Introduction
Long-term capital gains on shares refer to the profits earned from the sale of equity shares or equity-oriented mutual funds held for more than 12 months on recognized stock exchanges. When investors hold shares for an extended period, they undertake the maximum entrepreneurial risk associated with the business venture. LTCG is determined by the difference between the sale price and the purchase price of the shares held for more than one year.
Calculation of Long-Term Capital Gains on Shares:
The calculation of LTCG on shares involves several key components, including the sale proceeds, indexed cost of acquisition, brokerage or commission charges, other expenses related to the sale, and the holding period. The indexed cost of acquisition is computed by adjusting the purchase price for inflation using the Cost Inflation Index (CII) published by the Income Tax Department. The formula for calculating LTCG on shares is as follows:
𝐿𝑇𝐶𝐺 = Sale Proceeds−Indexed Cost of Acquisition−Brokerage or Commission Charges−Other Expenses Incurred
Taxation of Long-Term Capital Gains on Shares:
As per the current tax laws in India, LTCG on shares is taxed at a flat rate of 10% on the excess gains over ₹1 lakh in a financial year, without allowing the benefit of indexation. This taxation regime was introduced in the Union Budget 2018, replacing the earlier system of exempting LTCG on shares if held for more than 12 months. However, certain exemptions and deductions may be available to taxpayers to reduce their tax liabilities:
- Grandfathering Provision: Taxpayers can calculate the LTCG tax liability based on the market value of shares as of January 31, 2018, to ensure that gains accrued till that date are not subject to LTCG tax.
- Investment in Equity-Linked Savings Schemes (ELSS): Taxpayers can claim deductions under Section 80C of the Income Tax Act for investments made in ELSS mutual funds, which offer tax benefits along with the potential for wealth creation through equity investments.
- Capital Loss Set-Off: Capital losses from the sale of shares can be set off against LTCG on shares, thereby reducing the overall tax liability. Any unadjusted capital losses can be carried forward for up to eight assessment years for set-off against future capital gains.
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 compared to short-term capital gains.
- Tax Planning: Tax planning strategies such as tax-loss harvesting, judicious timing of investments, and utilization of exemptions and deductions can help investors optimize their tax liabilities and maximize after-tax returns on investments.
- Professional Advice: Given the complexities of taxation and investment decisions, investors are advised to seek professional advice from tax consultants or financial advisors to develop tax-efficient investment strategies tailored to their individual circumstances.
Conclusion
Long-term capital gains on shares play a significant role in the taxation of equity investments in India. By understanding the calculation, taxation, exemptions, and deductions related to LTCG on shares, investors can make informed decisions regarding their investment portfolios and tax planning strategies. While LTCG tax imposes a financial burden on investors, effective tax planning and prudent investment decisions can help minimize tax liabilities and enhance 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.