Long Term Capital Gain Tax on Shares in India

When you sell shares or equity-oriented mutual funds after holding them for a long period, the profit earned is classified as Long Term Capital Gains (LTCG). These gains are subject to taxation, but the tax treatment varies based on the type of asset, whether listed or unlisted, and the holding period.

Let’s delve into how LTCG is calculated, the applicable tax rates, exemptions available, and other essential aspects like indexation benefits and adjustments under Section 112A.

What is Long Term Capital Gain Tax on Shares?

Long-term capital gains are realized when you sell shares or equity-oriented units held for more than one year. The tax on LTCG depends on whether the shares are listed or unlisted:

• Listed Shares: Include those traded on recognized stock exchanges.

• Unlisted Shares: Refer to privately held shares or those not traded on exchanges.

If the sale price of shares is lower than their purchase price, it results in a long-term capital loss, which can be carried forward for up to eight financial years and adjusted against future capital gains.

Tax Rates on Long Term Capital Gains

The tax rates on LTCG differ based on the type of shares or mutual funds:

Capital Asset	Tax Rate	Indexation
Listed Equity Shares	10% (on gains exceeding ₹1 lakh)	No
Equity-Oriented Mutual Funds	10% (on gains exceeding ₹1 lakh)	No
Unlisted Equity Shares	20%	Yes
Debt-Oriented Mutual Funds	20%	Yes
Balanced Funds (Equity-Oriented)	10% (on gains exceeding ₹1 lakh)	No
Balanced Funds (Debt-Oriented)	20%	Yes
Hybrid Funds (Equity > 65%)	10% (on gains exceeding ₹1 lakh)	No
Hybrid Funds (Equity < 65%)	20%	Yes

How to Calculate Long Term Capital Gain Tax on Shares

The formula for calculating LTCG is straightforward:

LTCG = Sale Price – Indexed Cost of Acquisition – Expenses Related to Sale

Indexed Cost of Acquisition

This factor adjusts the purchase price of shares to account for inflation over time. It is calculated using the formula:

Indexed Cost = Purchase Price × (CII in the Sale Year / CII in the Purchase Year)

CII: Cost Inflation Index is released annually by the Income Tax Department.

Illustration of LTCG Calculation

Let’s break this down with an example:

Atul purchased 500 shares of a company in January 2015 at ₹1,000 per share. He sold all 500 shares in May 2018 for ₹1,500 per share. The applicable CII for 2014-15 and 2018-19 is 240 and 280, respectively.

Steps to Calculate LTCG:

1. Purchase Cost: ₹5,00,000 (500 × ₹1,000).

2. Indexed Cost: ₹5,00,000 × (280 ÷ 240) = ₹5,83,333.

3. Sale Price: ₹7,50,000 (500 × ₹1,500).

4. LTCG: ₹7,50,000 – ₹5,83,333 = ₹1,66,667.

Atul’s taxable LTCG would be ₹1,66,667, and he would pay 10% tax on the amount exceeding ₹1 lakh.

Tax Exemptions on LTCG

Section 54F

You can claim exemption on LTCG by investing the proceeds in a residential property, subject to these conditions:

1. The property must be purchased within two years or constructed within three years of the sale.

2. If the new property’s cost is less than the capital gain, only a proportional exemption applies.

Adjustment Against Basic Exemption Limit

Resident individuals and HUFs can adjust LTCG against the basic exemption limit (₹2.5 lakh for most taxpayers). Any remaining exemption limit after adjusting other income can reduce the taxable LTCG.

Illustration:

Mr. Arun has a salary of ₹2,00,000 and FD interest income of ₹8,000. He sold shares, earning an LTCG of ₹1,68,000. His exemption limit is ₹2,50,000. After adjusting salary and interest, ₹42,000 remains for LTCG adjustment. Thus, the taxable LTCG is ₹26,000 (₹68,000 – ₹42,000).

Section 112A – Grandfathering Provisions

Section 112A ensures a smooth transition to LTCG taxation introduced in 2018. For shares purchased before February 1, 2018, the acquisition cost is adjusted using the Fair Market Value (FMV) as of January 31, 2018, ensuring gains before this date remain untaxed.

FMV Calculation Rules:

Type of Asset	FMV
Listed Shares	Highest price on January 31, 2018
Unlisted Shares (later listed before sale)	Indexed cost of acquisition
Mutual Funds	Net Asset Value (NAV) as on January 31, 2018

Frequently Asked Questions

1. Can I avoid LTCG tax on shares?

Yes, you can avoid LTCG tax by reinvesting the gains in residential property (Section 54F) or utilizing the basic exemption limit.

2. Is LTCG below ₹1 lakh taxable?

No, LTCG on listed shares and equity funds is tax-free up to ₹1 lakh in a financial year.

3. What if my income is below ₹2.5 lakh?

If your total income, including LTCG, is below the exemption limit, you are not liable to pay tax.

4. Can I reinvest LTCG to avoid tax?

Yes, reinvesting LTCG in a residential property or specified bonds can exempt or defer taxes.

Conclusion

Understanding LTCG tax rules and planning your investments can help optimize your tax liabilities. By leveraging exemptions under Section 54F or adjustments against the basic exemption limit, taxpayers can minimize their LTCG tax burden. With tools like indexation and grandfathering, the tax framework ensures fairness while accounting for inflation and previous gains.

Tax-smart investment decisions ensure not only compliance but also long-term financial growth.