Any profit earned from the sale of a capital asset, such as shares, is referred to as capital gains. A capital gain on the investment is only possible when the current selling price of a share exceeds the price at which you purchased it. The profits booked from the sale of shares are considered 'income' and hence, are liable to a capital gains tax.
Depending on the time span for which the investor holds the shares, capital gains can be divided into two categories – short-term capital gain and long-term capital gain on shares. Read on to explore long-term capital gains (LTCG), how to calculate them, the tax liability and exemptions on these gains, and more.
Long-Term Capital Gains on Shares
When investors book profits on the sale of equity shares held by them for more than 12 months at the time of sale, these profits are known as long-term capital gain on shares. Its value is determined by the difference between the sale price and the acquisition cost of shares held for more than a year.
Furthermore, listed equity shares which, if held over 12 months, generate long-term capital gains on shares. These shares are traded on exchanges like the NSE, BSE, etc. However, capital gains on unlisted equity shares are treated as long-term gains only if investors hold the shares for at least 24 to 36 months.
Computation of Long-Term Capital Gains on Shares
To determine the long-term capital gains on shares, the total sale price should be deducted by the following two items:
- Brokerage fees or other costs associated with the selling of shares
- Indexed purchase price of the equity shares
Example of Long-Term Capital Gains on Shares
Assume Sandeep paid Rs. 15,000 in total for 100 listed company shares in January 2017 for Rs. 150 per share. After one year and five months, in June 2019, he sold the shares he had bought for Rs. 170 each for Rs. 17,000.
In this case, it is necessary first to estimate the asset's indexed purchase price in order to calculate the long-term capital gains on shares.
The indexed purchase price is determined by adjusting the original price against the increase in inflation in the asset's value. The Cost Inflation Index, which the Indian government publishes, can be used to estimate the indexed cost.
Cost Inflation Index (CII) from 2016-17 to 2020-21
Financial Year Cost Inflation Index (CII)
2016-17 264
2017-18 272
2018-19 280
2019-20 289
2020-21 301
In light of the aforementioned table, the indexed purchase price of the shares will be = Rs. (15000x 280/272) = Rs. 15,441 approximately.
Sales >
Brokerage fee (0.5%)= Rs. 85
Indexed purchase price = Rs. 15,441
Therefore, Sandeep's long-term capital gain based on the above numbers= Rs. 17,000 – Rs. (15,441+85) = Rs.1474.
Tax Liabilities on Long-Term Capital Gains from Shares
Under Section 10 (38) of the Income Tax Act of 1961, long-term gains on shares were previously immune to taxation. However, the Union Budget of 2018 proposed the replacement of Section 10 (38) with Section 112A to set tax implications on long-term capital gain on the sale of equity shares.
Under this Section, the concessional rate of long-term capital gain tax on shares is 10% for gains exceeding Rs. 1 Lakh. Although, the amount does not include the benefits of indexation or the calculation of capital gains in foreign currency for non-residents.
In comparison to short-term capital gains, which are taxed at 15%, long-term capital gains are a much better investment option.
Capital Gains Exemptions
An individual can be exempt from long-term capital gain tax on shares in India by reinvesting their long-term capital gain in the following ways.
Investing in Bonds
One can also follow Section 54EC to save on long-term capital gains tax on shares by transferring the total gain to acquire capital gains bonds issued by NHAI and RECL. However, these bonds currently offer only a 5% return and have a five-year lock-in period, so they aren't as popular with many financial advisors.
Investing in Residencial Properties
One can purchase new residential property to avoid paying tax on long-term capital gains on shares. As per Section 54F of the Income Tax Act 1961, profits earned from the sale of any assets, including gold, stocks, or commercial property, are exempt from capital gains tax liability if the profits are reinvested in the purchase or construction of a residential property.
Setting off and Carrying Forward Losses
Another way for an investor to save on long-term capital gains tax on shares is to offset profits made against losses incurred. However, one must remember that short-term capital losses can be offset by both long-term and short-term gains, but long-term gains can only offset long-term losses.
Frequently Asked Questions
How do we calculate the acquisition cost for investments made on or before January 31, 2018?
The actual cost will be shown in the COA for investments bought before January 31, 2018. However, the FMV as of January 31 shall be regarded as COA if the actual cost is less than that figure. In addition, if the acquisition cost is less than the fair market value, the full value of consideration on transfer or the actual cost, whichever is greater, will be regarded as the acquisition cost.
What does the new grandfathering rule in the 2018 budget mean?
The grandfathering rule is used to assess the cost of acquisition in order to compute the long-term capital gain tax on shares and securities for which Securities Transaction Tax (STT) is paid.
To determine the long-term capital gain (LTCG) on the sale of equity shares and equity mutual funds purchased on or before December 31, 2017, the cost of acquisition is the lower of the FMV as of that date or the selling price, and the greater of, the earlier result and cost price.
How will the fair market value of the shares be determined?
The FMV will be the highest price of such share or unit that has been listed as of January 31, 2018, on a recognized stock exchange. The highest price stated on a day immediately prior to January 31, 2018, on which it has been traded, shall serve as the fair market value if there is no trading on that day.
In the case of an unlisted share, the fair market value will be equal to the unit's net asset value as of January 31, 2018.
What will be the acquisition cost for bonus shares purchased before February 1, 2018?
The cost of acquiring bonus shares bought before January 31, 2018, will be estimated in accordance with clause 31 of the Finance Bill, 2018. The gains accumulated up to January 31, 2018, will therefore continue to be exempt because the fair market value of the bonus shares as of that date will be used as the acquisition cost.