Home Learn What is Long Term Capital Gain Tax on Shares in India? Learn LTCG Calculation, Funding & Indexation

What is Long Term Capital Gain Tax on Shares in India? Learn LTCG Calculation, Funding & Indexation

What is Long Term Capital Gain Tax on Shares in India? Learn LTCG Calculation, Funding & Indexation
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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 realize 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. Understanding how long term capital gain tax on shares works is crucial for you because it can have an impact on tax liabilities and overall investment strategy.

Let’s dive deep into the world of 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. In the context of shares, LTCG refers to the profit earned on the sale of shares that have been held for more than one year.

LTCG is important for you to understand because it affects tax liabilities. In most countries, including India and the United States, 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 before selling them, they may pay a lower LTCG tax rate on shares with any profit earned from the sale.

For example

Let’s say an investor bought 100 shares of a company at ₹50 per share and held onto them for more than a year. The company experienced growth and the share price increased to ₹80 per share, and the investor decided to sell the shares. The investor made a profit of ₹300 on the sale (₹80 – ₹50 =  ₹30 per share profit x 100 shares),

Since the shares were held for more than one year, the profit will be considered LTCG. The tax rate on this profit will depend on the country’s tax laws and the investor’s income level, but in many cases, it will be lower than the LTCG tax on stocks rate on shares on short-term capital gains. 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 differently from Short-Term Capital Gains (STCG) on shares. Long Term Capital Gains (LTCG) refers to the profit earned from the sale of shares held for over one year.

The long term capital gain on shares is taxed at a flat rate of 20% 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. However, the benefit of indexation is only available for debt-oriented mutual funds and not for equity-oriented mutual funds or shares.

It is important to note that any LTCG on sale of shares up to ₹1 lakh in a financial year (April to March) is exempt from tax. Any LTCG above ₹1 lakh in a financial year is subject to the flat LTCG tax rate on shares of 20% with indexation.

LTCG Example

Let’s say you bought shares in a company for ₹500,000 in April 2019 and sold them in May 2022 for ₹8,00,000. Thus, you made a profit of ₹300,000 on the sale of the shares. So, if you hold the shares for more than one year, the tax authorities will consider the profit as a long term capital gain on shares. 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 ₹5,79,795. The taxable LTCG will be ₹2,20,205 (₹8,00,000 – ₹5,79,795), and the tax on LTCG will be ₹44,041 (20% 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 on long term capital gain 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 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 for calculating LTCG on shares is as follows:

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

In India, shares long term capital gains tax (LTCG) and equity-oriented mutual funds incur a 10% tax (plus surcharge and cess) if they surpass Rs. 1 lakh in a fiscal year. LTCG applies to profits from the sale of shares or equity-oriented mutual funds held for over a year.

For securities not covered by Section 112A, different tax rates are applicable. The table below outlines the tax implications for long term capital gains tax on shares on various securities:

ParticularsApplicable Tax Clause
Sale of listed shares on recognized stock exchanges and Mutual Funds with STT paid.10% tax for gains exceeding Rs. 1 Lakh.
Sale of bonds, debentures, shares, and listed securities without STT payment.10%
Sale of debt-oriented Mutual FundsWith indexation – 20%Without indexation – 10%

Grandfathering on LTCG Tax- Section 112A

The Finance Act 2018 brought changes to the Income Tax Act, introducing exemptions and relaxations effective from the assessment year 2019-2020. Long term capital gains on listed or unlisted equity shares or equity-oriented funds are now taxable at a 10% rate, with an exemption for LTCG up to Rs 1 lakh. To qualify for the 10% rate, taxpayers must meet specific conditions:

  1. Pay STT on shares at the time of purchase and sale.
  2. 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:

  1. Actual cost of acquisition at the time of purchase.
  2. FMV of the shares as of January 31, 2018, or the actual sales consideration on transfer, whichever is lower.

Example for Calculating LTCG on Sale of Shares

Take a look at this example of long term capital gain tax on shares. Suppose an investor purchased 1,000 shares of ABC Ltd. at ₹100 per share on January 1, 2019, and sold them on March 31, 2022, at ₹300 per share. Let us assume that the Securities Transaction Tax (STT) was paid on the purchase and sale of shares.

The investor held the shares for more than 24 months, and therefore, the capital gains on the LTCG on sale of shares will be considered as long-term capital gains. The LTCG tax rate on the sale of listed equity shares is 10%, and the cost inflation index (CII) for the financial year 2019-20 was 289 and for the financial year 2021-22 was 317.

Here is how to calculate the LTCG:

Sale Price = ₹300 per share x 1,000 shares = ₹3,00,000

Purchase Price = ₹100 per share x 1,000 shares = ₹1,00,000

Indexed Purchase Price = ₹1,00,000 x (317/289) = ₹1,09,758

LTCG = ₹3,00,000 – ₹1,09,758 = ₹1,90,242

LTCG Tax = ₹1,90,242 x 10% = ₹19,024

Therefore, the investor will have to pay ₹19,024 as LTCG tax on the sale of shares

How to Reduce Capital Gains Tax Liability?

Reducing capital gains tax in India liability is a key consideration for investors like you who are seeking to maximize 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 can help to reduce the overall tax liability, as gains and losses are netted 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 long term capital gain tax 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 2010 and sold it in 2023 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 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 24 months, while STCG is the gain from the sale of a short-term asset held for less than or equal to 24 months. 

Therefore, let’s have a look at other differences as well.

ParametersLong-Term Capital Gains (LTCG)Short-Term Capital Gains (STCG)
DefinitionCapital gains from the sale of a long-term assetCapital gains from the sale of a short-term asset
Holding periodAsset held for more than 24 monthsAsset held for less than or equal to 24 months
Tax rate for individuals10% (if the total LTCG exceeds Rs. 1 lakh)Taxed at the individual’s applicable income tax slab rate
Tax rate for companies20% (plus applicable surcharge and cess)30% (plus applicable surcharge and cess)
Tax-saving optionsIndexation, tax-loss harvesting, and investing in tax-saving instrumentsNone
ExamplesGains from selling a house after holding it for more than 24 monthsGains from selling shares held for less than or equal to 24 months

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 liability.

Invest in Long-Term Growth

Investing your tax return in long-term growth-oriented investments can help to maximize 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 maximize 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

International Funds

International Funds, popular for investing in foreign stocks, have gained traction. Despite being Equity-focused, they face taxation akin to Debt Mutual Funds. If sold within 3 years, units incur tax based on the investor’s income slab, while those held over 3 years qualify for a 20% long-term capital gains tax with indexation.

ETFs

Exchange Traded Funds (ETFs) in India include Index, Sectoral, Gold, and International ETFs. Index and Sectoral ETFs are taxed like Equity investments. For holdings exceeding 12 months, a 10% LTCG tax is applicable on gains over Rs. 1 lakh in a financial year, while a 15% STCG tax applies for shorter durations.

Gold and International ETFs follow Debt Mutual Fund taxation. STCG tax applies at the investor’s slab rate for holdings under 36 months, while LTCG tax at 20% with indexation is imposed for longer durations.

Fixed Income Investments

listed Debt instruments, STCG tax adheres to the income slab rate for holdings less than 12 months, while LTCG tax is 20% with indexation or 10% without for periods exceeding 12 months. Unlisted bonds observe a 36-month threshold, with STCG taxed per the income slab and LTCG at 20% without indexation.

Gold Investments

Gold investments, including physical gold, digital gold, Gold ETFs, and Gold Mutual Funds, share similar taxation. All qualify for LTCG if held over 36 months, with STCG taxed at the investor’s slab rate for shorter durations, and LTCG at 20% with indexation. Sovereign Gold Bonds are an exception, with tax-free capital gains at maturity; exiting before maturity incurs STCG and LTCG taxes.

Real Estate Investments

Real Estate investments have their own capital gains rules. STCG tax applies for holdings below 24 months, following the investor’s income slab rate. LTCG tax, at 20% with indexation, is applicable for durations exceeding 24 months. Additional regulations include a 1% TDS on sales over Rs. 50 lakh and mandatory reporting of sales over Rs. 30 lakh to the Income Tax Department.

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:

  1. 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.”
  2. Non-residents with LTCGs from share transactions disclosed in Section B7 (ITR-2) and B8 (ITR-3).
  3. Treating equity shares as stock-in-trade means profits go under “Income from business and profession,” exempt from a 10% long term capital gain tax on stocks, even exceeding Rs. 1 Lakh.

Tax Rates- Long Term Capital Gains vs Short Term Capital Gains

TaxesConditionTax Applicable
Long Term Capital Gains Tax (LTCG)Sale of:1. Equity Stocks2. Units of equity oriented mutual funds10% over and above Rs 1,00,000
Others20%
Short Term Capital Gains Tax (STCG)When Securities Transaction Tax (STT) is not applicableAt normal slab rates
When Securities Transaction Tax is applicable15%

Exceptions of Long Term Capital Gain Tax on Shares

In general, long-term capital gains tax is levied on the profits earned from the sale of shares that are held for more than 12 months. However, there are certain long term capital gain on shares exempt under section to this rule, which are:

  • Listed Equity Shares: Long term gain tax on shares arising from the sale of listed equity shares on a recognized stock exchange are exempt from tax, provided Securities Transaction Tax (STT) has been paid on the sale transaction.
  • Equity-Oriented Mutual Funds: Long-term capital gains arising from the sale of equity-oriented mutual funds are exempt from tax, provided STT has been paid on the sale transaction.
  • Start-up Shares: Long-term capital gains arising from the sale of shares of eligible start-up companies are exempt from tax, subject to certain conditions.
  • Transfer by Will or Inheritance: Long-term capital gains arising from the transfer of shares by way of inheritance or will are exempt from tax.
  • Sale of Agricultural Land: Long-term capital gains arising from the sale of agricultural land are exempt from tax.

Exemptions on Long Term Capital Gain Tax on Shares

Section 54F offers individuals a pathway to long term capital gains exemption on shares. To qualify, one must reinvest the net consideration amount from share sale in up to two real estate properties. Before Budget 2019, this was limited to one long term capital gain tax on property.

Reinvestment must take place within 1 year before the sale or 2 years after. Alternatively, one can invest in a construction project, completed within 3 years of share sale.

For a full tax exemption on LTCG, reinvest the entire net consideration. If not possible, exemption is based on the portion invested:

Exemption on Capital Gain=(Capital Gains×Cost of a New House)/Net Consideration Value

However, selling the new property within 3 years revokes the long-term capital gain exemption. The introduction of income tax on long-term capital gain aimed to be inconvenient, but “Grandfathering” minimized the impact.

Adjusting Long-Term Capital Gains against the Basic Exemption Limit

Resident individuals or Hindu Undivided Families (HUFs) can offset LTCG rate on shares (LTCG) against the basic exemption limit. However, non-resident individuals and non-resident HUFs cannot use the exemption limit for LTCG. To make this adjustment, taxpayers need to offset all other income against the exemption limit first, with the surplus then applied to adjust LTCG.

Long Term Capital Gain vs Short Term Capital Gains

Here is a table of differences between long term capital gains vs short term capital gains:

Aspects of ComparisonLong-Term Capital GainsShort-Term Capital Gains
Duration of OwnershipOwned for more than one yearOwned for one year or less
Tax RatesGenerally taxed at a more favorable rate than salary or wagesSubject to ordinary income tax rates
Tax BracketsLower tax rates applicable, usually resulting in reduced tax liabilityTaxed at the individual’s marginal income tax bracket
Federal Tax BracketsVaries; currently seven brackets with rates ranging from 10% to 37%Subject to applicable federal tax bracket rates
Calculation of Net Capital GainsBased on adjusted basis, considering acquisition cost, depreciation, sale costs, and improvementsDetermined by subtracting the asset’s acquisition cost from the sale price
Inherited BasisInherits the donor’s basis if the asset is received as a giftN/A (short-term gains are not affected by inheritance)
Tax Minimization StrategyHolding assets for more than a year to benefit from lower tax ratesNo specific strategy due to higher tax rates

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 exemptions available under the Income Tax Act. Therefore, proper planning and tax-efficient investment strategies can help you to minimize the tax liability and maximize 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. 

FAQs

1. Is it possible to avoid long-term capital gains tax on shares?

To sidestep long-term capital gains tax on shares, strategic tax planning is key. Reinvesting those gains is crucial for exemptions.

2. How Can you Calculate Long Term Capital Gain Tax on Shares?

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.

3. What happens when LTCG on shares is less than 1 lakh?

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 lakh.

4. Is it possible to reinvest capital gains to avoid taxes?

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.

5. Is there any capital gains tax to sell a stock and 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.

6. What is Section 112A of income tax act?

Section 112A levies a 10% tax on capital gains over Rs. 1,00,000 from the transfer of a long-term capital asset, such as LTCG on equity shares, units of equity-oriented funds, or units of business trusts.

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