Long-term Capital Gains on Shares

Investing in shares has long been a popular way to build wealth in India. As an investor, it is crucial to have a comprehensive understanding of the tax implications associated with these investments. One such tax implication is the long-term capital gains tax (LTCG) on shares. So, what is long-term capital gains tax on shares in India, and how is it computed? Let’s find out.

What is Long-term Capital Gain Tax on Shares?

Long-term gains tax is a tax levied on the profit earned from the sale of assets held for an extended period, typically exceeding one year. If you have held the shares for more than one year, any gains realised from their sale will be subject to long-term capital gains tax.

LTCG Tax Rate in India on Shares

Individuals and Hindu Undivided Families (HUFs) are required to pay LTCG tax at a rate of 10% (plus surcharge and cess) if the total LTCG for a financial year exceeds Rs. 1 lakh. However, any long-term capital gains below Rs. 1 lakh are currently exempt from taxation. Let’s understand it with the help of an example.

Suppose you purchased shares worth ₹10 lakh in April 2021 and sold them in May 2023. By that time, the value of your shares jumped to ₹12 lakh. As you have sold them after more than a year and have made gains worth ₹2 lakh, you need to pay LTCG tax of 10% on ₹1 lakh (Gains - ₹1 lakh). If your gains are under ₹1 lakh, you are not required to pay any LTCG tax.

Additionally, the LTCG tax rate in India on shares has no indexation benefit. With indexation,you can adjust the purchase price of the shares based on the inflation index. This adjustment aims to account for the impact of inflation on the cost of acquisition.

The aforementioned provision is applicable to transfers executed on or after April 1, 2018. Furthermore, this new provision was introduced with prospective effect, meaning that gains accrued from February 1, 2018 onwards will be considered for taxation.

This provision, commonly known as the 'grandfathering rule,' ensures that any long-term gains derived from equity instruments purchased prior to January 31, 2018, will be calculated in accordance with this rule.

Exemptions Available on Long-term Capital Gains

Here is the list of exemptions associated with long-term capital gains:

Section 54: Sale of Residential Property

This section is applicable to individuals and HUFs selling a long-term residential house. Here, exemption is allowed if proceeds are reinvested in another residential house in India. Additionally, the purchase must be made within 1 year before or 2 years after the sale, and construction must occur within 3 years. The provisions of this section allow exemption for only one house.

Section 54F: Sale of Non-Residential Assets

This section is applicable when LTCG arises from the sale of assets other than residential property. The benefits apply only if the entire net sale consideration is invested in one residential house. The assessee must not own more than one residential house on the date of transfer. The purchase and construction timelines are the same as those in Section 54.

Section 54EC: Investment in Specified Bonds

LTCG from the sale of land or buildings can be exempted if the proceeds are invested in National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) bonds. The maximum investment limit under this section is ₹50 lakh per financial year. These bonds must be purchased within six months of the asset transfer. They carry a lock-in period of five years, and premature redemption is not allowed.

Section 10(38): Listed Equity Shares

Gains from the sale of listed equity shares acquired before January 31 2018, were exempt.

Calculation of Long-term Capital Gains on Shares (with Example)

Listed equity shares held for over one year qualify as long-term capital assets. LTCG exceeding ₹1.25 lakh in a financial year is taxed at 12.5%, without indexation benefits, under Section 112A. For example, if you buy 1,000 shares of a listed company at ₹100 each and sell them after 14 months at ₹150, the total gain is ₹50,000.

Since this is below the ₹1.25 lakh exemption threshold, no LTCG tax is payable. However, if the gains were ₹2 lakh, ₹75,000 would be taxed at 12.5%, resulting in a tax liability of ₹9,375.

Essential Considerations for Long-term Capital Gain Tax on Shares in India

• Holding Period: For long-term capital gains tax rate treatment, an investor must hold the shares for over a year. If the shares are sold within one year of purchase, the gains will be considered as short-term capital gains, which are taxed at the applicable short-term capital gains tax rate.

• Exemptions: As mentioned earlier, gains up to ₹1 lakh from the sale of shares in a financial year are currently exempt from LTCG tax. However, this exemption limit is subject to change, and it is advisable to stay updated with the latest regulations.

Ways to Reduce LTCG Liability

• Tax Harvesting

This method allows you to make a profit from selling shares without facing any tax liability as long as the gains are below Rs. 1 lakh and reinvested. The new acquisition cost is determined by the rate at which the shares are repurchased. To make the most of this method, you can repeat the process annually to utilize the Rs. 1 lakh exemption, potentially saving up to Rs. 10,000 in taxes each year.

Let's understand this method with an example. Imagine you buy 1000 shares of a company at Rs. 300 each. After three years, the share price increases to Rs. 600. If you decide to sell the shares at this point, the total sale price would be Rs.600,000.

After three years, you would be required to pay a capital gains tax of Rs. 20,000, calculated as follows:

Gains from sale of shares = ₹6,00,000 - ₹3,00,000 = ₹3,00,000

The capital gains above ₹1 lakh are taxed at a rate of 10%, resulting in an LTCG of ₹20,000 (₹3,00,000 - ₹1,00,000 = ₹2,00,000 x 10%).

By employing the tax harvesting method and buying and selling shares every year, you can save Rs. 20,000 in tax liability.

Let's delve into the details:

Suppose the share price after one year is Rs. 310. If you sell the shares at this price, the total capital gains would be Rs. 10,000 (Rs. 3,10,000 - Rs. 3,00,000). Since capital gains below Rs. 1 lakh are tax-exempt, the total tax liability would be zero.

Additionally, let's assume you repurchase the 1000 shares at Rs. 310.

In the second year, if the share price rises to Rs. 380, the capital gains would be Rs. 70,000 (Rs. 3,80,000 - Rs. 3,10,000). Once again, the capital gains fall below Rs. 1 lakh and remain exempt from tax.

The 1000 shares are repurchased again at Rs. 380. In the third year, if the share price increases to Rs. 460, the capital gains would be Rs. 80,000 (Rs. 4,60,000 - Rs. 3,80,000). Once again, the capital gains fall below Rs. 1 lakh and remain exempt from tax.

This demonstrates how you can sell and repurchase shares to reduce their capital gains tax liability. However, it's crucial to remember that the equity market is highly volatile, and you may not always be able to repurchase shares at the expected price.

• Offsetting and Carrying Forward Losses

Another method to reduce your long-term capital gains tax liability by offsetting gains against losses incurred. However, it's crucial to note that short-term capital losses can only be offset against short-term capital gains and long-term capital gains, while long-term capital losses can only be offset against LTCG.

Moreover, no specific restrictions exist regarding offsetting losses from one asset category against another. For example, a long-term capital loss from the sale of a property can be used to offset long-term capital gains from investments in shares or mutual funds.

Additionally, both short-term and long-term losses can be carried forward for up to eight successive years. This means that losses incurred in the current year can be set off against gains earned in future years.

Here, you must remember an important caveat - your income tax returns must be filed within the specified due date under section 139 of the IT Act, 1961. Failure to file the return on time will result in the capital losses lapsing, and the taxpayer will not be allowed to carry them forward.

Long-term Capital Gains on Shares vs Mutual Funds

As mentioned, LTCG on shares arise when listed equity shares are sold after holding them for more than 12 months. As per the Income Tax Act, gains up to ₹1.25 lakh in a financial year are exempt from tax. However, any LTCG above this limit is taxed at 12.5% without the benefit of indexation.

Equity-oriented mutual funds that invest at least 65% in equities and follow the same LTCG rules as equity shares. Gains above ₹1.25 lakh are taxed at 12.5% without indexation. Suppose you invest ₹5 lakh in an equity mutual fund and redeem it after 18 months for ₹6.5 lakh. The gain of ₹1.5 lakh exceeds the exemption limit, so ₹25,000 is taxable at 12.5%, amounting to ₹3,125 in tax.

Post-April 1, 2023, debt mutual funds no longer enjoy LTCG benefits. Regardless of holding period, gains are treated as short-term and taxed as per the investor’s slab rate. For example, if you invest ₹10 lakh in a debt fund and sell it after 3 years for ₹11.5 lakh, the ₹1.5 lakh gain is taxed at your applicable slab rate, say 30%, leading to ₹45,000 in tax.

Impact of Budget 2025 (or Latest Amendments) on LTCG Tax

Budget 2025 introduced targeted amendments to India’s long-term capital gains (LTCG) tax regime, effective April 1, 2026 (AY 2026–27), without altering the broader framework of holding periods or asset classifications. The headline change is a uniform LTCG tax rate of 12.5% across listed equity shares, equity mutual funds, Unit Linked Insurance Plans (ULIPs) (with annual premiums above ₹2.5 lakh), and specified securities held by Foreign Institutional Investors (FIIs) and Alternative Investment Fund (AIFs), eliminating prior disparities such as the 10% rate for certain foreign investors.

For immovable property acquired on or after July 23, 2024, LTCG is now taxed at 12.5% without indexation, replacing the earlier 20% rate with indexation benefit. Debt mutual funds acquired post-April 1, 2023, continue to be taxed at slab rates, with no indexation.

Notably, the Finance Bill 2025 clarified that ULIP proceeds that are not eligible for Section 10(10D) exemption will be taxed as capital gains, aligning ULIPs with equity mutual funds.

Additionally, income from Category I and II AIFs is now explicitly treated as capital gains, taxed at 12.5%, resolving prior ambiguity over business income classification. While the Section 87A rebate remains technically available for LTCG up to ₹1.25 lakh, discrepancies in the ITR utility implementation may require manual computation to claim eligible rebates.

Common Mistakes to Avoid While Filing LTCG on Shares

Here are some of the common mistakes you must avoid when filing LTCG on shares:

• Many investors forget that LTCG up to ₹1.25 lakh in a financial year is exempt. Failing to account for this can lead to over-reporting or under-reporting of taxable income.

• Confusing short-term and long-term holding periods (12 months for listed shares) is a frequent error. This leads to incorrect tax classification and wrong filing.

• The LTCG exemption under Section 112A applies only if Security Transaction Tax (STT) was paid both at acquisition and sale, except for Initial Public Offerings (IPOs) and Follow-on Public Offerings (FPOs). Overlooking this can make you claim exemptions that do not apply.

• Shares transferred through off-market deals (like gifts) are often missed. These must be disclosed as per tax rules.

• Filing LTCG in the wrong ITR form (like ITR-1) is a common mistake. For capital gains, ITR-2 or ITR-3 is usually required.

• Errors in International Securities Identification Number (ISIN), quantity, or acquisition/sale dates can lead to mismatches with broker-reported data, such as Form 26AS or AIS, which may trigger scrutiny by the Income Tax Department.

• Although LTCG on listed shares does not allow indexation, some investors wrongly apply it, leading to errors and potential scrutiny.

In Conclusion

Long-term capital gains tax on shares in India plays a significant role in the overall taxation framework for investors. Understanding the tax rates, indexation benefits, and other considerations allows you to make informed decisions while planning your investment strategies.

Therefore, it is always advisable to consult a tax professional or financial advisor for personalised guidance based on your specific circumstances. By staying well-informed about the tax implications, you can optimise your returns and ensure compliance with the tax regulations in India.