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, cost of acquisition, brokerage or commission charges, and other expenses related to the sale. Note that indexation benefit is not available for equity shares and equity-oriented mutual funds taxed under Section 112A, since these are governed by a flat-rate regime rather than an indexation-based one. The formula for calculating LTCG on shares is as follows:
LTCG = Sale Proceeds − Cost of Acquisition − Brokerage or Commission Charges − Other Expenses Incurred
Taxation of Long-Term Capital Gains on Shares
As per current tax laws in India, LTCG on shares is taxed at a flat rate of 12.5% on gains exceeding ₹1.25 lakh in a financial year, without the benefit of indexation. This structure comes from the Finance Act 2024, which revised the earlier rules that had been in place since the Union Budget 2018 (when the rate was set at 10% over a ₹1 lakh exemption). The exemption threshold was raised from ₹1 lakh to ₹1.25 lakh, and the tax rate was increased from 10% to 12.5%, effective July 23, 2024, and this remains the applicable regime.
The ₹1.25 lakh exemption is a combined limit across all your equity holdings for the year, covering shares and equity mutual funds together, not separately for each.
Tax Exemptions of Long-Term Capital Gains on Shares
However, certain exemptions and provisions may still help reduce tax liability:
- Grandfathering Provision: Taxpayers can calculate the LTCG tax liability based on the market value of shares as of January 31, 2018, ensuring that gains accrued till that date are not subject to LTCG tax. This provision continues to apply under the current rules.
- 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. Note that ELSS units carry a mandatory 3-year lock-in period, after which redemption gains are taxed under the same LTCG rules described above.
- Capital Loss Set-Off: Capital losses from the sale of shares can be set off against LTCG on shares, thereby reducing overall tax liability. Any unadjusted capital losses can be carried forward for up to eight assessment years for set-off against future capital gains.
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 provisions related to LTCG on shares under the current 12.5% regime, 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.