Table of content
- What Are Long-Term Capital Gains on Stocks
- What is the Tax Rate for Long-Term Capital Gains on Shares?
- Recent Amendments to Long-Term Capital Gains (LTCG) Tax Provisions
- Income Tax Implications on Long-Term Capital Gains from Shares
- Understanding Grandfathering Provisions for LTCG Tax under Section 112A
- Steps to Calculate Long-Term Capital Gains on Shares
Long-Term Capital Gain Tax on Shares in India
Understanding long-term capital gains tax on shares is crucial for investors aiming to maximise profits while complying with Indian tax regulations. Long-term capital gains or LTCG tax applies to profits earned by holding shares for more than a year. The new 12.5% tax rate, exemptions up to ₹1.25 lakh, and revised provisions highlight the need for investors to stay informed.
Let us explore the long-term capital gains tax, its implications, and steps to calculate it effectively.
What Are Long-Term Capital Gains on Stocks
Long-term capital gains on shares are the profits you receive from selling shares held for more than one year. In India, this classification ensures a lower tax rate compared to short-term capital gains. The purpose of this distinction is to encourage long-term investments in equity markets, fostering stability and wealth accumulation over time.
For example, if you purchase 200 shares of a company at ₹ 40 per share and sell them after one year at ₹ 70 per share, the profit of ₹ 30 per share (totaling ₹ 6,000) constitutes long-term capital gains.
What is the Tax Rate for Long-Term Capital Gains on Shares?
As of July 23, 2024, capital gains on stocks are taxed at a uniform rate of 12.5% for long-term gains. This replaces the previous rates of 10% for some assets and 20% with indexation for others.
Asset Class | Holding Period | Tax Rate | Exemption Limit |
Equity Shares | > 1 Year | 12.5% | ₹ 1.25 Lakh |
Equity-Oriented Mutual Funds | > 1 Year | 12.5% | ₹ 1.25 Lakh |
Debt Funds | > 3 Years | 12.5% | ₹ 1.25 Lakh |
Real Estate (Property) | > 2 Years | 12.5% | ₹ 1.25 Lakh |
Recent Amendments to Long-Term Capital Gains (LTCG) Tax Provisions
The 2024 Union Budget introduced key changes to LTCG taxation:
Uniform Tax Rate: The tax rate on LTCG is now standardised at 12.5% across all asset classes, including shares, real estate, and debt funds. This shift simplifies the tax regime.
Removal of Indexation Benefit: The indexation benefit, which adjusted the cost of acquisition for inflation, has been removed. This change increases the tax burden for long-term investors as gains are now calculated on nominal values.
Exemption Threshold Increase: The exemption limit for LTCG has been raised to ₹1.25 lakh, offering relief to smaller investors.
Revised Holding Periods: The holding periods for assets have been streamlined to 12 months and 24 months, simplifying tax calculations.
Transition Provisions: For transfers completed by July 22, 2024, the 10% tax rate applies. From July 23, 2024, the new 12.5% LTCG tax rate without indexation is effective.
These amendments reflect the government's intent to create a more uniform and simplified tax regime, encouraging long-term investments across various asset classes.
Income Tax Implications on Long-Term Capital Gains from Shares
The impact of capital gains tax on stocks extends to your overall tax liability. While the exemption for gains up to ₹ 1.25 lakh offers relief, profits beyond this threshold are taxable. Additionally, compliance with Securities Transaction Tax (STT) during both purchase and sale is mandatory to qualify for LTCG benefits.
Understanding Grandfathering Provisions for LTCG Tax under Section 112A
The grandfathering provision under Section 112A was designed to protect investors from immediate tax implications due to the reintroduction of the LTCG tax in 2018. It allowed investors to exclude gains accrued up to 31 January 2018 from taxation, thereby providing relief to those who had invested before the tax was reinstated.
Key Aspects of the Grandfathering Provision:
Fair Market Value (FMV) as of 31 January 2018: For shares purchased before this date, the cost of acquisition for tax purposes was considered the higher of:
Actual purchase price.
FMV on 31 January 2018 or the actual sale price, whichever was lower.
This provision ensured that investors were not taxed on gains realised before the tax's reintroduction, maintaining fairness and stability in the investment environment.
Steps to Calculate Long-Term Capital Gains on Shares
Calculating long-term capital gain on shares involves the following formula:
LTCG = Sale Price - (Indexed Cost of Acquisition + Transfer Expenses + Other Costs)
Calculating long-term capital gains on shares involves several steps to determine the taxable amount accurately:
1. Determine the Sale Price:
Identify the amount received from selling the shares.
2. Compute the Taxable Gain:
Subtract the indexed cost of acquisition from the sale price.
Taxable Gain = Sale Price - Indexed Cost
3. Apply the Tax Rate:
Multiply the taxable gain by the applicable tax rate (12.5% for LTCG on shares).
Tax Payable = Taxable Gain × Tax Rate
Example Calculation:
Suppose you purchased 1,000 shares at ₹100 each in April 2015 and sold them in July 2024 for ₹150 each.
Sale Price: 1,000 shares × ₹150 = ₹1,50,000
Cost of Acquisition: ₹100 × ₹1000 = ₹1,00,000
Taxable Gain: ₹50,000
Tax Payable: ₹50,000 × 12.5% = ₹6,250.
This calculation ensures compliance and effective tax planning.
Conclusion
The long-term capital gains tax on shares plays an important role in shaping investment strategies. By utilising exemptions, understanding grandfathering provisions, and utilising tax-saving methods, investors can ensure efficient tax management while maximising returns. With a 12.5% tax rate and ₹1.25 lakh exemption, the taxation system supports fair taxation for investors. Staying informed about changes in tax regulations and consulting professionals when needed ensures compliance and enhances profitability.
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FAQ
What is the long-term capital gain tax on shares in India?
The long-term capital gain tax on shares refers to the tax levied on profits made by selling equity shares that are held for more than one year. Starting July 23, 2024, gains over ₹ 1.25 lakh in a financial year will be taxed at a flat 12.5% rate, with no indexation benefits.
Are any exemptions available for long-term capital gains on shares?
Long-term capital gains on shares up to ₹ 1.25 lakh in a financial year are exempt from taxation. This exemption applies to both equity shares and equity-oriented mutual funds. Gains exceeding this limit are subject to the 12.5% tax rate, providing a significant benefit for smaller investors.
How is the cost of acquisition calculated for shares under Section 112A?
For shares purchased before 1 February 2018, the cost of acquisition is determined by the grandfathering provisions. The cost is the higher of the actual purchase price or the fair market value as of 31 January 2018. This ensures that gains accrued before this date remain tax-free.
What is the significance of the exemption limit for long-term capital gains tax?
The exemption limit sets the threshold below which long-term capital gains (LTCG) are not taxed. As of the 2024 amendments, the exemption limit has been raised to ₹1.25 lakh per financial year. This means that if your total LTCG from all applicable asset classes is within this limit, you are not required to pay LTCG tax. Any gains exceeding this limit are taxed at the applicable LTCG tax rate.
Are there any tax-saving options to reduce long-term capital gain tax on shares?
You can reduce long-term capital gain tax on shares through strategies like tax-loss harvesting or investing in tax-saving instruments such as Equity Linked Savings Schemes (ELSS). These approaches allow you to offset gains with losses or claim deductions under Section 80C, lowering your overall tax liability.
What are the recent changes to long-term capital gains tax provisions?
The Union Budget 2024 introduced significant changes to LTCG taxation. Firstly, a uniform tax rate of 12.5% now applies, replacing the previous rates of 10%. Secondly, the indexation benefit, which adjusted the acquisition cost for inflation, has been eliminated. Finally, the LTCG exemption limit has been increased from ₹ 1 lakh to ₹ 1.25 lakh.
How do I calculate my long-term capital gain on shares?
To calculate long-term capital gain on shares, use this formula:
LTCG = Sale Price – (Cost of Acquisition + Cost of Improvement + Transfer Expenses + Incidental Charges)
The cost of acquisition can include indexed values to account for inflation, reducing your taxable profit and subsequent tax liability.
Can I use tax-loss harvesting for long-term capital gains on shares?
Yes, tax-loss harvesting is an effective method to reduce capital gains tax on stocks. It involves selling investments at a loss to offset gains from profitable investments. For instance, if you incur a ₹ 50,000 loss on one stock and a ₹ 1,00,000 gain on another, only the net ₹ 50,000 is taxable.
Is the 12.5% LTCG tax rate applicable to all asset classes?
Yes, the 12.5% LTCG tax rate applies to all asset classes, including equity shares, mutual funds, and real estate, as per the Union Budget 2024. The previous system, where equity assets were taxed at 10% without indexation and non-equity assets at 20% with indexation, has been replaced with this uniform rate. However, the 12.5% rate is applicable only to gains exceeding ₹1.25 lakh in a financial year and applies without any indexation benefits.
How do grandfathering provisions impact my long-term capital gains tax calculation?
Grandfathering provisions ensure gains accrued before 31 January 2018 remain tax-free. When calculating LTCG on shares purchased before this date, the cost of acquisition is adjusted to the higher of the fair market value as of 31 January 2018 or the actual purchase price, reducing taxable gains.