Long-Term Capital Gain Tax on Shares

How are Long-Term Capital Gains on Shares Taxed?

Before the 2018 budget, the long-term capital gains on the sale of shares in India and equity-oriented funds were exempted from tax under section 10(38). However, Budget 2018 revoked this section, resulting in the removal of this exemption.

This section was replaced by the section 112A of the Income Tax Act. This section states the provisions for taxation on capital gains on shares -

• Equity Shares
• Equity-oriented funds or units of equity-oriented funds.
• Business trusts or units of business trusts.

Even though long-term capital gains on shares are now taxable under the Income Tax Act, there are various ways in which you can save tax on long-term capital gains. Sections like 54, 54F, 54GB, and 54EC provide deductions and exemptions from capital gain tax.

What is the Income Tax Rate on Long-term Capital Gain on Shares?

Long-term capital gains on shares are taxed differently in the case of different assets. Equity investment takes place when you purchase the shares of a company. If you hold these shares for a minimum of 1 year and sell them, it results in long-term capital gains.

For example, if you invested Rs.1 lakh in equity shares and sold it for Rs.1.5 lakhs after 15 months, then your long-term capital gain will be Rs.50,000. However, it is important to note that the benefit of indexation is not available for long-term capital gains on equity investments.

Long-term capital gains upto Rs.1 lakh are exempted from tax. However, if the LTCG exceeds this threshold, then such gains are taxable at a @10% (plus surcharge and cess) tax rate. The table given below shows the LTCG tax rates on shares in India and other securities in India.

Tax Provision Amendments on Long-term Capital Gains

In the Budget 2018, Section 10(38) of the Income Tax Act, 1961, was revoked, thereby removing the exemption on long-term capital gains (LTCG) tax on the sale of equity shares and equity-oriented mutual funds. This section, initially introduced in the Finance Act, 2004 by the Kelkar Committee, was intended to encourage investments from Foreign Institutional Investors (FIIs).

However, after the revocation in Budget 2018, Section 10(38) was replaced by Section 112A. This new section introduced taxation on capital gains arising from the following assets:

• Equity Shares
• Equity-oriented funds or units of equity-oriented funds
• Business Trusts or units of business trusts

LTCG and STCG Rates in 2023-24 and 2024-25 - Comparison

Budget 2024, announced on 23rd July 2024, brought about certain changes in the long-term and short-term capital gains tax rates and holding periods. Given below is a table showing the comparison between the capital gains tax rates in FY 23-24 and FY 24-25.

Taxation for mutual funds

What are the Exemptions on Long-Term Capital Gains?

Section 54F of the Income Tax Act allows individuals to avail of a tax exemption on long-term capital gains. The benefit of section 54F is available only if the individual meets the following conditions -

• The individual has to reinvest the net consideration received from selling the shares in a maximum of 2 properties. Earlier, before 2019, individuals could invest in only 1 property. However, this limit was later increased to 2 real estate properties.
• This reinvestment of sale consideration should take place either 1 year before the sale or 2 years after the sale.
• The individual can also invest the net consideration in a construction project. This construction project should be completed within 3 years from the date of sale/transfer of shares.

Exemption on capital gains tax will be calculated as follows -

Points to Note:

• If you want to avail of an exemption on the entire capital gain amount, you have to reinvest the entire value of consideration. Otherwise, only the part of consideration that is reinvested will be considered for exemption from capital gain.
• The exemption granted on capital gains tax can be revoked if the individual sells the newly purchased property within 3 years.

What is the Grandfathering Provision in the Income Tax Act?

Grandfathering of capital gains exempts certain individuals from complying with the tax provisions of long-term capital gains on mutual funds. This benefit is allowed to those people who made decisions based on the old regime. Under grandfathering, such people can trade according to the previous stipulations. Such individuals who are allowed the benefit of grandfathering are known as grandfathered individuals. Section 112A of the Income Tax Act provides certain provisions for such individuals who are exempt from capital gain tax as per grandfathering provisions.

Different tax implications arise depending on when securities were bought and sold, as per Indian tax laws.

• Securities purchased and sold before 31st August 2018 are completely exempt from taxes under section 10(38) of the Income Tax Act.
• Similarly, if securities were bought before 31st January 2018 and sold before 1st April 2018, they also allow full exemption under the same section. However, selling securities acquired before 31st January 2018 after 1st April 2018 subjects them to Long-Term Capital Gain (LTCG) tax under section 112A.
• Likewise, transactions involving securities purchased and sold between 31st January 2018 and 1st April 2018 incur long-term capital gain tax under the same section.

The computation of taxable capital gain amount requires you to consider 2 factors -

• Grandfathering of capital gains provisions
• Tax Exemptions upto Rs.1 lakh

How to Calculate the Long-term Capital Gain Tax on Shares for Grandfathering?

The cost of acquisition plays an important role in determining the long-term capital gain. Consider the higher of the following to determine the cost of acquisition -

1. The actual cost of acquisition
2. And the lower of the following

Fair Market Value (FMV) on 31.01.18.
Full value consideration or sale price of the security.

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

Formula:-

Let’s take an example: Suppose Mr. X purchases shares at Rs. 15,000 on 1.05.17 and sells them on 1.02.18 for Rs.20,000. The highest quoted price for this security on 31.1.18 is Rs.18,000.

The cost of acquisition will be determined as follows -
Actual cost of acquisition - Rs.15,000
The lower of -

• FMV - Rs.18,000
• Sale price - Rs.20,000

The cost of acquisition is determined as Rs.18,000 as it is lower of the FMV and the sale price and higher than the actual cost of acquisition.

Therefore,
LTCG = Sale price - Cost of acquisition
LTCG = Rs. (20,000-18,000) = Rs.2,000

Long-Term Capital Loss

Long-term capital loss occurs when you sell or transfer long-term assets at a lower price than their acquisition cost. This loss can be offset against any long-term capital gains within the same assessment year. If the long-term capital gains on equity shares fall below Rs. 1 Lakh after this offset, they are not subject to taxation.

If the entire long-term capital loss cannot be offset in the current year, it can be carried forward to the next year. This carry-forward provision allows the loss to be applied against gains for up to eight subsequent assessment years.

How to Disclose LTCG in ITR Filing?

The ITR-2 and ITR-3 forms have been updated by the Central Board of Direct Taxes. Here are the key changes:

Individuals and Hindu Undivided Families (HUFs) with long-term capital gains (LTCG) from share sales must report these gains in Section B7 of the ITR-2 form unless they classify the gains as "Income from Business or Profession."

Non-residents with LTCGs from share sales must disclose them in Section B7 of the ITR-2 form and Section B8 of the ITR-3 form.

The disclosure of LTCG in ITR depends on how an individual treats his income from mutual funds in ITR. If you still don’t know how to report your capital gains on shares in ITR, you can choose our CA-assisted ITR filing service and relieve yourself of your tax worries.

Other than the exemptions mentioned above, there are various other ways you can save your capital gain taxes. If you want to find out about more such tax-saving investment options, get in touch with our tax experts, who navigate through 300+ provisions to find the best one for your tax situation. Hire a Tax Expert Now!