Long Term Capital Gain on Shares

Investing in shares is one of the most popular ways to build wealth in India, offering the potential for significant returns over time. When you sell your shares, the profit you have made will be subject to Long-Term Capital Gains on shares tax.

Here, we will break down how LTCG tax works and its impact on your tax liabilities.

What Constitutes Long-Term Capital Gains on Shares

Long-Term Capital Gains arise when you sell shares listed on a recognised stock exchange after holding them for more than 12 months. This holding period qualifies the gains as "long-term," as opposed to "short-term," which applies to shares held for 12 months or less.

For example, if you purchased shares in a company in January 2022 and sold them in February 2024 at a profit, the gain would be classified as a long-term capital gain, as the holding period exceeds 12 months.

Tax Rates for Long-Term Capital Gains on Shares According to Budget 2024

Key changes in Budget 2024 that mutual fund investors should be aware of include:

1. Uniform LTCG Tax Rate: Long-term capital gains on shares (LTCG) will now be taxed uniformly at 12.5% across all asset classes. The Budget 2024 has eliminated the indexation benefit, which previously allowed for a lower LTCG tax rate with indexation. Prior rates of 20% with indexation and 10% without indexation are no longer applicable.
2. Revised Holding Periods: From July 23, 2024, assets will be classified as long-term if held for more than 12 months (for listed securities on Indian stock exchanges) or more than 24 months (for other asset classes). Investors can classify listed securities as long-term investments after holding them for over a year, and non-listed assets after holding them for more than two years.
3. Exclusion of Certain Assets from LTCG Classification: Profits from debt mutual funds, debt ETFs, market-linked debentures, and unlisted bonds and debentures will not be considered short-term capital gains, regardless of their holding periods.

Calculation of Long-Term Capital Gains on Shares

Calculating LTCG on shares involves determining the sale proceeds, subtracting the cost of acquisition and accounting for any exemptions:

1. Full Value of Consideration (Sale Proceeds): This is the amount received from selling the shares.
2. Cost of Acquisition: This is the original purchase price of the shares or the fair market value as of January 31, 2018, whichever is higher.
3. LTCG Exemption: Gains up to ₹1.25 lakh in a financial year are exempt from tax. Only the amount exceeding this threshold is taxable at 12.5%.

Here is how you can calculate the LTCG tax on shares:

• Long-Term Capital Gain on Shares = Sale value of long-term equity assets – (the cost of acquisition of asset + expenses incurred due to their transfer or sale).

If the LTCG amount is more than ₹1.25 lakh: 

• Long-Term Capital Gain Tax on Shares= (LTCG Amount - ₹1.25 lakh) x 12.5%

The changes brought about by Budget 2024, including the revised holding periods and the uniform long-term capital gain on shares tax rate of 12.5%, have significant implications for investment strategies. While the elimination of indexation benefits simplifies the tax landscape, it also underscores the importance of strategic planning and informed decision-making.