Long-Term Capital Gain Tax on Shares
Introduction
Selling shares at a profit is exciting, but before you celebrate those gains, it’s important to understand how much of it you actually get to keep. Long-Term Capital Gain (LTCG) Tax on shares is the tax levied on profits earned from selling equity shares held for more than 12 months on a recognized stock exchange. This guide explains what qualifies as a long-term gain, how the tax is calculated, current rates, and legitimate ways to reduce your liability.
What Is Long-Term Capital Gain on Shares?
When you sell listed equity shares or equity-oriented mutual fund units after holding them for more than 12 months, any profit you make is classified as a long-term capital gain. If the same shares are sold within 12 months of purchase, the profit is instead treated as a short-term capital gain and taxed differently, and typically at a higher rate.
The 12-month holding period applies specifically to shares listed on a recognized stock exchange in India and equity-oriented mutual funds. This shorter threshold (compared to the 24 months required for property or unlisted shares) reflects how equity markets are treated differently under Indian tax law.
Current LTCG Tax Rate on Shares
Under Section 112A of the Income Tax Act, LTCG on listed equity shares and equity-oriented mutual funds is taxed at 12.5% on gains exceeding ₹1.25 lakh in a financial year. No indexation benefit is available on this gain, meaning you cannot adjust your purchase price for inflation before calculating the taxable amount.
This rate structure came into effect from July 23, 2024, under the Finance Act 2024. Before that, the applicable rate was 10% on gains above ₹1 lakh. Both the rate and the exemption threshold were revised upward.
A few important points about the exemption:
- The ₹1.25 lakh exemption applies per financial year, not per transaction
- It’s a combined limit across all your equity shares and equity mutual funds together, not a separate ₹1.25 lakh for each
- Only gains above this threshold attract the 12.5% tax; gains within the limit are fully exempt
How to Calculate LTCG Tax on Shares
Calculating your LTCG tax liability involves a few straightforward steps:
Step 1: Determine the sale value
This is the total amount you received from selling the shares.
Step 2: Deduct expenses related to the sale
Subtract brokerage fees, transaction charges, and any other costs directly linked to the sale.
Step 3: Subtract the cost of acquisition
This is what you originally paid to purchase the shares. Indexation is not applicable here.
Step 4: Arrive at your capital gain
The formula is:
LTCG = Sale Value − Cost of Acquisition − Expenses Related to Sale
Step 5: Apply the exemption and tax rate
Subtract the ₹1.25 lakh exemption from your total LTCG for the year (if not already used against other equity gains), then apply 12.5% tax on the remaining amount.
Example: Suppose you sell shares for ₹5,00,000 that you originally bought for ₹3,00,000, and you incur ₹5,000 in brokerage. Your capital gain is ₹1,95,000. After applying the ₹1.25 lakh exemption, your taxable gain is ₹70,000. Tax payable would be 12.5% of ₹70,000, which comes to ₹8,750, plus applicable cess.
The Grandfathering Clause
If you purchased shares before February 1, 2018, you benefit from a grandfathering provision. Under this rule, the cost of acquisition for tax purposes is taken as the higher of the actual purchase price or the fair market value of the shares as on January 31, 2018 (subject to certain conditions). This ensures that gains which had accrued before the LTCG tax regime was reintroduced in 2018 are not retroactively taxed.
Ways to Reduce LTCG Tax on Shares
While there’s no way to avoid LTCG tax on shares entirely once your gains exceed the exemption limit, a few strategies can help lower your liability:
- Use the annual exemption wisely: Since the ₹1.25 lakh exemption resets every financial year, consider spreading large stock sales across multiple years rather than booking all your profits at once, where practical.
- Capital loss set-off: Long-term capital losses can be set off against long-term capital gains, reducing your net taxable amount. Any losses that remain unadjusted can be carried forward for up to eight assessment years.
- Tax-loss harvesting: If you’re holding underperforming stocks alongside profitable ones, selling the losers strategically before the financial year ends can help offset gains from your winners.
- ELSS investments: While this doesn’t directly reduce LTCG on shares you already hold, investing in Equity-Linked Savings Schemes offers deductions under Section 80C, which can lower your overall taxable income.
Conclusion
LTCG tax on shares is a relatively straightforward regime once you understand the mechanics: a flat 12.5% rate on gains above ₹1.25 lakh per year, no indexation, and a grandfathering provision for older holdings. The real value lies in planning around it, using your annual exemption efficiently, harvesting losses when appropriate, and holding investments long enough to benefit from the lower long-term rate. As with any tax matter, consulting a qualified tax professional for guidance specific to your portfolio is always a good idea.
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.