A long-term capital gain arises from the sale of a specific investment option that has been held by the investor for more than 1 year. This threshold of 1 year is applicable in the case of shares. However, in the case of other capital assets like land and buildings, long-term capital gains on shares arise only after the asset has been held for 3 years or more.
Long term capital gain tax on shares is calculated on the basis of the applicable tax rate, i.e., 10% (plus surcharge and cess), if the amount exceeds Rs.1 lakh during a financial year.
In this article, we explore the various aspects of long-term capital gain tax on the sale of shares, tax rates, tax provisions, grandfathering, how to calculate long term capital gains tax on shares, and a lot more.
Before the 2018 budget, the long-term capital gains on the sale of shares in India and equity-oriented funds were exempted from tax under section 10(38). However, Budget 2018 revoked this section, resulting in the removal of this exemption.
This section was replaced by the section 112A of the Income Tax Act. This section states the provisions for taxation on capital gains on shares -
Even though long-term capital gains on shares are now taxable under the Income Tax Act, there are various ways in which you can save tax on long-term capital gains. Sections like 54, 54F, 54GB, and 54EC provide deductions and exemptions from capital gain tax.
Long-term capital gains on shares are taxed differently in the case of different assets. Equity investment takes place when you purchase the shares of a company. If you hold these shares for a minimum of 1 year and sell them, it results in long-term capital gains.
For example, if you invested Rs.1 lakh in equity shares and sold it for Rs.1.5 lakhs after 15 months, then your long-term capital gain will be Rs.50,000. However, it is important to note that the benefit of indexation is not available for long-term capital gains on equity investments.
Long-term capital gains upto Rs.1 lakh are exempted from tax. However, if the LTCG exceeds this threshold, then such gains are taxable at a @10% (plus surcharge and cess) tax rate. The table given below shows the LTCG tax rates on shares in India and other securities in India.
| Particulars | Taxation |
|---|---|
| Mutual funds for which STT has been paid and the sale of shares listed on a recognized stock exchange. | 10% tax on profits exceeding Rs.1 lakh. |
| Sale of debentures, bonds, and other listed securities on which STT has not been paid. | 10% tax rate |
| Sale of debt-oriented mutual funds | With indexation - 20% Without indexation - 10% |
In the Budget 2018, Section 10(38) of the Income Tax Act, 1961, was revoked, thereby removing the exemption on long-term capital gains (LTCG) tax on the sale of equity shares and equity-oriented mutual funds. This section, initially introduced in the Finance Act, 2004 by the Kelkar Committee, was intended to encourage investments from Foreign Institutional Investors (FIIs).
However, after the revocation in Budget 2018, Section 10(38) was replaced by Section 112A. This new section introduced taxation on capital gains arising from the following assets:
Budget 2024, announced on 23rd July 2024, brought about certain changes in the long-term and short-term capital gains tax rates and holding periods. Given below is a table showing the comparison between the capital gains tax rates in FY 23-24 and FY 24-25.
Taxation for mutual funds
| Product | Before | After | ||||
|---|---|---|---|---|---|---|
| Period of holding | Short Term | Long Term | Period of holding | Short Term | Long Term | |
| Equity oriented MF units | > 12 months | 15.00% | 10.00% | > 12 months | 20.00% | 12.50% |
| Specified Mutual funds which has more than 65% in debt | > 36 months | Slab rate | Slab rate | > 24 months | Slab rate | Slab rate |
| Equity FoFs | > 36 months | Slab rate | Slab rate | > 24 months | Slab rate | 12.5% |
| Overseas FoF | > 36 months | Slab rate | Slab rate | > 24 months | Slab rate | 12.5% |
| Gold Mutual Funds | > 36 months | Slab rate | Slab rate | > 24 months | Slab rate | 12.5% |
Section 54F of the Income Tax Act allows individuals to avail of a tax exemption on long-term capital gains. The benefit of section 54F is available only if the individual meets the following conditions -
Exemption on capital gains tax will be calculated as follows -
Exemption on capital gain = (capital gains x cost of new house) / net consideration value
Grandfathering of capital gains exempts certain individuals from complying with the tax provisions of long-term capital gains on mutual funds. This benefit is allowed to those people who made decisions based on the old regime. Under grandfathering, such people can trade according to the previous stipulations. Such individuals who are allowed the benefit of grandfathering are known as grandfathered individuals. Section 112A of the Income Tax Act provides certain provisions for such individuals who are exempt from capital gain tax as per grandfathering provisions.
Different tax implications arise depending on when securities were bought and sold, as per Indian tax laws.
The computation of taxable capital gain amount requires you to consider 2 factors -
The cost of acquisition plays an important role in determining the long-term capital gain. Consider the higher of the following to determine the cost of acquisition -
Fair Market Value (FMV) on 31.01.18.
Full value consideration or sale price of the security.
The highest quoted price on 31.1.18 is considered as the FMV. If the security was not listed on this date, then the quoted price on the date preceding 31.1.18 is taken into consideration.
Full value consideration - Cost of acquisition = LTCG on shares
Let’s take an example: Suppose Mr. X purchases shares at Rs. 15,000 on 1.05.17 and sells them on 1.02.18 for Rs.20,000. The highest quoted price for this security on 31.1.18 is Rs.18,000.
The cost of acquisition will be determined as follows -
Actual cost of acquisition - Rs.15,000
The lower of -
The cost of acquisition is determined as Rs.18,000 as it is lower of the FMV and the sale price and higher than the actual cost of acquisition.
Therefore,
LTCG = Sale price - Cost of acquisition
LTCG = Rs. (20,000-18,000) = Rs.2,000
Long-term capital loss occurs when you sell or transfer long-term assets at a lower price than their acquisition cost. This loss can be offset against any long-term capital gains within the same assessment year. If the long-term capital gains on equity shares fall below Rs. 1 Lakh after this offset, they are not subject to taxation.
If the entire long-term capital loss cannot be offset in the current year, it can be carried forward to the next year. This carry-forward provision allows the loss to be applied against gains for up to eight subsequent assessment years.
If you want to carry forward your losses to the subsequent years, you must mandatorily file an ITR by 31st July 2024. Also, don’t forget to e-verify it within 30 days of filing, or your ITR may be rendered invalid.
The ITR-2 and ITR-3 forms have been updated by the Central Board of Direct Taxes. Here are the key changes:
Individuals and Hindu Undivided Families (HUFs) with long-term capital gains (LTCG) from share sales must report these gains in Section B7 of the ITR-2 form unless they classify the gains as "Income from Business or Profession."
Non-residents with LTCGs from share sales must disclose them in Section B7 of the ITR-2 form and Section B8 of the ITR-3 form.
The disclosure of LTCG in ITR depends on how an individual treats his income from mutual funds in ITR. If you still don’t know how to report your capital gains on shares in ITR, you can choose our CA-assisted ITR filing service and relieve yourself of your tax worries.
Other than the exemptions mentioned above, there are various other ways you can save your capital gain taxes. If you want to find out about more such tax-saving investment options, get in touch with our tax experts, who navigate through 300+ provisions to find the best one for your tax situation. Hire a Tax Expert Now!
CGAS, or capital gain account scheme, allows individuals to park their capital gains in this account to be eligible for the capital gains tax exemption in case they don’t immediately invest the amount to buy a property.
Individuals can save tax on LTCG on shares by considering investing in tax-saving instruments, balancing capital gains with capital losses, keeping the shares for a longer period, taking indexation benefits, and investing in tax-free bonds. However, it is a better idea to consult a tax expert for the best advice on tax-related matters.
If a seller earns a long-term capital gain exceeding Rs. 1 lakh from selling equity shares or equity-oriented units of a mutual fund, they will incur a long-term capital gains tax of 10%, along with applicable cess.
Investors can benefit from an exemption of up to Rs. 1 lakh each financial year for Long-Term Capital Gains (LTCG) tax on the sale of shares or mutual fund units. By strategically timing the redemption of their investments over two financial years, they can maximize the utilization of the tax exemption limit for both years.
When selling stocks for a profit, you may be subject to capital gains tax. Any profit earned from the sale of stocks held for more than a year is taxable at rates of either 0%, 15%, or 20%. However, if the shares were held for a year or less, the tax rate applicable will be your ordinary tax rate.
The taxation of capital gains is now simpler and more rational. This rationalization and simplification involve five main aspects:
The new provisions for the taxation of capital gains come into effect on July 23, 2024, and apply to any transfers made on or after that date.
Previously, there were three holding periods to consider an asset a long-term capital asset. Now, the holding period has been simplified to two periods: one year for listed securities and two years for all other assets.
The rate for short-term STT paid listed equity, equity-oriented mutual funds, and units of business trusts (Section 111A) has increased from 15% to 20%. Similarly, the rate for these assets for the long-term (Section 112A) has increased from 10% to 12.5%.
The reduction in the rate will benefit all categories of assets. In most cases, taxpayers will benefit significantly. However, where the gain is limited compared to inflation, the benefit may be minimal or absent in a few cases. Budget 2024 has Retained the indexation benefit for properties purchased before 1.4.2001. However, the indexation benefit has been removed for the properties purchased after 1.4.2001.
Yes, the rollover benefits remain unchanged. Taxpayers can still take advantage of these benefits under the IT Act. This means that taxpayers who want to save on long-term capital gains tax, even with the lower rates, can continue to use the rollover benefits if they meet the applicable conditions.
For properties (land, buildings, or both) purchased before April 1, 2001, the cost of acquisition as of April 1, 2001, shall be the:
| S.No. | Particulars | Amount |
|---|---|---|
| 1. | Cost of acquisition of property in 1990 | 5 lakhs |
| 2. | Stamp duty value as on 1.4.2001 | 10 lakhs |
| 3. | FMV of the property as on 1.4.2001 | 12 lakhs |
| 4. | Sale consideration (Property sold on or after 23.7.2024) | 1 crore |
| 5. | Cost of acquisition as on 1.4.2001 (lower of stamp duty value or FMV) | 10 lakhs |
| 6. | Indexed cost of acquisition in FY 2024-25 = 10x363/100 = 36.3 lakhs | 36.3 lakhs |
| LTCG (old) | Tax (old) @20% | LTCG (New) | Tax (New) @12.5% |
|---|---|---|---|
| 63.7 lakhs | 12.74 lakhs | 90 lakhs | 11.25 lakhs |
The taxpayer will have the option to avail roll over benefits for saving of tax.
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