Long-Term Capital Gain on Shares: Everything You Need to Know

LTCG on shares

According to Section 112A of the Income Tax Act, long-term capital gain tax applies to gains earned from listed equity shares, equity-oriented mutual fund units, and business trust units held for more than 12 months.

The LTCG on shares is taxed at 12.5% with the exemption of ₹1,25,000.

The grandfathering clause of Section 112A

Long-term capital gain on shares was taxable from 2018 onwards, hence, the ‘Grandfathering’ Clause of Section 112A protects your capital gain earned before 31st January 2018 from taxation. In the case of listed equity shares, equity-oriented mutual fund units, and business trust units, the cost of acquisition is the actual purchase price or the fair market value of the shares, whichever is higher.

Let’s understand this with an example,

Suppose you bought 100 shares worth ₹10,00,000 in 2017. By 31st January 2018, the value of shares increased to ₹11,10,000. This gain of ₹1,10,000 will not be taxed at all. But if you continue to hold the shares, and the value of your shares increases to ₹12,25,000. You will get an exception of ₹1,25,000. So you will have to pay 12.5% tax on the profit of ₹1,00,000 (Initial purchase price of ₹10,00,000 - Selling price of ₹12,25,000). In this example, STT and brokerage were not considered.

Exemption in LTCG on shares

Long-term capital gains (LTCG) on equity shares, equity-oriented mutual funds, and business trust units give an exemption of ₹1,25,000 on capital gains. This exemption is deducted from the total amount of profit made on shares sold. The amount exceeding ₹1,25,000 will be taxed at 12.5%.

Set off long-term capital gains against long-term capital losses

When you sell your equity shares, equity-oriented mutual fund units, and business trust units at a loss, I.e, at a lower value than the purchase price, it comes under ‘Long-term capital loss’.

Only long-term capital gain can be set off against long-term capital loss. If you make a profit on the sale of certain shares and a loss on others, you can set off the profit against the loss incurred.

Frequently Asked Questions

What is the tax applicable to long-term capital gains on shares?

A tax of 12.5% is applicable on a capital gain of more than ₹1,25,000.

What is the grandfathering Clause of Section 122A?

As per the grandfathering law, the capital gain on equity and equity-related instruments is non-taxable if they were bought before 31st January, 2018. The long-term capital gains earned after 31st January 2018 are taxable as per the Income Tax Act.