Long Term Capital Gain Tax on Shares (LTCG on Shares)

Investing in stocks is exciting – watching your investments grow over time is even better! But when you sell your shares after holding them for more than a specific period, Long Term Capital Gain tax on shares will take a bite out of your profits. But when you know the structure and implications of LTCG on shares, you can legally save your money from paying taxes.

In this article, let us understand what LTCG on shares is, its tax implications, exemptions and deductions, indexation benefits, legal ways to minimize your LTCG tax, and many more!

What are Capital Gains? 

Any profit or gain from the sale of capital assets is regarded as a capital gain under the Income Tax Act. These capital gains are further classified into Short Term Capital Gain and Long Term Capital Gain based on the holding period. 

What is Long Term Capital Gain on Shares? 

Long Term Capital Gain refers to the profit an investor earns when selling a capital asset after holding it for more than 24 months. However, for listed equity shares and equity-oriented mutual funds, the holding period is more than 12 months for the gain to be classified as Long Term Capital Gain.

LTCG Tax Rate on Shares in India

Section 112A will apply if the long-term capital gain results from the transfer of equity shares, equity-oriented fund units, or business trust units. 

These long-term capital gains were previously taxed at 10% exceeding Rs.1,00,000 limit, however, following the announcement of the Union Budget 2024-25, a uniform tax rate of 12.5% will be applicable to long-term capital gains (LTCG) exceeding Rs 1.25 lakh without the indexation benefit.

Let us understand this concept with the help of the table below.

LTCG Tax Calculation

WIth the help of the proforma given below, the taxpayers can calculate their Long Term Capital Gain on the shares that they sell.

Example to Calculate LTCG on Shares

Scenario 1: LTCG is below exemption limit

Suppose you bought 1,000 shares of a listed company at Rs 100 per share on 1st June 2022. After holding them for more than 12 months, you sold them on 1st August 2024 for Rs 200 per share and a brokerage fee of 0.5% applies on both buying and selling. 

Here, Rs 99,000 will not be taxed at 12.5%, as the LTCG is below the exempted limit of Rs 1.25,000 as per the Union Budget 2024-25. 

Scenario 2: LTCG is above exemption limit

Suppose you bought 1,000 shares of a listed company at Rs 300 per share on 31st September 2022. After holding them for more than 12 months, you sold them on 31st October 2024 for Rs 500 per share and a brokerage fee of 0.5% applies on both buying and selling.

Here, Rs 72,500 will be taxed at 12.5%. This means, Rs 9,062.5 is the total tax payable on the LTCG gained. 

LTCG Tax Rate on Equity Shares vs Other Assets

Long-term capital gains (LTCG) taxation differs depending on the asset class. Listed equity shares and equity-oriented mutual funds held for over 12 months are taxed at 12.5% on gains exceeding Rs.1.25 lakh.

In contrast, other long-term capital assets, such as real estate, debt mutual funds, and unlisted shares, previously enjoyed indexation benefits with a 20% tax rate. However, under the revised tax regime from July 23, 2024, these assets will also be taxed at 12.5%, but without indexation.

The table below outlines the key differences.

Exemptions and Deductions on LTCG Tax on Shares

Exemptions

1. Basic Limit Exemption: The LTCG on listed equity shares and equity-oriented mutual funds is exempted up to Rs 1,00,000 and Rs 1.25 lakh per financial year if the transfer occurs before and after 23 July 2025, respectively. The gains exceeding this threshold will be taxed at 12.5%.

2. Section 54F: The taxpayer is responsible for paying taxes on the proceeds from the sale of capital assets, such as gold, shares, and other capital assets. However, under Section 54F, if such sale proceeds are reinvested for the purchase or construction of a house property, then the gain may be claimed as an exemption.

To claim this exemption, the taxpayer must invest the net sale proceeds from the old asset into a new residential property. The new house should be purchased either within 1 year before or 2 years after the sale, or constructed within 3 years. 

Additionally, the taxpayer must not own more than one residential property at the time of sale (excluding the new one) and must refrain from purchasing or constructing another house within the next 2 or 3 years, respectively.

Deductions

In accordance with Section 80C to 80U, listed stocks, equity-oriented mutual funds, and business trust units that are subject to Section 112A taxation are not eligible for any deductions for long-term capital gains. These deductions cover items like medical expenses, life insurance, ELSS, or PPF investments

Set off and Carry Forward of LTCG on Shares

Set off of Long-Term Capital Losses 

Adjusting a loss from one source of income against income from another within the same fiscal year is known as Set off of Losses.

Here, the taxpayer has the right to set off their Long Term Capital Loss (LTCL) against their income from any other sources under the same head. Here, the Long Term Capital Loss can only be set off against income from Long Term Capital Gain and not against any other income head, including Short Term Capital Gain.

Carry Forward of Long-Term Capital Losses 

If Long Term Capital Losses cannot be fully set off in one financial year, you can carry these losses forward to offset future years' gains for up to 8 assessment years against income from LTCG only.

However, the Income Tax Department has set a rule stating that losses for a year cannot be carried forward unless the tax return for that year is filed before the due date as this is essential for tracking your losses. By filing your returns on time, you will be able to carry forward and deduct these losses in future years.

How to Save LTCG Tax on Shares?

To minimize the Long Term Capital Gain (LTCG) tax on shares, you can consider the following strategies.

1. Utilize Tax harvesting and Tax loss harvesting: Tax harvesting means selling long-term equity shares to book profits up to the tax-exempt limit, and then reinvesting in the same or similar shares.

However, the drawback to this approach is that share prices may fluctuate over time. The gains available today might be reduced in the future or worse, turn into a loss if the market moves unfavorably while waiting to sell.

On the other hand, tax loss harvesting involves selling shares at a loss to offset capital gains made from other investments in the same financial year.

2. Offset gains with capital losses: The Long-Term Capital Losses (LTCL) can offset Long-Term Capital Gains, and any unadjusted losses can be carried forward for up to 8 years. This strategy minimizes tax liability while optimizing the investment portfolio.

3. Invest in residential property: The investor can make use of Section 54F by reinvesting their net sales of the shares on buying or constructing a residential house. This can make the entire gain exempt from tax. 

Best Time to Sell Shares to Optimize LTCG Tax

The best time to sell your shares would be when you see that the earnings from those shares have reached their peak. However, if you want to optimize your long term capital gain tax on shares, you can make use of any of the above-mentioned methods. 

Filing and Reporting LTCG Tax on Shares

To file and report your LTCG tax on shares, you first need to compute the total taxable gain arising from the long-term capital assets. If this taxable gain is more than the basic exemption limit, i.e., Rs 1 lakh or 1.25 lakh, then paying the tax is a must.

Next, you need to complete your LTCG tax filing by reporting the long-term capital gains in either ITR 2 or ITR 3.

• ITR 2: This is for individuals and HUFs who can report their capital gains, without earning any income from business and profession. 

• ITR 3: This is for individuals and HUFs who can report their capital gains, along with the income earned from business or profession.

Now, declare your total LTCG under Schedule 112A  and pay advance tax if applicable. Finally, you file your ITR before the due date to avoid penalties. 

Conclusion

Long-term investing is all about playing the smart game, and LTCG tax is just another rule to navigate. Instead of waiting until tax season to worry about it, take charge now by using the exemptions, timing your asset sales, and balancing gains with losses. A little planning today can mean more money in your pocket tomorrow. Stay informed, stay proactive, and make your investments work for you!

FAQs

Q. How to save LTCG on shares?

You can save your long-term capital gain tax on the sale of shares by utilizing the annual exemption limit, offsetting your gains with capital losses, spreading your gains, and making use of Section 54F.

Q. Can LTCG on shares be set off?

Yes! The Long-Term Capital Losses can be set off against income from Long-Term Capital Gains. Additionally, you can carry forward these losses for up to 8 assessment years against LTCG only.

Q. How much is LTCG tax on shares?

Before 23 July 2024, the LTCG on shares was taxed at 10% if it exceeds Rs 1,00,000. Whereas, after 23 July 2024, the LTCG tax has been increased to 12.5% if it exceeds Rs.1,25,000.

Q. How to calculate long-term capital gain on shares?

If you subtract transfer expenses (like brokerage fees) and the cost of acquisition of shares from the full value of consideration (the total selling price of the share), you get your Long-Term Capital Gain.