Long Term Capital Gain Tax on Shares

Imagine this: You’ve kept your shares for years, watching patiently as they waited for the right time to sell. At last, when the market tops, you make a move. But then comes the nasty question: What is the LTCG tax? Be careful not to lose some substantial amount of profits in the pockets of the taxman.

Introduction

Stock investment can earn very high returns, but this investment also brings in tax liabilities. One very important thing an investor needs to understand is LTCG Tax on shares. Selling stocks after a long period of holding them may bring in good profits, and knowledge about the way LTCG tax works may be helpful for an investor in making strategic investments with minimal tax liability.

The Indian government charges LTCG tax on equity share gains and gains on equity-oriented mutual funds. To avoid shocks during tax time and to invest in a way that would bring benefits at tax time, knowledge about the structure of this tax is crucial.

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What is Long-Term Capital Gain (LTCG)?

Beyond looking up the definition, do you remember when you bought blue chip shares and decided to keep them like some prized family possession? If you did sell it after more than 12 months of holding and made money, then you have successfully received what we call a Long-Term Capital Gain.

But now you must be wondering, what makes it “long-term”? The reasoning for that is quite simple:

• For equity shares and equity-oriented mutual funds: Holding period of more than 12 months
• For debt instruments and property: Holding period of more than 36 months

Think of it as the government saying, “Hey, you are a patient investor. You deserve special tax treatment!”

LTCG Tax Rate on Shares in India

LTCG was tax-free earlier but not anymore. Since 2018, the tax landscape has changed big time. Now if your long-term capital gains exceed ₹1 lakh in a financial year, you need to pay a 12.5% tax on the amount exceeding the threshold.

Let me illustrate this with a real-world scenario: Suppose you made a profit of ₹1.5 lakhs on your long-term equity investments. Here’s how the tax would work:

• First ₹1 lakh: Tax free
• Remaining ₹50,000: 12.5% tax = ₹6,250

How to Calculate LTCG Tax on Shares?

Calculating LTCG tax is like solving a maths puzzle but I’ll break it down for you:

1. Sale Value: The amount you got when you sold your shares.
2. Cost of Purchase: If you bought shares before January 31, 2018, you get the grandfathering benefit. This means you can use the higher of:
   • Actual purchase price
   • Fair market value as of January 31, 2018
3. Transfer Charges: Include brokerage fees, transaction charges, and STT (Securities Transaction Tax)
4. Apply the Formula: LTCG = Sale Value – (Cost of Purchase + Transfer Charges)

Let’s see it in action: You bought shares worth ₹2 lakhs in 2017 and their value on January 31, 2018 was ₹3 lakhs. You sold these shares in 2025 for ₹5 lakhs.

• Sale Value: ₹5,00,000
• Cost of Purchase: ₹3,00,000 (higher than original cost or January 31, 2018 value)
• Transfer Charges: ₹5,000
• LTCG: ₹5,00,000 – (₹3,00,000 + ₹5,000) = ₹1,95,000
• Tax Payable: (₹1,95,000 – ₹1,00,000) × 12.5% = ₹11,875

Tip: Tax rates and rules mentioned in this article are subject to change based on your income slab. Always consult with a tax professional.

LTCG Tax on Shares vs. Mutual Funds

Equity shares and mutual funds are two different roads to the same destination – wealth creation. But their tax treatment has a small difference:

Equity Shares:

• 12.5% tax on gains above ₹1 lakh
• You are in control
• Each transaction can be timed for tax efficiency

Equity Mutual Funds:

• Same 12.5% tax rate
• Professional management
• Rebalancing can trigger taxable events

The main difference is control and convenience. With direct equity, you are the captain of your ship. With mutual funds, you have an experienced captain.

Exemptions & Deductions

Now this is where it gets exciting! Here are the ways to reduce your LTCG tax:

1. Section 54F: Invest your gains in a residential property within 2 years and you can claim an exemption. It’s like converting your stock market profits into your dream home!
2. Section 54EC: Invest in specified bonds within 6 months of sale and you can claim exemption up to ₹50 lakhs. These bonds have a lock-in period of 5 years.
3. Tax Harvesting: This means selling and buying back shares strategically to book losses that can be set off against gains. Think of it as pruning your garden for better growth.

How to Pay Long-Term Capital Gain Tax?

Paying LTCG tax is not as scary as it seems. Here’s your step-by-step guide:

1. Maintain Records: Keep all your transaction statements, contract notes, and bank statements organized.
2. Calculate Advance Tax: If your tax liability is more than ₹10,000, you need to pay advance tax in installments.
3. File Your Returns: Use ITR-2 to file returns with capital gains. Remember to include all schedules.
4. Payment Options:
   • Online through income tax website
   • Through your bank’s net banking
   • By visiting authorized banks

Tips to Minimize LTCG Tax Legally

After years of advising investors, here are my top tips to minimize your LTCG tax:

1. Strategic Selling: Space out your selling decisions across financial years to maximize the ₹1 lakh exemption.
2. Tax Loss Harvesting: Set off your gains by booking losses in underperforming investments. But remember, this needs to be planned!
3. Gift to Family Members: Transfer shares to family members in lower tax brackets. But ensure this fits into your overall financial plan.
4. Invest in Tax-Saving Instruments: Consider investment in ELSS funds that can provide tax benefit under Section 80C, along with capital appreciation.
5. Perform frequent portfolio reviews. Don’t let tax dictate your investment decisions but be aware of it during the portfolio review process.

Conclusion

Taking it on cannot be a headache when it comes to taxes on the long-term capital gains on shares. Proper knowledge and strategies ensure the greatest profit with minimal tax burden. For an investor, whether seasoned or new to investment, long term capital gain tax needs to be understood so that proper decisions can be made for achieving specific financial goals.

So, next time you consider selling your shares, take the time to contemplate the tax ramifications. A little planning can save you a good amount of the money you hard-earned in the first place.

Stock Market Trading Basics

Part-1: The History of Stock Trading

Part-2: The History of Stock Market Crashes

Part-3: Stock Market Trading: Vocabulary

Part-4: Equity Finance vs Debt Finance

Part-5: Indian Stock Market Holidays Calendar

Part-6: How to Invest Smartly in Stock Market in 2024