What is Long Term Capital Gain Tax on Shares in India & How is it Calculated?
Let’s say you invested in a stock of a company a few years ago and held onto it for more than one year. During that time, the company experienced growth and its stock price increased significantly. You decide to sell the shares and realise a profit from the sale. Since you held the shares for more than one year, any profit you made on the sale will be considered Long-Term Capital Gains (LTCG) in the share market.
In this blog, we will explore how long term capital gain tax on shares works, while also covering its impact on tax liabilities and on your overall investment strategy.Let’s dive deep into understanding long term capital gain tax on shares, how to calculate LTCG on shares, and much more.
What are Long-Term Capital Gains?
LTCG or Long-Term Capital Gains on shares refer to the profit earned on the sale of an asset that has been held for more than one year. LTCG is important for you to understand because it affects tax liabilities. In India, LTCG is taxed at a lower rate than short term capital gains tax on shares (STCG), which are gains made on assets held for less than one year. This means that if an investor holds shares for more than one year, they are eligible for LTCG tax rate on shares, which is lower than STCG.
Here is a long-term capital gain example,
Let’s say an investor bought 100 shares of a company at Rs. 50 per share and held onto them for more than a year. The company experienced growth and the share price increased to Rs. 80 per share, and the investor decided to sell the shares. The investor made a profit of ₹3,000 on the sale (Rs. 80 – Rs. 50 = Rs. 30 per share profit x 100 shares).
Since the shares were held for more than one year, the profit is taxed under LTCG. Let us now learn what is LTCG tax rate on shares in India.
What is the Rate of Long Term Capital Gain Tax on Shares?
The Indian government taxes Long Term Capital Gains (LTCG) on shares, which is different from Short-Term Capital Gains Tax (STCG) on shares.
The long term capital gain on shares is taxed at a flat rate of 12.5% with the benefit of indexation, which adjusts the purchase price of the shares for inflation. This means that the tax is levied on the inflation-adjusted gain instead of the nominal gain.
It is important to note that any LTCG on sale of shares up to ₹1.25 lakh in a financial year (April to March) is exempt from tax. Any LTCG above ₹1.25 lakh in a financial year is subject to the flat LTCG tax rate on shares of 12.5% with indexation.
Example of a Calculation of Long Term Capital Gains Tax Rate in India
Let’s say you bought shares in a company for Rs. 5,00,000 in April 2021 and sold them in July 2024 for Rs. 8,00,000. Thus, you made a profit of Rs. 3,00,000 on the sale of the shares. As you have held the shares for more than one year, LTCG will be levied in this case. You can claim the benefit of indexation to adjust the purchase price for inflation. Assuming the inflation rate for the period is 5%, the indexed cost of acquisition will be Rs. 5,79,795. The taxable LTCG will be Rs. 2,20,205 (Rs. 8,00,000 – Rs. 5,79,795), and the tax on LTCG will be Rs. 27,525 (12.5% of ₹2,20,205).
Amendments to Long-term Capital Gains Tax Provisions
In the 2018 Budget, the Income Tax Act of 1961 saw a significant change with the removal of Section 10 (38). This change eliminated the exemption of LTCG on equity shares and equity-oriented mutual funds. The original section, introduced in 2004 by the Kelkar Committee, aimed to attract investments from Foreign Institutional Investors (FII).
Post-Budget 2018, Section 10 (38) was replaced by a new provision, Section 112A, which outlines the taxation of income from capital gains from specific assets like –
1. Equity Shares
2. Equity Funds and its units.
3. Business Trusts and its units.
How to Calculate Long Term Capital Gain on Shares?
The formula used to calculate capital gains tax for the long term is::
LTCG = Sale Price of Shares – (Cost of Acquisition + Cost of Improvement + Transfer Expenses + Other Incidental Charges)
Where:
- Sale Price of Shares: The price at which the shares were sold
- Cost of Acquisition: The price at which the shares were acquired
- Cost of Improvement: The cost of any improvements made to the shares (if applicable)
- Transfer Expenses: Any expenses incurred in transferring the shares (such as broker fees)
- Other Incidental Charges: Any other incidental charges related to the acquisition or transfer of the shares (such as legal fees)
The prevailing tax laws in the relevant country will apply the long term capital gain tax on shares once they calculate the LTCG.
Income Tax on LTCG on Shares
During the Union Budget 2024, the government implemented a uniform 12.5% capital gain tax rate for all long-term capital gains, regardless of the asset class. Previously, the tax rate differed depending on the type of asset.
Grandfathering on LTCG Tax- Section 112A
According to the Union Budget 2024, long term capital gains on listed or unlisted equity shares or equity-oriented funds are now taxable at a 12.5% rate, with a capital gain tax exemption of long term capital gain of up to Rs. 1.25 lakh. To qualify for the 12.5% rate, taxpayers must meet specific conditions:
- Pay STT on shares at the time of purchase and sale.
- Pay STT when selling equity-oriented mutual fund units.
To address the taxability of shares, it’s crucial to implement prospective tax clauses, applying from the date of the levy of LTCG under Section 112A. To achieve this, the Income Tax Department introduced grandfathering clauses. These clauses determine the cost of acquisition based on the Fair Market Value (FMV). For shares purchased before February 1, 2018, the cost of acquisition is the higher of:
- Actual cost of acquisition at the time of purchase.
- FMV of the shares as of January 31, 2018, or the actual sales consideration on transfer, whichever is lower.
How to Reduce Capital Gains Tax Liability?
Reducing capital gains tax in India liability is a key consideration for investors who are seeking to maximise their returns. In particular, long term rate on shares can have a significant impact on an investor’s bottom line, and therefore it is important to explore the various tax-saving options available.
Tax Loss Harvesting
One option for reducing long term capital gain tax on shares is to take advantage of tax-saving instruments such as tax loss harvesting. Tax loss harvesting involves selling off losing investments to offset gains from winning investments. This may reduce your overall tax liability by netting gains and losses against each other.
For example, if an investor has made a capital gain of Rs. 10,000 on the sale of one stock and incurred a capital loss of Rs. 5,000 on the sale of another stock, the net capital gain would be Rs. 5,000, and the LTCG tax would be applicable only on this amount.
Indexation
Another option for reducing tax on long term capital gains on shares is to take advantage of indexation. Indexation involves adjusting the purchase price of an investment to reflect inflation, thereby reducing the taxable gains. This is particularly relevant for long-term investments, as inflation can erode the value of the investment over time. For example, if an investor purchased a stock for Rs. 1,00,000 in 2021 and sold it in 2024 for Rs. 2,00,000, the actual gain is not Rs. 1,00,000 but is reduced to reflect inflation over this period. By applying indexation, the taxable capital gain is reduced, thereby reducing the LTCG tax liability.
Other tax-saving options for LTCG on stocks include investing in tax-saving instruments such as Equity Linked Savings Schemes (ELSS), National Pension Scheme (NPS), and Unit Linked Insurance Plan (ULIP), among others. These investments offer tax benefits under Section 80C of the Income Tax Act, thereby reducing the overall tax liability.
Difference between LTCG and STCG
The key difference between LTCG and STCG is the holding period of the asset. LTCG is the gain from the sale of a long-term asset held for more than 12 months, while STCG is the gain from the sale of a short-term asset held for less than or equal to 12 months.
Therefore, let’s have a look at other differences as well.
| Parameters | Long-Term Capital Gains (LTCG) | Short-Term Capital Gains (STCG) |
| Definition | Capital gains from the sale of a long-term asset | Capital gains from the sale of a short-term asset |
| Holding period | Asset held for more than 12 months | Asset held for less than or equal to 12 months |
| Tax rate for individuals | 12.5% (if the total LTCG exceeds Rs. 1.25 lakh) | 20% (if the total LTCG exceeds Rs. 1.25 lakh) |
How to Reinvest Your Tax Return?
Reinvesting your tax return is a smart way to put that money to work for you. If you have received a tax return and are considering reinvesting it, here are some steps to consider, specifically in the context of long term capital gain tax (LTCG) on shares:
Evaluate Your Investment Portfolio
Before deciding how to reinvest your tax return, it is important to evaluate your current investment portfolio. If you have investments in shares or stocks that have appreciated over a long-term, you may have to pay LTCG tax on their sale. So, you may want to consider reinvesting your tax return in other areas such as mutual funds, exchange-traded funds (ETFs), or other investment vehicles that may not have as high a tax liability.
Consider Tax-Saving Options
As mentioned earlier, there are tax-saving options available for LTCG on stocks such as indexation, tax-loss harvesting, and investing in tax-saving instruments such as Equity Linked Savings Schemes (ELSS) and National Pension Scheme (NPS). You may want to consider investing your tax return in these instruments to save on LTCG tax on stocks liability.
Invest in Long-Term Growth
Investing your tax return in long-term growth-oriented investments can help to maximise returns over the long run. You may want to consider investing in companies with strong fundamentals, that have a good track record, and have a promising future. These types of investments may generate better returns over the long run, especially if you are willing to hold onto them for an extended period.
Diversify Your Portfolio
It is always a good idea to diversify your investment portfolio via portfolio investing to spread out risk and maximise returns. You may want to consider investing your tax return in a mix of stocks, mutual funds, ETFs, and other investment vehicles to diversify your portfolio and reduce overall risk.
LTCG on Other Instruments
The Union Budget 2024 introduced significant changes to the tax treatment of various investment securities, particularly focusing on indexation benefits and tax rates. Here’s a summary of the applicable tax rates and indexation benefits for different asset classes:
Indexation and Taxation Table
| Asset Class | Holding Period | Tax Treatment Before April 1, 2023 | Tax Treatment After April 1, 2023 |
| Equity Mutual Funds (with STT paid) | < 12 months | STCG Tax at 15% | STCG at 15% |
| > 12 months | LTCG at 10% (no indexation) for gains > INR 1 lakh | LTCG at 10% (no indexation) for gains > INR 1 lakh | |
| Debt Mutual Funds | < 36 months | STCG as per individual tax slab | STCG as per individual tax slab |
| > 36 months | LTCG at 20% with indexation | LTCG as per individual tax slab | |
| Gold ETFs and Gold Funds | < 36 months | STCG as per individual tax slab | STCG as per individual tax slab |
| > 36 months | LTCG at 20% with indexation | LTCG as per individual tax slab | |
| International Funds and FoFs | < 36 months | STCG as per individual tax slab | STCG as per individual tax slab |
| > 36 months | LTCG at 20% with indexation | LTCG as per individual tax slab |
Summary of Changes
- Equity Mutual Funds: No change in tax treatment; long-term capital gains (LTCG) over Rs. 1 lakh are taxed at 10% without indexation.
- Debt Mutual Funds: Post 1st April, 2023, LTCG from debt mutual funds are taxed as per individual tax slabs, eliminating the previous 20% long term tax on shares with indexation.
- Gold ETFs and Funds: Similar to debt mutual funds, gains are now taxed as per individual tax slabs irrespective of the holding period, removing the indexation benefit for long-term holdings.
- International Funds and Fund of Funds (FoFs): Also follow the new rule where LTCG is taxed according to the investor’s income tax slab without indexation benefits.
Provisions to Disclose LTCG in ITR Filing
The Central Board of Direct Tax has updated the ITR-2 and ITR-3 forms. Here’s a concise breakdown:
- For individuals and Hindu Undivided Families (HUFs) with long term capital gain on stocks from shares, report in Section B7 of ITR-2, unless considered “Income from Business or Profession.”
- Non-residents with LTCGs from share transactions disclosed in Section B7 (ITR-2) and B8 (ITR-3).
- Treating equity shares as stock-in-trade means profits go under “Income from business and profession,” exempt from a 12.5% tax on long term capital gain on shares, even exceeding Rs. 1.25 Lakh.
To Wrap It Up….
In conclusion, long-term capital gains tax on shares is an important aspect that you must understand to make informed investment decisions. You need to be aware of the tax implications of selling shares held for over 12 months and the capital gains exemptions available under the Income Tax Act. Therefore, proper planning and tax-efficient investment strategies can help you to minimise the tax liability and maximise investment returns even with LTCG on unlisted shares.
Understanding LTCG tax on shares is an essential aspect of building a diversified and profitable investment portfolio. Thus, by staying informed and proactive, you can make sound investment decisions that can help you achieve financial goals.
Frequently Asked Questions About Long Term Capital Gains Tax
To sidestep long-term capital gains tax on shares, strategic tax planning is key. Reinvesting those gains is crucial for exemptions.
2. How to calculate capital gains tax for the long term?
To compute long-term capital gains tax on shares, pinpoint the sale price, purchase cost, and related charges. Calculate gains by deducting acquisition and sale expenses from the sale price.
Shares listed on the stock exchange and subject to Security Transaction Tax (STT) are exempt from Long-Term Capital Gain tax on shares in India if the gains are below Rs 1.25 lakh.
Yes, you can strategically reinvest capital gains to minimize long term capital gain on sale of shares. According to the Income Tax Act, you have options like capital gain bonds, real estate, or other assets to reinvest.
Selling shares or stocks and reinvesting the gains in an eligible capital asset exempts you from long term capital gain tax on sale of shares.
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