Long Term Capital Gain Tax on Shares

Capital gains from shares

Capital gains are the returns made upon selling your investment in a capital asset. These assets include stocks, bonds, mutual funds, real estate, etc. Hence, as the name suggests, the proceeds of these sales are ‘gains’ on ‘capital investments.’

In the case of shares, capital gains are made when they are bought at a lower price and sold at a higher price. When you make a profit, i.e., capital gain, it adds to your income and is thus taxable. This tax is called Capital Gains Tax.

The capital gains tax depends upon the period for which the asset or security is held. If a share is held for more than 12 months and then profited from, then it qualifies as a Long-Term Capital Gain (LTCG). Similarly, any gains made within 1 year are known as Short-Term Capital Gains (STCG).

How are Long-Term Capital Gains (LTCG) on Shares Taxed?

Long-term capital gains on different assets are all taxed differently. When you purchase shares of a company, you are said to have made an equity investment. In order to qualify for LTCG, you should have held on to your investment for at least 1 year.

For example, if you invested ₹1 lakh in equity investments and sold them at ₹1.3 lakh after a year, your long-term capital gains stand at ₹30,000. It is worth noting that long-term capital gains on equity investment is not subject to ‘indexation.’ It means that the long-term capital gains on equity will not be adjusted for inflation.

Capital gains up to ₹1 lakh per year are exempted from capital gains tax. According to the budget 2023, long term capital gain tax rate on shares or equity investments will continue to be charged at 10% on the gains, whereas short term capital gains tax on shares or equity investments will be charged at 15%.

The 10% long term capital gain tax rate will be applicable if the investor has paid the Securities Transaction Tax (STT) during the purchase and sale of his shares. It will also be applicable if STT is paid when his investment in an equity fund is transferred to somebody else.

Moreover, even capital gains made on investments in ELSS, i.e., Equity Linked Savings Scheme are taxable. These schemes distribute the invested amount between various stocks of different market capitalisations and are locked in for a 3-year period. Once this period is over, a 10% capital gains tax kicks in without the benefit of indexation. However, the LTCG must be over ₹1 lakh to qualify for taxation.

Gains made after January 31, 2018

LTCG was reintroduced in India in 2018 without any indexation benefit for equity investments. Let’s say an investor made an equity investment of ₹1 lakh in September 2020 and sold the shares in November 2021 for ₹1.4 lakh. In this case, his capital gains of ₹40,000 would be counted as LTCG since he sold his shares after the 12-month threshold. The LTCG tax on this capital gain would be 10% of 40,000, i.e., ₹4,000.

Tax exemption on LTCG made from Shares

Section 54F of the Income Tax Act deals with exemptions on capital gains made from equity markets through reinvestment in real estate. This section says that the total proceeds realised from the sale of the equity shares must be re-invested in buying a new residential property – the entire amount and not just the capital gains if the investor wants to claim tax exemption. This purchase must be made either 1 year prior to the equity sale or within 2 years from the date of the equity sale.

An investor can also use capital gains to construct a new property, but it must be completed within a period of 3 years from the date of the equity sale. This exemption can be revoked if the purchased property is sold within 3 years of its purchase.

Provisions to Disclose LTCG in ITR Filing

The Central Board of Direct Tax has made changes to the ITR-2 and ITR-3 forms. As per the new provisions:

Individuals as well as Hindu Undivided Families (HUFs) must disclose their LTCG from the sale or transfer of shares in Section B7 of the ITR-2 form. (If they do not classify those gains as “Income from Business or Profession.”)

Additionally, non-residents who have long-term capital gains from the sale or transfer of shares must disclose them in Sections B7 and B8 of the ITR-2 and ITR-3 forms, respectively.

If an individual considers their equity shares/equity-oriented shares as stock-in-trade, any profits from the sale or transfer of those shares must be reported as “Income from business and profession”. Such gains will not be taxed at 10%, even if the amount surpasses ₹1 Lakh.

Conclusion

Long Term Capital Gain Tax on shares is an important aspect that investors need to consider while paying taxes. It is also essential to plan your investments with a view to optimizing returns and minimizing taxes, as taxes can have a significant impact on overall returns.

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