Equity shares are among the most popular investment methods for those willing to take high risks for high potential returns. When investors choose to invest in the shares of a company, they hope that the shares will increase in price, resulting in capital gains.
When you stay invested for a long time, capital gains are called long term capital gains. Read the following sections to know more about long-term capital gains tax on shares.
Understanding Capital Assets and Their Types
Capital assets are assets that you sell or transfer to get capital gains. Stocks, mutual fund units, buildings, land, house properties, machinery, jewellery, patents, leasehold rights, etc., are all capital assets.
There are two types of capital assets:
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Long-term capital assets:
If you sell assets like debt-oriented mutual fund units, jewellery, etc., after holding them for 36 months, they are long-term capital assets. Listed stocks, bonds, debentures, equity funds, and zero-coupon bonds are long-term capital assets if held for more than 12 months.
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Short-term capital assets:
For certain assets, a holding period of 36 months or less makes them short-term capital assets. This also includes immovable assets such as houses, buildings, or land held for 24 months or less. Other assets like shares, UTI units, equity funds, etc., are short-term if held for 12 months or less.
Things like personal goods and items, agricultural land, raw materials for business, special gold bonds, etc., do not come under capital assets. Another critical point is that the holding period of the previous owner counts for assets that you acquire as a gift or inheritance.
What Are Long Term Capital Gains?
Capital gains refer to profits arising from the sale/transfer of any capital asset. This can include gains from selling assets such as stocks, real estate, commodities, etc. When the selling price of a capital asset is higher than its purchase price, it results in capital gains. On the other hand, when the purchase price is higher, it results in a capital loss.
If one sells an asset after a specific holding period, it results in long-term capital gains (LTCG). The holding period refers to the period from the acquisition of the asset to the day preceding the transfer of the asset.
Let us say that you have purchased 500 shares at Rs. 40 per share and sold them at Rs. 60 per share after two years. This would mean that you would get capital gains of Rs. 10,000. However, if you sell them at Rs. 30 per share, you would incur a capital loss of Rs. 5,000.
Taxation of Capital Gains in India
Profits arising from the sale of a capital asset are taxable under the head ‘Income from Capital Gains’ in India. You need to pay capital gains tax for income earned from selling shares, mutual funds, bonds, house property, etc. The tax rate depends on the type of asset and the holding period of investment.
Capital gains tax is not applicable on a property you have inherited as it does not involve a transfer of ownership. However, if you sell an inherited asset, you would be liable to pay capital gains tax.
Long-term capital gains tax on shares and equity-oriented funds is applicable if you stay invested for over a year. LTCG applies to debt-oriented mutual fund units and jewelry if held for over three years.
The following table shows the long term capital gains tax rates:
| Type of Taxes | Rate of Taxes |
| LTCG on the sale of equities/equity funds | 10% on gains of over Rs. 1 lakh |
| LTCG for sale of any other security except equities | 20% |
Capital Gains Tax on Equity Shares
When the purchase price of shares is lower than its selling price, you get capital gains. For listed shares, if the holding period is more than 12 months at the time of sale, it results in the generation of long-term capital gains.
In the case of unlisted shares, for a holding period of less than a year, STCG is applicable at 15%. LTCG on shares is suitable at 10% for gains over Rs. 1 lakh in a financial year.
Besides capital gains, profits from intraday trading are taxed as speculative business income. The gains are added to your taxable income and taxed as per applicable slabs. Dividends from shares are also taxable at the hands of investors from FY 2020-21.
Capital Gains Taxation of Mutual Funds
The taxation of mutual funds depends on the type of funds and holding period of investment. Equity mutual funds are those whose portfolio has an equity exposure of more than 65%. The LTCG tax rate for equity funds is 10%. Keep in mind that capital gains of up to Rs. 1 lakh earned from equity mutual funds are tax-free.
Debt funds are defined as mutual funds with debt exposure of over 65%. If you sell debt fund units after 36 months from the date of purchase, the LTCG tax rate is 20%. Moreover, in this case, individuals are eligible for indexation benefits.
For hybrid funds, the equity exposure decides the rules of taxation. If a fund’s equity exposure is over 65%, it is taxed as equity funds. Otherwise, it is taxed like debt mutual funds. Capital gains earned from investments made via a Systematic Investment Plan (SIP) are taxed based on individual installments on a first-in, first-out basis.
Taxation of Equity Linked Savings Scheme (ELSS)
ELSS funds are tax-saving mutual funds that invest at least 80% of their assets in equities and equity-related instruments. These mutual funds have a three-year lock-in period, the shortest among tax-saving investments under Section 80C.
These mutual funds allow you to claim tax deductions of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. Besides tax benefits, ELSS funds offer high potential returns as they invest in equity shares of companies belonging to multiple sectors.
Capital gains from ELSS funds are subject to only long-term capital gains (LTCG) due to the 3-year lock-in period.
How to Calculate Long-Term Capital Gains?
The following are the steps to calculate LTCG from selling an asset:
Step 1: Start with the FMV accrued/received from selling shares.
Step 2: Deduct the following expenses from the FMV to know the LTCG on shares.
- Indexed cost of acquisition
- Indexed cost of improvement
- Expenses exclusively required for the transfer
Step 3: The profits after these deductions will be your capital gains.
Where, Indexed cost of acquisition = Cost of acquisition x Cost Inflation Index for the year of transfer/CII for the year of acquisition
Indexed cost of improvement = Cost of improvement x CII for the year of transfer/CII for the year of acquisition
Example: Mrs. Patel bought 450 shares of a listed company in January 2020 at Rs. 90 per share after paying a 1.5% brokerage. In January 2021, she sold all shares at Rs. 130/share of the company. The CII for 2020 and 2021 is 289 and 301, respectively.
Here, Indexed cost of acquisition = Rs. 42,181.66 (Rs. 40,500 x 301/289) and cost of transfer = Rs. 607.5
LTCG on share transfer = Rs. 58,500 – (Rs. 42,181.66 + 607.5) = Rs. 15,710.84
Tax Exemptions Available on Long Term Capital Gains
The following tax exemptions are applicable on LTCG:
- Section 54: This allows you to claim tax exemption on the LTCG earned from selling a house if you invest in another residential property. You can claim exemption on capital gains of up to Rs. 2 crore by investing in up to 2 houses. The exemption will be applicable on capital gains only and not the entire sales proceeds.
- Section 54B: Section 54B allows you to claim exemption on LTCG earned from transferring agricultural land, provided that you reinvest in a new agricultural land. The capital gains will be taxable if you do not use them to buy new land within two years.
- Section 54EC: You can claim tax exemption on capital gains from selling your house by investing in certain bonds within six months of the sale. You can reinvest capital gains of up to Rs. 50 lakh in bonds of the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC).
- Section 54F: This Section allows tax exemption on capital gains earned from selling a property other than a house. You need to reinvest the entire sales consideration in a new residential property and not just the capital gains to claim this exemption.
- Through Capital Gains Account Scheme: You do not have to pay capital gains taxes if you invest in the Capital Gains Account Scheme (CGAS). If you have not invested the capital gains before filing Income Tax Returns (ITR) within the due date, you can open a CGAS account at any bank.
Terms to Know when Calculating Capital Gains
Here are some of the important terms you need to know when calculating capital gains on shares:
- The total value of consideration: This is the amount you receive instead of transferring your capital assets. Capital gains will still be subject to taxation if you have not received any compensation.
- Cost of improvement: These include any expenses incurred while making alterations or additions to the asset before selling.
- Cost of acquisition: This refers to the value you purchased the asset. If a capital asset is acquired without making a purchase, the previous owner’s fee of improvement and addition will apply.
- Cost inflation Index: This index is used to adjust the cost of acquisition and improvement against the effects of inflation over the years. The Indian government publishes the CII every year.
Final Word
Capital gains in India are subject to taxes depending on the nature of assets and holding period of investments. Long-term capital gains tax on shares is 10% on realized returns above Rs. 1,00,000 in a financial year if you have them for over a year.
Frequently Asked Questions
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What is the meaning and function of indexation?
Indexation is a method of reducing your capital gains for taxation purposes by calculating the effects of inflation. Inflation gradually reduces your purchasing power as prices of products and services increase.
Thus, the government allows you to claim indexation benefits on long-term investments in debt funds and some other assets. With this benefit, you can adjust the purchasing price of your investments to lower your tax liability.
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Which properties are not regarded as capital assets?
The following is a list of exclusions under capital assets as per the Income Tax Act:
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- Any personal goods like clothes and furniture
- Consumables, raw materials, or stocks held for business purposes
- Special bearer bonds from 1991
- Gold deposit bonds under the Gold Deposit Scheme (1999) or Gold Monetization Scheme (2015)
- Central Government-issued gold bonuses
- Agricultural land in rural India
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Are dividends from shares tax-free?
No, since FY2020-21, all dividends have been taxable in the hands of investors. In other words, dividend income is added to your taxable income and taxed as per your applicable income tax rates.
Before 2020, companies paid Dividend Distribution Tax (DDT) before sharing dividends with their shareholders. Thus, investors did not have to pay taxes on dividend income of up to Rs. 10 lakh in a financial year.
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Can you adjust capital losses from your stock investments?
You can set off any losses under the head’ capital gains’ against other capital gains but not against other income like salary or business income. While you can set off short-term capital losses against both STCG and LTCG on shares, you can only set off long-term capital losses against LTCG.
If you cannot set off total losses in a financial year, you also have the option to carry it forward to the following year. You can carry forward and set off both STCG and LTCG for up to 8 assessment years.
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Is there any TDS deduction applicable on stock investments?
No TDS (Tax Deducted at Source) is applicable on capital gains from stock investments for resident investors. If a resident shareholder gets dividend income above Rs. 5,000 in a financial year, the entire dividend will be subject to a 10% TDS deduction.
However, if a resident does not submit the PAN or provides an invalid PAN, a 20% TDS deduction will apply. If a resident shareholder submits a declaration through Form 15G or Form 15H, no TDS will be deducted.
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