Introduction
Capital gains arise from the sale or transfer of capital assets, including shares, and are categorized into long-term and short-term based on the holding period. Shares held for more than 12 months qualify as long-term capital assets, while those held for a shorter duration are considered short-term assets. LTCG tax applies to the profits generated from the sale of shares held for more than one year.
Taxation Framework for LTCG on Shares:
In India, LTCG on shares is subject to taxation at a flat rate of 10% on gains exceeding ₹1 lakh in a financial year, along with surcharge and cess. However, certain exemptions and deductions are available to taxpayers:
- Amendments in Tax Provisions: In Budget 2018, Section 10(38) of the Income Tax Act, which provided exemption on LTCG tax on equity shares, was revoked. It was replaced by Section 112A, which introduced taxation on LTCG arising from the sale of equity shares, equity-oriented funds, and business trusts.
- Exemptions and Deductions: Taxpayers can avail exemptions under Section 54F by reinvesting the net consideration amount from the sale of shares in real estate properties. The reinvestment must meet specific criteria, including the completion of construction within three years from the date of sale.
- Grandfathering Provision: The introduction of the LTCG tax was accompanied by a grandfathering provision to minimize the impact on investors who made decisions based on the previous tax regime. This provision exempts certain individuals from complying with the new tax rules.
Calculation of LTCG on Shares:
The calculation of LTCG on shares involves determining the difference between the sale proceeds and the cost of acquisition. For shares acquired before January 31, 2018, the cost of acquisition is determined based on the higher of the actual cost or the fair market value (FMV) on January 31, 2018.
Example: If shares purchased for ₹15,000 are sold for ₹20,000, with the FMV on January 31, 2018, being ₹18,000, the LTCG would be ₹2,000 (₹20,000 – ₹18,000).
Important Considerations for Investors:
- Investment Horizon: Investors should consider their investment horizon and tax implications before buying or selling shares. Holding shares for more than 12 months qualifies them for LTCG treatment, resulting in a lower tax rate.
- Tax Planning: Strategies such as tax-loss harvesting and utilization of exemptions can help investors optimize their tax liabilities and enhance after-tax returns on investments.
- Consulting Tax Advisors: Given the complexities of tax laws and regulations, seeking advice from tax advisors or financial experts can help investors navigate the LTCG tax landscape effectively.
Conclusion
Long-term capital gain tax on shares is an integral aspect of the taxation framework for equity investments in India. By understanding the calculation, amendments, exemptions, and considerations related to LTCG tax, investors can make informed decisions regarding their investment portfolios and tax planning strategies. While LTCG tax imposes a financial obligation on investors, prudent tax planning and strategic investment decisions can help minimize tax liabilities and maximize overall investment returns in the long run.
Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.