We all invest in different kinds of capital assets, such as real estate, stocks, bonds, jewellery, etc., to generate profits.
Among other classes, equity shares are considered risky with high rewards. When we buy equity shares of a company, we need to accept all the risks and rewards associated with that company and equity investment.
And we might sell our shares for one reason or another. When we sell our holdings, we might experience losses or gains. This gain on the invested capital is called capital gain.
Losses are not taxable for apparent reasons, but capital gains are subject to taxation.
These can be classified into two broad categories:
The rate of tax depends on your holding period. And different asset classes attract different rates of taxes.
In this blog, we are going to learn:
- What are LTCGs on shares?
- How are LTCGs on equities calculated?
- What are the tax implications on LTCGs arising from selling shares?
- How can the tax liability be reduced?
What are long-term capital gain taxes on the selling of shares?
A long-term capital gain on equity shares is the gain you make on selling your investment (listed equity shares) after holding it for a period exceeding 12 months.
It is the difference between the sale price of the equity shares and their purchase price after you have owned them for more than 12 months.
Before 2018, the long-term gains made on selling equity shares were tax-free. The initiative was taken to attract more potential investors towards this asset class. Only STT (securities transaction tax) had to be paid. However, this has been amended after 2018.
As per the Union budget 2018, 10% tax will be levied on long-term capital gains (over 1 lakh) arising from the transfer or selling of equity instruments without any indexation benefit.
However, the profits made before or on 31st January, 2018, will be exempted from the rule.
What is the grandfathering rule of Section 112A?
The Union Budget announced this and introduced taxation on long-term capital gains on shares and equity-oriented funds. The rule elaborates on how to calculate the cost of purchase of equity shares precisely if the purchase was made on or before 31st January 2018.
As per the rule, we need to calculate two values:
Value 1 : Either fair market value as of 31st January 2018 or the actual price of selling (whichever is lower)
Value 2: Value 1 or Actual Purchase Price (whichever is higher)
How are LTCGs on equities calculated?
The simple technique to calculate long-term capital gains on equity shares is as follows:
- Long-term capital gains = The value of consideration in full (-) the cost of acquisition
- Capital gains exceeding 1,00,000= (a) - 1,00,000 Rs
- Tax payable= Tax rate of 10%: 10% x (b)
As a taxpayer, you should keep in mind that you can not claim a deduction (under VIA) or any rebate (under 87A).
What are the tax implications on LTCGs arising from selling shares?
As per the Union budget 2018, a 10% tax will be levied on long-term capital gains (over 1 lakh) arising from the transfer or selling shares without any indexation benefit.
How to calculate LTCG taxes with a practical example?
Let’s assume that you purchased around 100 shares of ABC company, whose shares were listed on the stock exchange on 1st January 2015. The price per share was ₹1000.
You sold the same shares for ₹1500 per share in 2018. The fair market value on 31st January 2018 was ₹1300 per share.
Now that you have held the shares for more than 12 months, long-term capital gains taxes will be implied.
Step 1
The cost of acquisition will be calculated as follows:
Value 1:
Fair market value as of 31st Jan 2018= ₹1300 x 100 i.e ₹130000
Or sale proceeds = ₹1500 x 100 i.e ₹ 150000
The lower of the above values would be ₹1,30,000.
Value 2:
Value 1: ₹1,30,000
The cost of acquisition is ₹1,00,000
The higher of the above values is ₹1,30,000.
Hence the cost of acquisition would be Rs 1,30,000.
Step 2
Long-term capital gains: Sale Price – Cost of Acquisition
=1,50,000 - 1,30,000
=₹20,000
Hence, no tax has to be paid. You don’t have to pay any tax if the value remains under ₹ 1,00,000. However, above that, 10% of whatever is earned would have to be paid as taxes.
How can the tax liability be reduced?
There can be many ways to do it. But we will be sharing the most useful and practical ones here.
- Be patient: Ask yourself, “Can I delay selling these investments?” If it’s the last option left, go ahead. But if not, do not heed your urge to sell without any specific reason or urgent circumstances.
- Make use of capital losses: Use capital losses to set off your gains to reduce your tax liabilities.
- Get to know about exemptions: The Income Tax authorities give certain exemptions that you can use to reduce your tax obligations. Please consult your tax advisor to learn about them.
- Tax harvesting: Let us explain this with an example. Suppose you bought 1000 shares at ₹100 each. After one year, the price rises to 150, and you sell it. The capital gains would be ₹50,000 (1,50,000 - 1,00,000). No tax liability arises. You repurchased at ₹ 150/share again. Now suppose the price rises to ₹220 after one year. The gains you make on selling the same is ₹70,000, which is again tax exempted. The same technique can be used repeatedly to reduce tax liability.
Conclusion:
The gains depend upon your holding period. You need to pay taxes on the gains if you invest in equities. Tax on Long Term Capital Gains will apply if you sell your shares after one year.