 54 of the Income Tax Act on the investment of the capital gains in a new property within a stipulated time period. This exemption reduces the LTCG tax applicable on the sale of a property.
Normally, gold is considered a safe haven investment and attracts LTCG tax if the asset is sold after three years from the date of purchase. The gains are taxed as LTCG at 20 per cent with the benefit of indexation if the sale is made after three years. If you sell gold after holding it for a long time, the purchase price will be adjusted for inflation and, hence, the taxable capital gain can reduce.
For example, if you had purchased gold worth Rs 5 lakh and sold it for Rs 8 lakh after three years, a LTCG of Rs 3 lakh would be taxed at 20 per cent. Applying indexation to the gain reduces the taxable gain; therefore, tax payable is reduced too. LTCG tax applies on Gold ETFs (Exchange Traded Funds) as well as Sovereign Gold Bonds (SGBs) though at the same rate with the benefit of indexation.
Mutual funds are among the most widely used investment vehicles for portfolio diversification. Tax treatment for investments in mutual funds depends on whether the mutual fund is an equity or debt instrument.
The tax treatment of these funds is almost the same as that of shares since they invest in shares. If the units of the mutual fund are held for more than a year, then the profit earned would be subject to 12.5 per cent LTCG tax in case the total gains exceed Rs 1.25 lakh in a given financial year. In case the holding period is less than a year then the sale will attract Short Term Capital Gains (STCG) tax. Under STCG the tax on the gains will be 15 per cent.
Debt mutual funds invest in bonds and other debt instruments. For debt mutual funds, LTCG tax is 12.5 per cent without indexation. If the units are held for less than three years, it attracts STCG tax. STCG taxes the profit at the investor's ordinary income tax rate.
The LTCG Tax influences the investment decisions and asset planning of investors within their portfolio. Whether it is gold, real estate, shares, or mutual funds, each asset has a distinct tax structure. Long-term investment is preferred for tax considerations, yet LTCG tax should not be ignored because it affects the actual amount of profit you make. Proper tax planning, combined with knowledge of exemptions and indexation benefits, can reduce your tax burden and improve the overall returns of your investment.