Groww Logo
Home>Blog>Mutual Funds>LTCG Tax Calculation Examples: How it is Done

LTCG Tax Calculation Examples: How it is Done

02 February 2022

When an individual redeems his/her capital assets, the profits earned from this sale are called capital gains. There are two kinds of capital gains, namely short-term capital gains (STCG) and long-term capital gains (LTCG). 

In this article, we will delve into the intricacies of LTCG and its calculation. We will also discuss how an LTCG calculator can help you determine your capital gains. Let’s begin!

What is LTCG tax?

Long-term capital gains or LTCG tax is levied on the profits earned from an asset that is held for the long-term. Here, the term ‘assets’ refers to bonds, commodities, real estate, or shares. The table below indicates how various capital assets are distinguished as long-term or short-term based on their holding period:

Type of Capital Asset Holding Period of the Asset
Long-term Short-term
Listed shares 1 year or more Less than 1 year
Debt-oriented mutual funds 3 years or more Less than 3 years
Equity-oriented mutual funds 1 year or more Less than 1 year
Immovable properties 2 years or more Less than 2 years
Movable property 3 years or more Less than 3 years

Therefore, in the case of shares and equity-oriented mutual funds, LTCG tax is applicable for the units that are held for a period of 1 year or more. Upon redemption of the units, it is charged at the rate of 10% on the returns above Rs. 1 lakh in a financial year. 

So, in simple terms, if an investor sells his/her units of an equity-oriented scheme after a holding period of 1 year, he/she is liable to pay LTCG tax at the rate of 10% on the gains exceeding Rs. 1 lakh.

As this concept can be confusing for novice investors, allow us to elaborate on the same by way of some examples.

LTCG Tax Calculation Examples

Take a look at the following scenario:

1) Ms Sharma purchased 200 shares of ABC company Ltd at Rs. 1,000 per share in August 2019. She then sold all the shares at Rs. 1,800 per share in August 2021. 

In the above case, Ms Sharma will be subjected to LTCG tax as she has held the shares for more than 1 year. Her profit made on the sale is Rs. 1,60,000 (200×1800 –  200×1000), which is called long-term capital gains.

Furthermore, she is liable to pay LTCG tax on the profits exceeding Rs. 1 lakh, which is Rs. 60,000 (Rs. 1,60,000 – Rs. 1,00,000). The rate of taxation is 10%. 

So, her long-term capital gains tax stands at Rs. 6,000 (Rs. 60,000 x 10%).

2) Mr Singh invested Rs. 1,50,000 in an ELSS fund and redeemed all units after 3 years for Rs. 2,75,000. 

In the above case, LTCG will be applicable as the holding period exceeds one year. 

He will have to pay LTCG tax at a 10% rate above capital gains of Rs. 1,00,000 i.e Rs. 25,000

Tax on his long-term capital gains will be Rs. 2,500 (10% of Rs. 25,000).

Note that only LTCG is applicable for ELSS funds as these mutual fund schemes have a lock-in period of 3 years. 

What are Indexation Benefits for LTCG?

When calculating LTCG for assets such as debt mutual fund units, land, building, gold jewellery etc., the benefit of indexation is allowed. This is used for adjusting the price of purchase of certain investments to offset the effect of inflation on them. 

Indexation increases the purchase price of these assets, which lowers an investor’s shown profits, reducing his/her taxable income. The Cost Inflation Index (CII) is used to estimate the purchase price of assets adjusted with inflation. 

Note that in the case of equities and equity mutual funds, LTCG is calculated without this indexation benefit. 

Calculation of LTCG with Indexation

The following formula is used to calculate long term capital gains with indexation benefits.

LTCG = Full value consideration received – (indexed acquisition cost + indexed improvement cost (if any) + transfer cost (If any))

Where, 

Indexed acquisition cost = Acquisition cost x CII (cost inflation index) of the year of transfer/CII of the year of acquisition

Indexed improvement cost = Improvement cost x CII of the year of transfer/CII of the year of acquisition. 

CII is the indexed cost of acquisition and improvement for computing LTCG.

Examples of LTG Tax Calculation with Indexation

1) Mr Kumar bought a plot of land for Rs. 15 lakh in 2012. After 8 years, he sold the land for Rs. 40,00,000. 

Cost Inflation Index = CII of FY2020-21/CII of FY2012-13 = 301/220 = 1.37 (approx.)

Indexed cost of purchase = CII x purchase price = 1.37 x 15,00,000 = Rs. 20,55,000

LTCG = Selling price – Indexed cost of purchase = Rs. 40,00,000 – Rs. 20,55,000 = Rs. 19,45,000.

Tax on LTCG = 20% on Rs. 19,45,000 = Rs. 3,89,000

2) Ms Mishra bought units of a debt-oriented hybrid mutual fund worth Rs. 2,00,000 in FY2009-10. She sold all units of this mutual fund in FY2018-19 at Rs. 4,50,000. 

In the above scenario, the mutual fund would be taxed like a debt fund as it primarily invests in fixed-income securities. 

Cost Inflation Index = CII of FY2018-19/CII of FY2009-10 = 280/148 = 1.89 (approx.)

Indexed cost of purchase = CII x purchase price = 1.89 x 2,00,000 = Rs. 3,78,000

LTCG = Selling price – Indexed cost of purchase = Rs. 4,50,000 – Rs. 3,78,000 = Rs. 72,000

Tax on LTCG = 20% of Rs. 72,000 = Rs. 14,400

What is an LTCG Calculator?

LTCG calculator is an online utility tool that allows one to ascertain his/her long-term capital gains and the tax liability for the same. It generally consists of a formula box, wherein an individual can enter the purchase value, holding period, and sale value of an asset. After that, this calculator will display one’s taxable long-term capital gains.

Although each online calculator has its own specifics, an LTCG calculator generally requires you to follow these steps:

Step 1: Enter the type of asset sold, for example, equity shares, equity-oriented mutual fund units, debt-oriented mutual fund units, etc.

Step 2: Enter the date of sale as well as that of purchase.

Step 3: Submit the selling price and the buying price. 

The LTCG calculator will furnish the output, which includes the amount of capital gains or loss, applicable tax rate, tax payable, indexed buying price, etc.

With the help of such digital tools, prospective investors can get a clear idea about their net return on investment. 

 

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. NBT do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
Do you like this edition?
LEAVE A FEEDBACK
ⓒ 2016-2022 Groww. All rights reserved, Built with in India
MOST POPULAR ON GROWWVERSION - 3.2.5
STOCK MARKET INDICES:  S&P BSE SENSEX |  S&P BSE 100 |  NIFTY 100 |  NIFTY 50 |  NIFTY MIDCAP 100 |  NIFTY BANK |  NIFTY NEXT 50
MUTUAL FUNDS COMPANIES:  ICICI PRUDENTIAL |  HDFC |  NIPPON INDIA |  ADITYA BIRLA SUN LIFE |  SBI |  UTI |  FRANKLIN TEMPLETON |  KOTAK MAHINDRA |  IDFC |  DSP |  AXIS |  TATA |  L&T |  SUNDARAM |  PGIM |  INVESCO |  LIC |  JM FINANCIAL |  BARODA PIONEER |  CANARA ROBECO |  HSBC |  IDBI |  INDIABULLS |  MOTILAL OSWAL |  BNP PARIBAS |  MIRAE ASSET |  PRINCIPAL |  BOI AXA |  UNION KBC |  TAURUS |  EDELWEISS |  NAVI |  MAHINDRA |  QUANTUM |  PPFAS |  IIFL |  Quant |  SHRIRAM |  SAHARA |  ITI