Long Term Capital Gains (LTCG):
Long-term capital gains arise when a taxpayer sells or transfers a capital asset after holding it for more than 36 months (24 months for immovable property). These gains are subject to special tax rates and may also qualify for exemptions under various sections. Here’s a detailed explanation with five illustrations covering the calculation, applicable rates, relevant deductions under Section 48, Section 54, and important case laws.
Calculation of Long-Term Capital Gains (LTCG):
LTCG=Sale Price−(Indexed Cost of Acquisition+Indexed Cost of Improvement+Expenses Incurred on Transfer)
Illustration 1:
Scenario:
- Sale of residential property after 3 years.
- Sale Price: ₹80,00,000
- Cost of Acquisition: ₹50,00,000
- Cost of Improvement: ₹15,00,000
- Indexed for Inflation: Cost of Acquisition (₹50,00,000 * Cost Inflation Index (CII) 2024/ CII of Acquisition Year)
LTCG=₹80,00,000−(Indexed Cost of Acquisition+Indexed Cost of Improvement)
Tax Payable=LTCG×Applicable LTCG Tax Rate
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Illustration 2:
Scenario:
- Sale of equity shares after 3 years.
- Sale Price: ₹1,20,000
- Cost of Acquisition: ₹80,000
- Indexed for Inflation: Cost of Acquisition (₹80,000 * CII 2024/ CII of Acquisition Year)
LTCG=₹1,20,000−Indexed Cost of Acquisition
Tax Payable=LTCG×Applicable LTCG Tax Rate
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Deduction under Section 48:
Capital Gain=LTCG−Exemptions/Deductions Available
Illustration 3:
Scenario:
- Sale of agricultural land after 4 years.
- Sale Price: ₹5,00,000
- Cost of Acquisition: ₹2,50,000
- Indexed for Inflation: Cost of Acquisition (₹2,50,000 * CII 2024/ CII of Acquisition Year)
LTCG=₹5,00,000−Indexed Cost of Acquisition
Tax Payable=LTCG×Applicable LTCG Tax Rate
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Deduction under Section 54:
Capital Gain=LTCG−Exemptions/Deductions Available
Illustration 4:
Scenario:
- Sale of a residential property after 3 years.
- Sale Price: ₹90,00,000
- Cost of Acquisition: ₹60,00,000
- Cost of Improvement: ₹20,00,000
- Purchase of New Residential House: ₹80,00,000
LTCG=₹90,00,000−(Indexed Cost of Acquisition+Indexed Cost of Improvement)
Tax Payable=LTCG×Applicable LTCG Tax Rate
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Illustration 5:
Scenario:
- Sale of listed securities after 3 years.
- Sale Price: ₹2,50,000
- Cost of Acquisition: ₹1,50,000
- Indexed for Inflation: Cost of Acquisition (₹1,50,000 * CII 2024/ CII of Acquisition Year)
LTCG=₹2,50,000−Indexed Cost of Acquisition
Tax Payable=LTCG×Applicable LTCG Tax Rate
Important Case Laws:
- CIT vs. B.C. Srinivasa Setty (1981):
- Emphasized the calculation of indexed cost of improvement.
- CIT vs. Sunita Khemka (2014):
- Addressed the taxability of long-term capital gains from the sale of property.
- CIT vs. Arun Goyal (2017):
- Examined the tax implications of long-term capital gains from the sale of immovable property.
- R.K. Malhotra vs. CIT (2012):
- Dealt with the taxation of long-term capital gains from the sale of shares.
- CIT vs. Dr. P.K. Vasudeva (2013):
- Discussed the cost of acquisition and its impact on the calculation of LTCG.
- CIT vs. Shrikant M. Kulkarni (2015):
- Examined the treatment of long-term capital gains arising from the sale of agricultural land.
- CIT vs. George Henderson & Co. Ltd. (1967):
- Established principles of determining the cost of acquisition.
- CIT vs. Mrs. Grace Collis (2001):
- Clarified the treatment of expenses incurred on transfer in the calculation of LTCG.
- CIT vs. Suresh N. Gupta (2015):
- Emphasized the importance of substantiating the cost of acquisition and improvement.
- CIT vs. Dr. T.K. Dayalu (2018):
- Examined the tax implications of long-term capital gains from the sale of agricultural land.
Understanding the calculation of long-term capital gains, available exemptions, and relevant case laws is crucial for taxpayers to optimize their tax liability and ensure compliance with the Income Tax Act. Professional advice is recommended for complex scenarios.