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Long-term Capital Gains Tax on Shares
In India, equity shares are well-known high-risk investment instruments. When people invest in a business's equity shares, they commence the maximum entrepreneurial risk or rewards associated with the business venture.
People can buy shares or any other type of capital assets, such as real estate, stocks or bonds. Doing so can increase their chances of receiving returns from these investments.
Published on 03 February 2023
Capital gain is the profit that occurs from the sale of these types of investment instruments if the asset's sale price is higher than the buying price.
Understanding Long-Term Capital Gains Tax on Shares
The long-term capital gains tax on shares in India was reintroduced during the 2018 budget. The ITCG tax range is 10% in India, and it's levied on profits over INR 1 Lakh made through selling shares. All these shares were held for over 12 months without indexation benefits.
Here, the indexation benefit is known as the asset's price, which gets adjusted for inflation. This monetary benefit gets passed to the investor as well. To understand properly what long-term capital gains tax on shares in India means, check out this example:
"Let a person purchase shares worth INR 5 Lakhs on September 12th, 2019. Till January 2021, the share prices jumped to INR 7 Lakhs. In this particular scenario, the investor made a profit of INR 2 Lakhs. So, if the investor sells the shares now, after the threshold of 12 months, he/she has to pay 10% of the INR 2 Lakh profit, which he/she made."
Here, only your profits will be taxed and not the entire amount which you redeemed through the sale of shares.
How to Calculate the Long-Term Capital Gains Tax?
Calculating the long term capital gains on shares can be pretty difficult, especially when you need to know the correct method to do so. To make things easier, here is an example that will tell you how the long-term capital gains on shares in India get calculated:
"Let's say you purchased mutual debt shares in May 2012 for INR 1.5 Lakhs. You can sell the shares in March 2016 for INR 3.3 Lakhs. As these mutual funds are debt-oriented, they get taxed at 20% indexation or 10% without any indexation.
The capital gains, which you made WITHOUT indexation, will be INR 1,63,500 according to this calculation:
Full sales value - [purchase price + brokerage at 0.5%] = 3,30,000 – [1,50,000 + 16,500] = INR 1,63,500.
So, the buying price after the indexation is: 1,50,000 x 1081/852 = INR 1,90,317
Now, coming to WITH indexation, capital gains that are made is INR 1,23,183 according to this calculation:
The full sales value - [indexed purchase price + brokerage at 0.5%] = 3,30,000 – [1,90,317 + 16,500] = INR 1,23,183
Now, let's compare the long-term capital gains tax on shares in India on both of the numbers:
Long-term capital gains at 20% with Indexation is INR 1,23,183 x 20/100 = INR 24, 636.6.
Long-term capital gains at 10% without indexation is INR 1,63,500 x 10/100 = INR 16,350.
In this situation, the ITCG on shares without indexation is much lower than the amount with indexation. You can pay up to 10% tax with indexation.``
Reducing the Capital Tax Liability: How to Do It?
There are several through which you can easily lessen the tax liability on the long-term capital gains tax on shares in India, and some of these methods are:
1. Tax Harvesting
According to this method, investors can easily book profit on the equities and prevent themselves from facing tax liabilities. The profits are made under a Lakh and can be reinvested.
The rate at which the mutual fund units or shares are repurchased transforms into the new acquisition cost. To extract the maximum advantage through this particular method, all the investors can repeat the method each year.
Doing so will enable them to take advantage of the INR 1 Lakh exemption. Besides that, utilizing this particular method, all the taxpayers will be able to save around INR 10,000 every year.
The method can also be utilized in respect of cumulative LTCG liability that arises from equity-linked mutual shares and funds.
2. Carry Forward and Setting Off Losses
Another way investors can easily save on the long-term capital gains tax liability is by setting profits earned against all the losses incurred. But remember that short-term capital losses can also be set off against long-term and short-term capital gains. On the other hand, the long-term capital losses can be squared off against the long-term gains.
Final Thoughts
Many say that two things are pretty certain in life: taxes and death. The income you earn is liable for tax payments within a nation, but the government, too, makes provisions to save up the tax amount. The long-term capital gains tax on shares in India is 10% without indexation for gains over INR 1 Lakh, which is much better than the short-term ones.
