Long Term Capital Gain Tax on Shares - Calculation, Tax Exemption and Process (2024)

Capital Gains can be described as profits arising out of the sale or transfer of properties, whether movable or immovable. These properties are called Capital Assets.

Capital Assets can be divided into two parts based on the holding period of the assets by a seller before any transaction takes place. These are – long-term capital assets and short-term capital assets.

The tenure to qualify as a long-term or short-term capital asset varies across different properties. Most securities in the market qualify as a long-term capital asset once it has been held for more than 12 months. Assets held below that period are considered short-term assets.

Taxability of Long Term Capital Gain (LTCG) on Shares

Long term capital gain tax on shares in India had a few changes to it in the year 2018. However, no change has been made to the taxation of short-term capital gains.

Tax on Short-Term Capital Gains is valued at 15% if the respective asset has been subject to Securities Transaction Tax (STT) during its purchase and sale. However, any short-term asset listed on the stock market which does not incur STT is subject to tax rate depending on the respective slab rate of that individual’s income including cess of 3% and surcharge (if applicable).

Tax Provision Amendments on Long-term Capital Gains

In Budget 2018, Section 10 (38) of the Income Tax Act, 1961 was revoked. It removed exemption on long term capital gains tax on equity shares arising out of the sale of equity shares and equity-oriented mutual funds. The section was introduced in the Finance Act, 2004 by the Kelkar Committee. It was done to encourage investments from the Foreign Institutional Investors (FII).

However, after Budget 2018, Section 10 (38) was replaced by another section, Section 112A. This section postulates taxation on capital gains arising out of the following assets –

  1. Equity Shares
  2. Equity oriented funds or units of equity-oriented funds
  3. Business Trusts or units of business trusts

Income Tax on Long Term Capital Gain on Shares

Long-Term Capital Gains (LTCG) on shares and equity-oriented mutual funds in India are taxed at a 10% rate (plus surcharge and cess) if they reach Rs. 1 lakh in a fiscal year. LTCG is defined as profits on the sale of shares or equity-oriented mutual funds held for more than a year.

Securities other than the ones mentioned in Section 112A are also subject to taxation. The following table demonstrates the nature of a long term capital gain tax on shares in India and other securities.

Particulars

Applicable Tax Clause

Sale of listed shares on recognised stock exchanges and Mutual Funds for which STT has been paid.

10% tax for gain amounts exceeding Rs. 1 Lakh.

Sale of bonds, debentures, shares, and other listed securities on which STT has not been paid.

10%

Sale of debt-oriented Mutual Funds

With indexation -20%

Without indexation – 10%

Long Term Capital Gains Tax Exemption

Individuals can avail long term capital gain tax exemption on shares under Section 54F. They need to meet the following parameters to benefit from Section 54F –

  1. An individual needs to reinvest the net consideration amount received from the sale of shares in a maximum of two real estate properties. Before Budget 2019, this limit was one housing property per person.
  2. Reinvestment should occur 1 year before the sale or 2 years after it.
  3. An individual can also decide to invest his/her consideration amount in a construction project. However, such construction should be completed within 3 years from the date of sale or transfer of shares.

If an individual wants to avail exemption on the entire capital gain amount, they must reinvest the entire net consideration value. In case that is not possible, exemption on capital gain will be based on the portion of consideration amount invested.

The calculation for that would be –

Exemption on Capital Gain = (Capital Gains x Cost of a New House)/Net Consideration Value

However, exemption on long-term capital gain would be revoked if the individual decides to sell the new property within 3 years of its purchase.

The introduction of income tax on long-term capital gain on shares, however, was supposed to be inconvenient for certain individuals. It was because of the implementation of “Grandfathering” for which the inconvenience was kept to a minimum.

Grandfathering

Under the new Section 112A, certain individuals are exempted from complying with it. This group of people can be considered “grandfathered” individuals.

Grandfathering can be seen as a concept where individuals who made decisions based on the previous tax regime are provided with the benefit to trade according to the previous stipulations. It is done to protect individuals from reforms that may affect their income significantly.

When computing the taxable capital gain amount, two factors need to be accounted for – grandfathering provision and tax exemptions up to Rs. 1 Lakh – apart from other necessary conditions which have been mentioned above.

The taxation system for these individuals is demonstrated below

Particulars

Tax implications

Purchase and sale of securities before 31.1.2018

Total exemption u/s 10 (38)

Purchase of securities before 31.1.2018 and sale before 1.4.2018

Total exemption u/s 10 (38)

Purchase of securities before 31.1.2018 and sale after 1.4.2018

LTCG tax on shares u/s 112A

Purchase and sale of securities after 31.1.18 and 1.4.18 respectively

Long-term capital gain tax on shares u/s 112A

Calculation of Long term Capital Gain for Grandfathering

For the calculation of long term capital gain, in this case, the pivotal factor is the Cost of Acquisition. It can be determined by considering higher of the following –

  1. The actual cost of acquisition
  2. And the lower of the following –
  • Fair Market Value (FMV) on 31.1.18
  • The sale price or full value consideration of the security

The highest quoted price on 31.1.18 is considered as the FMV. If the security was not listed on that date, then the quoted price on the date preceding 31.1.18 is considered.

The formula for calculation of LTCG on shares, in that case, = Full value consideration – Cost of Acquisition

Suppose Mr X purchases shares at Rs. 15000 on 1.5.17 and sells the same on 1.2.18 for Rs. 20,000. The highest quoted price for that security on 31.1.18 was Rs. 18000.

The cost of acquisition should be determined first before calculating his LTCG on shares. The higher of –

  1. The actual cost of acquisition which is Rs. 15000
  2. And the lower of –
  • FMV which is Rs. 18000
  • Sale price which is Rs. 20000

From this, the cost of acquisition should be Fair Market Value which is Rs. 18000 as it is the lower of the FMV and sale price and higher than the actual cost of acquisition. Therefore, LTCG = Sale price – Cost of Acquisition

Or, LTCG = Rs. (20000 – 18000)

Or, LTCG = Rs. 2000

Long-term Capital Loss

Long-term capital loss arises out of the sale or transfer of any long-term capital assets where the cost of acquisition is more than the sale price. Such loss is set off against the Long-term Capital gain in that particular Assessment Year. In case, LTCG on shares falls below Rs. 1 Lakh due to the set-off, taxability of long-term capital gains on shares is exempted.

In cases where the entire long-term capital loss cannot be set off against the gain, it is carried forward to the next year. A long-term capital loss can be carried forward for eight subsequent Assessment Years.

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Tax Filing Process Changes after Finance Bill 2018

On 14th June 2019, the Central Board of Direct Taxes (CBDT) announced relaxation of the earlier constringent set of rules for posting capital gains while filing tax.

After the implementation of Financial Bill 2018, which contained the revised taxation system for long-term capital gains, individuals were required to segregate their gains from equity shares and equity-oriented mutual funds. It made the tax filing process more complicated.

After the recent announcement by CBDT, individuals need to file income tax with only the net consolidated amount from capital gains. However, during the computation of income tax, the profits and losses from different equity shares and units of equity-oriented funds need to be calculated separately.

Provisions Regarding Disclosure of LTCG in ITR Filing

The ITR-2 and ITR-3 forms have been updated and changed according to the changes made by the Central Board of Direct Tax. The following are the provisions –

  • Individuals and Hindu Undivided Families (HUFs) who have long-term capital gains from the sale or transfer of shares need to disclose their LTCG in Section B7 of the ITR-2 form provided they do not consider those gains under the heading “Income from Business or Profession”.
  • Non-residents who have LTCGs from the sale or transfer of shares need to disclose the same in Section B7 and B8 of ITR-2 and ITR-3 respectively.

If an individual treats his equity shares and equity-oriented shares as stock-in-trade, then profits from sale or transfer of shares shall be posted under the head “Income from business and profession”. In that case, such gains will not be considered for a 10% long-term capital gain tax on shares even if the amount exceeds Rs. 1 Lakh.

Long Term Capital Gain Tax on Shares - Calculation, Tax Exemption and Process (2024)

FAQs

What is the exemption on long term capital gain tax on shares? ›

Capital gains up to Rs 1 lakh per year are exempted from capital gains tax. Long-term capital gain tax rate on equity investments/shares will continue to be charged at 10% on the gains. On the other hand, short-term capital gains tax on shares or equity investments will be charged at 15%.

How do you calculate long term capital gains tax on shares? ›

Long term capital gain on share is calculated by deducting the sale price and cost of acquisition of an asset that has been held for more than 12 months by an investor.

How is taxable income calculated for long term capital gains? ›

Long-term capital gains tax is a tax applied to assets held for more than a year. The long-term capital gains tax rates are 0 percent, 15 percent and 20 percent, depending on your income. These rates are typically much lower than the ordinary income tax rate.

What is the procedure for calculating capital gains? ›

In case of long-term capital gain, capital gain = final sale price - (transfer cost + indexed acquisition cost + indexed house improvement cost).

What is the maximum capital gains exemption? ›

In simple terms, this capital gains tax exclusion enables homeowners who meet specific requirements to exclude up to $250,000 (or up to $500,000 for married couples filing jointly) of capital gains from the sale of their primary residence.

How are you exempt from capital gains? ›

When does capital gains tax not apply? If you have lived in a home as your primary residence for two out of the five years preceding the home's sale, the IRS lets you exempt $250,000 in profit, or $500,000 if married and filing jointly, from capital gains taxes. The two years do not necessarily need to be consecutive.

How much tax do you pay on long-term stock gains? ›

According to the IRS, the tax rate on most long-term capital gains is no higher than 15% for most people. And for some, it's 0%. For the highest earners in the 37% income tax bracket, waiting to sell until they've held investments at least one year could cut their capital gains tax rate to 20%.

Can interest be deducted from capital gains on shares? ›

Due to this, the deductibility of interest is delayed until the sale of the shares. The interest on a loan in such a case needs to be identified with the particular shares acquired from the loan and claimed against capital gains only on those shares.

Can LTCG be adjusted against the basic exemption limit? ›

Exemptions on LTCG Tax

The provisions related to this are as follows: Only a resident individual or Hindu Undivided Family (HUF) can adjust the basic exemption limit against long-term capital gains.

Do you have to pay capital gains after age 70? ›

Whether you're 65 or 95, seniors must pay capital gains tax where it's due. This can be on the sale of real estate or other investments that have increased in value over their original purchase price, which is known as the “tax basis.”

At what age do you not pay capital gains? ›

The capital gains tax over 65 is a tax that applies to taxable capital gains realized by individuals over the age of 65. The tax rate starts at 0% for long-term capital gains on assets held for more than one year and 15% for short-term capital gains on assets held for less than one year.

Do long-term capital gains add to ordinary income? ›

Your long-term capital gains will not cause your ordinary income to be taxed at a higher rate. Ordinary income is calculated separately and taxed at ordinary income rates.

Do I have to pay capital gains tax immediately? ›

It is generally paid when your taxes are filed for the given tax year, not immediately upon selling an asset. Working with a financial advisor can help optimize your investment portfolio to minimize capital gains tax.

What are the two methods of capital gains? ›

Short-Term Capital Gain are those gains that are realized after selling the assets within the purchase of 36 months whereas Long-Term Capital Gain are those gains that are realized after selling the assets by holding it for more than the 36 months period.

What is the 6 year rule for capital gains tax? ›

Here's how it works: Taxpayers can claim a full capital gains tax exemption for their principal place of residence (PPOR). They also can claim this exemption for up to six years if they move out of their PPOR and then rent it out. There are some qualifying conditions for leaving your principal place of residence.

Is long-term capital gain on shares exempt under section 54? ›

From April 1, 2023, the exemption limit for capital gains under Sections 54 to 54F will be restricted to Rs. 10 crore. Additionally, Section 54 EC offers an exemption from long-term capital gains tax if invested in certain specified bonds within 6 months of the sale.

Who is exempt from capital gains tax on stocks? ›

A capital gains rate of 0% applies if your taxable income is less than or equal to: $44,625 for single and married filing separately; $89,250 for married filing jointly and qualifying surviving spouse; and. $59,750 for head of household.

Do I pay taxes on stocks I don't sell? ›

Understanding Capital Gains Tax

The tax doesn't apply to unsold investments or unrealized capital gains. Stock shares will not incur taxes until they are sold, no matter how long the shares are held or how much they increase in value.

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