Everything To Know About Long-Term Capital Gains On NRI Investments
Any gain or profit earned due to the selling of any capital asset is called capital gain. Since this profit or gain is under the income category as per Income Tax Act, one needs to pay tax for the profit earned in the same financial year in which there is the transfer of that asset to another person. The tax paid on the profits generated is called capital gains tax. There are two types of capital gains. One is Short Term Capital Gains and another is Long Term Capital Gains. Let’s take a look at long-term capital gains in detail.
But firstly, what are capital gains?
Capital gains are earnings gained through the sale of real estate, investments, and personal property. The Income Tax Act categorizes capital gains based on how long the person owned the property. Short-term capital gains are earnings received from selling assets owned for one year or less, and long-term capital gains are profits earned from assets possess for more than one year. Capital gains tax, sometimes known as CGT, is a tax applied on the profit made following the sale of a capital asset. For this to be true, you must sell the specific capital item for more than you purchased for it. As a result, inherited property or capital assets are not subject to this taxation. In such circumstances, there is no transaction, merely a shift of hands from one person to another.
An example of capital in real estate would be Jeff Colby’s purchase of a vacation home for Rs.100,000 and renting it out for five years before selling it for Rs.150,000, resulting in an Rs.50,000 capital gain. He computed his long-term capital gain based on his tax rate because he held the property for longer than a year. He didn’t have to pay any taxes on the earnings because his yearly income put him in the 15% tax band (Rs 37,651 to Rs 91,150 for a single person in 2016).
And, what are Long-Term Capital Gains?
Long-term capital gains are also known as LTCG. When an asset is held for a period longer than 36 months under such cases, it is considered to be long-term capital gains. For movable assets, like mutual funds, jewelry, debt funds, etc the holding period is reduced to 24 months instead of 36 months. While if these assets are held for less than or equal to 12 months they are considered short-term capital assets. This above-mentioned rule is applicable to all NRIs if the transfer date of assets is after July 10th, 2014 which doesn’t depend on the date of purchase. The assets are:-
- Preference shares or equity in a listed company on any registered stock exchange in India, ie., NSE or BSE
- Bonds, government securities, debentures, and such securities which are registered on NSE or BSE
- Units of UTI, whether quoted or unquoted
- Equity oriented mutual funds units, whether quoted or unquoted
- Zero-coupon bonds, whether quoted or unquoted
When the above-mentioned assets are in possession for a span of greater than 12 months then it will be considered as long-term capital assets. If these are inherited by a will, succession or gift then the duration for which these assets were in possession of the preceding owner will also be considered in determining if the asset is long term or short-term capital gain asset. For rights or bonus shares, the possession period of it is counted from the allotment date of these shares.
The graph on Long Term Capital Gains
As we can see from the graph, it is considered long term capital gains when the possession period for:-
- Stocks, Equity, Mutual Funds, and Listed Tax-free bonds is greater than 1 year
- Unlisted shares and House Property is greater than 2 years
- Debt funds, Sovereign gold bonds, Physical gold, funds and ETFs is greater than 3 years.
But, How To Calculate Long-Term Capital Gains?
For calculating long term capital gains follow the steps below:-
- Step 1: Calculate the full consideration value
- Step 2: Subtract the below charges:-
- Expenses related to transfer of assets exclusively and wholly
- Cost of acquisition indexed
- Cost of improvement indexed
- Step 3: After deducting the necessary charges, one can deduct exemptions that are provided under Section 54, 54B, 54F, and 54EC.
To sum up, the long-term capital gains are calculated differently for various assets as mentioned above. The taxation and the exemptions on the long-term capital gains provide NRIs with the advantage of saving some money. One can calculate the long-term capital gains by following the easy steps.
Is There Any Tax on Long-term Capital Gain?
The tax rate of long-term capital gain is calculated at 20% excluding the cess and surcharges which is applicable. There are some specific cases when the long-term capital gain is charged at 10% of the total gain. These are the following cases when LTCG is charged at 10%. They are:-
- Profit or gains earned by which are generated by selling the assets of listed securities of greater than Rs 1 lakh. This is as per the regulation listed in Section 112A of the Income Tax Act of India.
- Profit generated by selling off the securities that are registered in NSE or BSE in India, any Mutual Funds, zero-coupon bonds, and UTI that are sold before or on July 10th, 2014.
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Exemptions on Tax of Long Term Capital Gains
A person can be exempted from paying long-term capital gains from paying tax if their annual income is below a fixed limit. The exemption from tax is as follows:-
- Indian residents of 80 years of age or above will be tax exempted if their annual income is below Rs 5 lakh.
- Indian residents between the age of 60 to 80 years will be tax exempted from LTCG in 2021 if their annual income is below Rs 3 lakh.
- For NRIs below or equal to 60 years, the tax limit is Rs 2.5 lakh annually.
- For Hindu Undivided Families (HUF), the NRIs can get annual income below Rs 2.5 lakhs annually.
Except for the above-mentioned, the entire amount will be taxed under LTCG at 20% of the total profit earned. Since in this tax there is no minimum tax exemption limit on the entire profit earned it can attract higher taxes.
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Long Term Capital Gains FAQ's:
Capital gains are not considered for inherited property as there is only transfer of ownership but no sale of property. Further, there is tax charged on the property inherited through will or received as a gift by the Income Tax Act.
If a person sells the inherited property then capital gains will be considered as the person has gained profit from the property.
Under Section 80C to 80U of Income Tax Act, individuals will not get any tax deduction under long term capital gains tax in India.
The formula to calculate long term capital tax is:-
Full value of the asset minus expenditures that are incurred on transfer of asset minus the cost of improvement which is indexed minus cost of improvement minus expenditures which gets deducted from the consideration of full value.
Yes, expenditures from proceeds of selling of a capital asset which directly or wholly related to transfer or selling of property can be deducted as these charges included are necessary for asset transfer.
Yes, while selling house property brokerage charges are deductible.
No, capital gains tax can’t be rolled over.
It is deducted at source (TDS).