Long Term Capital Gain Tax on Shares: Rate & Grandfathering
Long-Term Capital Gain Tax on Shares
Sell listed shares you have held for more than a year and the profit is a long-term capital gain. Long term capital gain tax on shares is 12.5%, and the first ₹1.25 lakh of such gains in a tax year is exempt. You cannot adjust your purchase price upwards for inflation first, which is what indexation used to allow.
Two things make the sum harder than it sounds. If you bought before 1 February 2018, your cost is not what you paid. It is worked out under the grandfathering rule below. And if you sold into a company buyback, the treatment depends on which year you did it, because the law changed twice.
Dhanvantri Capital Services Private Limited, known as Dhanvantree, is an AMFI-registered mutual fund and SIF distributor (ARN-194216). We are not tax advisers. For your own return, speak to a chartered accountant.
The long term capital gain tax rate on shares
Long term capital gain tax on shares held more than 12 months is charged at 12.5%. The first ₹1.25 lakh of long-term gains in a tax year is exempt. That allowance is annual and covers all your long-term equity gains together. It is not one allowance per company or per broker.
Three conditions attach to the 12.5% rate on listed shares. Securities transaction tax, the small levy your broker collects on every exchange trade, must have been paid on both the purchase and the sale. The shares must be listed on a recognised Indian exchange. And the holding period must exceed 12 months, counted from the date you bought them rather than from the start of the financial year.
No indexation applies. You cannot raise your cost for inflation. That is the trade for the lower rate. Until 23 July 2024 the rate was 10% with a ₹1 lakh exemption.
Equity mutual funds follow the same 12.5% rate and the same ₹1.25 lakh exemption, and the allowance is shared across both. Debt and other categories are taxed differently, and that is covered on the page for long-term gains on mutual funds.
Unlisted shares work differently: the holding period is 24 months, and the rate is also 12.5% without indexation. Foreign shares follow the unlisted rules.
Working out your cost if you bought before February 2018
Shares bought before 1 February 2018 use a substituted cost, not the price you paid. The rule protects gains that had already accrued by 31 January 2018 from a tax that did not exist then. It can only help you or leave you level. It can never increase your gain.
The Formula
Your deemed cost is the higher of:
(a) What you actually paid.
(b) The lower of:
• The highest quoted price of the share on 31 January 2018.
• The price you sold it at.
The second half is the part people miss. Capping (b) at the sale price is what stops the rule manufacturing a loss on a share that has fallen since January 2018.
Where to Find the 31 January 2018 Figure
Listed shares: The highest traded price that day on the BSE or the NSE. Both publish historical data.
Mutual fund units: The NAV on that date, from AMFI’s records.
Worked Example 1: The Case Where It Helps
200 shares bought in 2016 at ₹500. Highest price on 31 January 2018: ₹2,200. Sold this year at ₹7,000.
Deemed cost = higher of ₹500, or lower of (₹2,200, ₹7,000)
= higher of ₹500, or ₹2,200
= ₹2,200 per share
Gain = (₹7,000 − ₹2,200) × 200
= ₹9,60,000
Less exempt amount: ₹1,25,000
Taxable gain: ₹8,35,000
Tax at 12.5%: ₹1,04,375
Plus: 4% cess
Worked Example 2: The Case Where It Gives You Nothing
Bought at ₹400. Highest price on 31 January 2018: ₹1,000. Sold at ₹800.
Deemed cost = higher of ₹400, or lower of (₹1,000, ₹800)
= higher of ₹400, or ₹800
= ₹800 per share
Gain = ₹800 − ₹800
= Nil
You made ₹400 a share in reality and pay nothing. But you also cannot book the ₹200 loss against the 31 January 2018 value, which is what the cap prevents. The rule leaves you at zero, deliberately.
Buyback. Check which year you sold
Buyback has been taxed three different ways since 2024. Until 30 September 2024 the company paid a buyback tax and the shareholder received the money tax-free. From 1 October 2024 the entire buyback amount became taxable in the shareholder’s hands. The law treated it as a dividend rather than a sale, so it was taxed at your slab rate the Income Tax Department’s rate tables carry the current slabs, the rate applying to your income as a whole. From 1 April 2026 it reverted to capital gains on the actual gain.
The Middle Period Is the One That Hurt
| Comparison | 1 Oct 2024 – 31 Mar 2026 | From 1 Apr 2026 |
|---|---|---|
| What is taxed | The whole buyback consideration | Only the gain |
| Head of income | Income from other sources, as dividend | Capital gains |
| Rate | Your slab rate | 12.5% long-term listed |
| Your cost | Not deductible against the dividend | Deducted normally |
| What you get for the cost | A capital loss, to set off elsewhere | — |
On ₹25 lakh received for shares that cost ₹10 lakh:
Under the 2024–26 rules, ₹25,00,000 was taxed as dividend at your slab rate, and a ₹10,00,000 capital loss you then have to find gains to use.
Under the rules from April 2026, only ₹15,00,000 is taxed, as a capital gain.
Took part in a buyback during that window and still hold the unused loss? It carries forward for eight years against future capital gains, provided the return was filed on time.
Bonus shares, splits and rights
A bonus issue does not change what you paid in total. It spreads the same cost over more shares. A split does the same. Neither is a taxable event when it happens; the effect shows up when you sell, because your per-share cost has fallen.
Bonus shares carry a cost of acquisition of nil. Say you hold 100 shares bought at ₹1,000 and receive 100 bonus shares. You now hold 200 shares for the same ₹1,00,000. For tax, the original 100 cost ₹1,000 each and the bonus 100 cost nothing. If you sell only some of them, the oldest shares are treated as sold first.
A split divides both the shares and the per-share cost. A 1:10 split on shares bought at ₹1,000 leaves you with ten times as many at ₹100 each.
Holding period for bonus shares runs from the date they were allotted, not from when you bought the originals. Sell bonus shares within twelve months of allotment and the gain is short-term even if the original holding is years old.
Using a loss
A long-term capital loss can be set off only against long-term capital gains. A short-term loss is more flexible and can go against either. Anything unused carries forward for eight tax years, but only if the return was filed by the due date.
Two points that decide whether a loss is worth anything.
File on time or lose it. A belated return forfeits the carry-forward entirely. For an investor sitting on a large unused loss this is the most expensive consequence of missing 31 July.
The ₹1.25 lakh exemption is not a loss. Gains below the threshold are exempt, not nil. You cannot treat the unused part of the exemption as something to carry forward.
The 87A rebate does not cover these gains
People whose total income sits under the rebate threshold often expect to owe nothing. On long-term capital gains that is not how it works.
Section 156 of the Income-tax Act 2025, which replaced Section 87A of the 1961 Act, can reduce a resident individual’s tax to nil where total income is under the threshold, ₹12,00,000 under the new regime and ₹5,00,000 under the old. It has never reached long-term gains on listed shares: the long-term provision has always carried an express bar on applying the rebate to them, and the Finance Act 2025 extended the same bar to every kind of special-rate income from assessment year 2026-27.
So someone with ₹9,00,000 of salary and ₹2,00,000 of long-term gains has total income of ₹11,00,000, under the threshold. The rebate clears the tax on the salary. The ₹75,000 of gain above the ₹1.25 lakh exemption is still taxed at 12.5%, and the bill stands.
The same bar now applies to short-term gains, where it was contested until Parliament closed the question. For more on how the pieces fit together, see the income tax section.
Reporting long term capital gains in your return
Long term capital gains on listed shares go in Schedule CG of ITR-2, transaction by transaction, with the date of purchase, date of sale, cost and consideration for each. Capital gains rule out ITR-1 beyond a small exempt amount, so most investors who sold anything use ITR-2.
Your broker’s capital gains statement is the practical starting point, and most brokers apply grandfathering for you. Check it rather than trust it, particularly for shares bought before February 2018 and for bonus or split holdings, where the per-share cost is the part that goes wrong.
Nobody deducts tax at source when a resident sells shares, so nothing is collected for you along the way. If the tax on your gains exceeds ₹10,000 for the year it becomes an advance tax obligation, payable in instalments during the year in the quarter you sold, rather than settled in July.
Frequently Asked Questions
12.5% on gains above ₹1.25 lakh in a tax year, for listed shares held more than 12 months, with no indexation. It was 10% above ₹1 lakh until 23 July 2024.
Use the highest quoted price of the share on that date on the BSE or NSE. Both publish historical price data. For mutual fund units, use the NAV on 31 January 2018 from AMFI’s records.
No. The deemed cost is capped at your sale price, so the calculation can reduce a gain to nil but never below it. That cap is the second half of the formula and it is what most summaries leave out.
It depends when. Until 30 September 2024 the company paid and you received it tax-free. Between 1 October 2024 and 31 March 2026 the whole amount was taxed as a dividend at your slab rate, with your cost allowed only as a capital loss. From 1 April 2026 only the actual gain is taxed, as a capital gain.
No. They are taxed when you sell, with a cost of acquisition of nil. Their holding period runs from the allotment date, so selling them within twelve months produces a short-term gain even if you have held the original shares for years.
The rate is the same at 12.5% without indexation, but the holding period is 24 months rather than 12, and the ₹1.25 lakh exemption does not apply. That exemption is reserved for listed shares on which securities transaction tax was paid. Foreign shares follow the unlisted rules.
A long-term capital loss carries forward for eight tax years and can be set off only against long-term gains. It carries forward only if the return was filed by the due date.
CLOSING
Reviewed by [Name, qualification] on [date].
Rates and rules on this page reflect the law for FY 2026-27 and change with each Budget. Section references follow the Income-tax Act 2025, which replaced the 1961 Act on 1 April 2026.
Dhanvantri Capital Services Private Limited, known as Dhanvantree, is an AMFI-registered mutual fund and SIF distributor (ARN-194216), Connaught Place, New Delhi. We are not tax advisers and this page is not a computation of your liability.
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.