The computation of Long-Term Capital Gain (LTCG) is specified under Section 48 of the Income Tax Act, 1961. The key factor in determining whether a capital gain is long-term is the holding period of the asset.

Section 48 – Computation of Capital Gains:
“The income chargeable under the head ‘Capital Gains’ shall be the difference between the full value of consideration received or accruing from the transfer of a capital asset and the cost of acquisition of the asset and the cost of any improvement to the asset, as reduced by the expenditure incurred in connection with the transfer.”

Explanation in Simple Terms:

1. Long-Term Capital Asset (LTCA):

   • A capital asset held for more than 36 months qualifies as a long-term asset for most assets like land, buildings, or unlisted shares.

   • For listed securities, equity mutual funds, and debt funds, the holding period is more than 12 months.

   • Jewelry, bonds, and similar assets generally have a 36-month holding period.

2. Computation of Long-Term Capital Gain (LTCG):
   The capital gain is computed similarly to short-term gains, with the special benefit of indexation for long-term assets. Indexation helps account for inflation, increasing the cost of acquisition and improvement, and thus lowering the capital gain on which tax is computed.

   • Sale Consideration: This is the price you sold the asset for.

   • Cost of Acquisition: This is the original price you paid for the asset, including any additional costs incurred like brokerage fees, registration charges, etc.

   • Cost of Improvement: If you have made any improvements to the asset (like renovation, upgrades, etc.), these costs can also be included.

   • Expenditure on Transfer: This includes any expenses directly related to the sale, like brokerage fees, legal charges, etc.

   • Indexed Cost of Acquisition: The original cost is adjusted for inflation using the Cost Inflation Index (CII).

3. Formula for LTCG (with Indexation):

   LTCG=Sale Consideration−(Indexed Cost of Acquisition+Indexed Cost of Improvement+Expenditure on Transfer)

4. Tax Rate:

   • LTCG on listed equity shares and equity mutual funds is taxed at 10% (without indexation), provided the gain exceeds ₹1 lakh in a financial year.

   • LTCG on other assets (e.g., land, property, unlisted shares) is generally taxed at 20% (with indexation).