Long term capital gains - Tax rates and exemptions

The tax levied on capital gains depends on the holding period of the investment. In India, capital gains are classified into two types - short-term and long-term. Let’s take a closer look at long-term capital gains, how they are taxed and what exemptions are available.

What is a long-term capital gain?

A long-term capital gain is the profit you earn from selling a long-term capital asset. The definition of a long-term capital asset can differ for different assets, as explained below:

• For equity-oriented mutual funds, listed equity shares and units of business trusts, the asset must be held for more than 12 months
• For debt mutual funds, real estate, gold and other capital assets, the holding period must be more than 24 months

What is long term capital gains tax?

Long term capital gains tax refers to the tax levied on the profits made from selling long-term capital assets. The taxation of long-term capital gains is covered under two key sections of The Income Tax Act - Section 112 and Section 112A.

• Section 112A applies to gains made from the sale of listed equity shares, equity-oriented mutual fund units, and units of business trusts
• Section 112 covers all other types of long-term capital gains that are not included under Section 112A
• For equity shares, equity mutual funds, and units of business trusts sold before July 23, 2024, the applicable tax rate is 10% without the benefit of indexation. If these assets are sold on or after July 23, 2024, the tax rate increases to 12.5% without indexation
• For land and buildings sold before July 23, 2024, the long-term capital gains are taxed at 20% with indexation. However, for sales on or after July 23, 2024, individuals and Hindu Undivided Families (HUFs) can choose between paying 12.5% without indexation or 20% with indexation, depending on which option results in lower tax
• In the case of other capital assets such as debt mutual funds, gold and unlisted shares, the gains are taxed at 20% with indexation if sold before July 23, 2024. If sold on or after that date, the tax is levied at 12.5% without indexation

How to save tax on LTCG (Long Term Capital Gains) with life insurance in India?

To reduce your tax liability on long-term capital gains, you can use life insurance as a tax-saving instrument. Life insurance qualifies for tax benefits under The Income Tax Act, 1961. Here's how it helps:

Exemption under Section 10(10D)

The death benefits received from a life insurance policy are exempt from tax under Section 10(10D), provided certain conditions are met. So, you do not have to pay any capital gains tax on the amount. Since the benefit from life insurance is tax^*-free, it helps your loved ones save tax in the long run

Tax-free policies

For policies where the annual premium does not exceed ₹ 2.5 lakh, any gains received on maturity are exempt from LTCG tax^*. You can invest in such plans and save long term capital gain on a ULIP

What is the impact of long-term capital gain tax on ULIP plans?

Long-term capital gains tax can affect the returns from a ULIP. ULIPs come with a mandatory lock-in period of five years. Hence, gains from such plans are taxed as long-term capital gains due to the holding period.

As per the Union Budget 2025, ULIPs not covered under Section 10(10D) will now be treated as capital assets if the annual premium exceeds ₹ 2.5 lakh. Any profits made from redeeming such ULIPs will be taxed under the capital gains head, rather than being treated as income from other sources.

Tax rate for long-term capital gains on such ULIPs, if held for more than 12 months, the gains will be taxed at 12.5% without indexation.

ULIPs issued before February 1, 2021, are also impacted by this change if their annual premium exceeds ₹ 2.5 lakh. These plans will no longer enjoy the full tax exemption under Section 10(10D) and will now be subject to capital gains taxation on redemption.

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