LTCG tweaked for real estate, remains same for equity: Here’s how it works

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The biggest fear of equity investors from the Union Budget has been belied. Union Finance Minister Arun Jaitley has left the much-feared long-term capital gains tax (LTCG) on equity investment untouched though he has reduced the holding period for LTCG for immovable assets to two years.

In real estate investment, when you make an investment and then sell it at a higher price to make a gain, this amount is taxable; but if you make a loss, no tax is payable. At present such gains are considered long-term capital gains if the holding period is over 3 years or more. This tenure has not been reduced to two years.

But what exactly is LTCG?

The long-term capital gains tax is a levy that is charged on returns on equity investment when held for a particular period.

Here ‘capital gain’ refers to profit arising out of transfer of a capital asset and the tax is charged on it. In stocks or equity-based mutual fund schemes, that long-term period is defined as a duration of one year or more. At present, no tax is charged on equity investments if held for one year or more.

Equity investors are required to pay a short-term capital gains (STCG) tax of 15 per cent if a security is held for less than one year. Besides, an education cess is applicable at 2 per cent and secondary and higher education cess is applicable at 1 per cent on the tax amount.

Take the case of Dev Kumar, a salaried employee.

In June 2016, he bought equity shares of Punjab National BankBSE 2.98 % and sold them in December, 2016 for a profit. Since shares are capital assets and Kumar made ‘capital gains’ on them in a period less than one year, he is liable to pay short-term capital gains tax at 15 per cent.

Had he held the shares till June 2017 of beyond, his investment would have been treated as long-term capital asset and no tax would have been levied on the profit earned.

For debt investment, the duration to qualify for long-term capital gains tax is three years or 36 months. If an investor liquidates her debt investment in less than three years, it becomes liable to be taxed as per the applicable income-tax slab.
Long-term capital gains tax on debt instruments is taxed at 20 per cent with an indexation benefit on the cost.

Indexation is calculated by applying an appropriate factor from the cost inflation index to the original price of units to calculate actual gain and the tax is applied on it.

Like India, in the US too the long-term investment in equity refers to a period of more than one year. The LTCG there is based on both the investor’s tax bracket and the amount of time the investment was held.

While short-term capital gains in the US are taxed at the applicable income-tax rate, the long-term capital gains are taxed between 15 per cent and 20 per cent based on income-tax slab in the country.

For instance, investors who come under the 15-39.6 per cent tax slab would pay an LTCG tax of 15 per cent while those in the tax slab above 39.6 per cent would pay 20 per cent LTCG, in addition to a 3.8 per cent medicare tax.

Dalal Street experts feared any tinkering with either of these tax rates or holding period could have led to a knee-jerk reaction on Dalal Street.