Long Term Capital Gains on Shares

Long-term capital gains (LTCG) apply when investors hold equity shares or mutual funds for over a specific period and sell them for a profit. These gains are taxed differently from short-term gains.Long Term Capital Gains (LTCG) arise from sale of capital assets like stocks, properties etc., held for a period of more than 24 months (12 months in case of listed shared and equity funds). This article covers LTCG definitions, tax rates, calculations, and holding period implications.

Long-term capital gain (LTCG) refers to profits from the sale of assets, like listed equity shares, held for over 12 months. It is taxed differently from short-term capital gains (STCG), encouraging longer investment horizons aligned with long-term financial goals.

For equity shares and units of equity-oriented mutual funds:

• Short-term: If held for 12 months or less
  

• Long-term: If held for more than 12 months

As per the Income Tax Act of India:

• LTCG on listed equity shares and equity mutual funds is exempt up to ₹1 Lakh per financial year.
  

• Any LTCG beyond ₹1 Lakh is taxed at 10% without indexation.
  

This rule came into effect from 1 April 2018, with a grandfathering clause applied to gains accrued until 31 January 2018.

To determine LTCG on shares:

1. Identify the sale price of the shares sold.
   

2. Determine the purchase price or the fair market value (FMV) as on 31 Jan 2018, whichever is higher (for shares bought before that date).
   

3. Subtract the cost of acquisition from the sale price.
   

4. Exempt the first ₹1 Lakh from taxation.
   

5. Apply a 10% tax on the remaining amount.
   

LTCG Formula

LTCG = Sale Price – Cost of Acquisition – Exempt Amount (₹1 Lakh)  

Tax Payable = 10% on LTCG (beyond ₹1 Lakh)  

Example

If an investor sells listed equity shares in FY 2024-25 and earns ₹1.80 Lakhs as capital gain:

• Taxable LTCG = ₹1.80 Lakhs – ₹1 Lakh = ₹80,000
  

• LTCG Tax = 10% of ₹80,000 = ₹8,000
  

If shares were acquired before 1 February 2018, the cost of acquisition for LTCG calculation is taken as the higher of:

• The actual purchase price
  

• The fair market value as on 31 January 2018
  

• The actual sale price
  

This was done to protect gains accrued before the introduction of LTCG tax.

LTCG applies when you sell:

• Equity shares listed on recognised stock exchanges in India
  

• Units of equity mutual funds
  

• Units of business trusts
  

It does not apply to debt mutual funds (now taxed as per individual slab) or unlisted shares, which follow different tax treatments.

Under Section 112A of the Income Tax Act:

• LTCG from listed equity shares or equity mutual funds is exempt up to ₹1 Lakh annually.
  

• No indexation benefit is allowed for calculating LTCG tax on these assets.
  

• Deductions under Chapter VI-A (such as 80C) cannot be claimed against LTCG.
  

However, LTCG can be set off against long-term capital losses, and losses can be carried forward for up to eight assessment years.

If you have LTCG from equity, you must report it while filing your Income Tax Return (ITR):

• Use ITR-2 (for individuals not earning from business)
  

• Provide ISIN of shares, date of acquisition, date of sale, sale value, cost, and gains
  

• Mention exempt amount and taxable gain separately
  

You should maintain a proper record of transactions and download capital gains statements from brokers or RTA platforms for accuracy.

Choosing long-term investments offers several advantages:

• Lower tax burden: LTCG tax is lower than short-term rates.
  

• Higher compounding: Staying invested allows compounding to work more effectively.
  

• Strategic financial planning: Helps in achieving retirement, children’s education, and long-term wealth creation goals.
  

• Tax efficiency: Capital gains tax is deferred until the asset is sold.
  

Before you sell shares and realise LTCG:

• Check whether your total gain exceeds ₹1 Lakh
  

• Consider holding for over a year to qualify for LTCG
  

• Plan sale to distribute gains across financial years
  

• Use losses for set-off if available
  

• Evaluate the reinvestment options available post-sale
  

Being mindful of tax implications can significantly improve net returns on your investments.

Long-term capital gains on shares are key to tax-efficient investing. Gains up to ₹1 Lakh are exempt, while amounts above that are taxed at 10%. By planning sales wisely, investors can optimise taxes and build long-term wealth.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.