14 May 2024 | By INDIE
Among the various income sources liable for tax in India, capital gains from investments in shares/stocks are a popular choice. However, when it comes to selling those shares for a profit, understanding the tax implications becomes crucial. In this blog, we will understand the Long-Term Capital Gain tax on shares in India.
The profit earned by selling assets, such as shares, at prices higher than the prices at which they were bought is known as capital gain. These gains are categorised based on the holding period of the asset. Shares held for more than one year are classified as long-term capital assets and shares held for one year or less are considered short-term capital assets.
LTCG on shares specifically refers to the profit earned after selling shares held for over a year. Calculating the LTCG involves subtracting the purchase price (including any associated expenses) from the sale price.
Example:
● Purchase price of shares: Rs. 50,000
● Selling price of shares: Rs. 75,000
● LTCG = Rs. 75,000 (Selling price) - Rs. 50,000 (Purchase price) = Rs. 25,000
The good news for Indian investors is that there is LTCG exemption on tax up to Rs. 1 lakh per financial year. This provides a buffer for smaller gains. However, for LTCG exceeding Rs. 1 lakh, a tax of 10% is levied. It's important to note that this is exclusive of surcharge and cess, which adds to the overall tax burden.
Securities Transaction Tax (STT) is a tax levied on the buying and selling of shares in the Indian stock market, which can be easily done via stock broking platforms. While STT might seem to add another layer of taxation, it plays a crucial role in LTCG. Shares acquired after paying STT are also eligible for LTCG exemption if the gains fall within the Rs. 1 lakh limit. This essentially eliminates double taxation for smaller gains.
Continuing from the previous example, if the LTCG from the sale of shares surpasses Rs. 1 lakh:
● Taxable LTCG = Rs. 25,000 (Total LTCG) - Rs. 1,00,000 (LTCG Exemption limit) = Rs. -75,000 (Negative value)
As the taxable LTCG is negative, there's no tax liability in this scenario. However, if the total LTCG exceeds Rs. 1 lakh, the tax would be calculated on the exceeding amount:
● Tax on LTCG = (Rs. 25,000 - Rs. 1,00,000) * 10% (Tax rate) = Rs. -7500 (Negative value)
Again, due to the negative taxable LTCG, there's no tax payable.
While the current tax structure offers some relief, exploring tax-saving options can further benefit investors.
● Investing in Equity Linked Saving Schemes (ELSS): LTCG arising from ELSS after the lock-in period of 3 years is taxed at a concessional rate, making them attractive for long-term wealth creation.
● Offsetting LTCG with Capital Losses: If you have incurred capital losses from other investments in the same financial year, you can offset them against your LTCG from shares, potentially reducing your tax liability.
Understanding long term capital gain tax on shares is essential for making informed investment decisions. While the current tax regime in India offers exemptions for smaller gains and a concessional rate for exceeding amounts, consulting a qualified tax advisor and a registered stock broking platform is recommended for personalised guidance based on your specific investment portfolio and financial situation.
If you are looking to start your journey in the stock market, check out digital investing app, INDIE.
INDIE aims to provide insights on various aspects of financial planning to help you navigate your journey effectively. Remember, tax laws are subject to change, so staying updated on any revisions or amendments is crucial.
