Capital Gains on Shares - Calculation, Computation and Tax on Shares

Introduction

When you sell shares for more than you paid, the profit is called a capital gain. In India, this gain is considered income and is taxed. The tax you pay depends on how long you held the shares and whether they are listed on a recognised stock exchange.

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How Capital Gains on Shares Are Classified

Capital gains on shares fall into two categories:

• Short‑Term Capital Gains (STCG): Profits from shares sold within 12 months of purchase.
• Long‑Term Capital Gains (LTCG): Profits from shares sold after 12 months. For unlisted shares (private companies) and some other securities, the long‑term threshold is 24 months.

These holding periods are simplified under Budget 2024. Previously, there was also a 36‑month category for certain assets, but now there are only two: 12 months (for listed shares) and 24 months (for unlisted and other shares).

Recent Changes (Budget 2024)

The Union Budget 2024 introduced several important updates:

• Higher exemption limit for LTCG: The first ₹1.25 lakh of long‑term capital gains on listed shares and equity‑oriented units is now tax‑free. (Previously, the exemption was ₹1 lakh.)
• New LTCG tax rate: Gains above the exemption are taxed at 12.5 %, up from 10 %.
• Higher STCG rate: Short‑term capital gains on listed shares now face a 20 % tax rate (up from 15 %).
• Standardised holding periods: Listed securities qualify as long‑term after 12 months; other securities after 24 months.

These changes apply to sales on or after 23 July 2024. Gains realised before this date still follow the old rates.

Tax Rates for Listed and Unlisted Shares

The table below summarises how capital gains on shares are taxed:

Share Type & Sale Date

Holding Period for LTCG

LTCG Tax Rate

Exemption (per FY)

STCG Tax Rate

Listed shares (STT paid) sold after 23 Jul 2024

>12 months

12.5 % (no indexation)

₹1.25 lakh

20 %

Listed shares (STT paid) sold before 23 Jul 2024

>12 months

10 % (no indexation)

₹1 lakh

15 %

Unlisted shares / other shares sold after 23 Jul 2024

>24 months

12.5 % (no indexation)

No exemption

Taxed at individual slab rates

Unlisted shares / other shares sold before 23 Jul 2024

>24 months

20 % (with indexation benefit)

No exemption

Taxed at individual slab rates

Notes:

• STT (Securities Transaction Tax) must be paid on listed shares for the above rates to apply.
• Indexation adjusts the purchase price for inflation; it is available only on certain assets sold before July 2024.
• For unlisted shares, long‑term gains have no exemption threshold.

Grandfathering Clause (2018)

When the government reintroduced LTCG tax on shares in 2018, it allowed gains up to 31 January 2018 to remain tax‑free. This is known as the grandfathering clause. To calculate LTCG for shares purchased before 31 Jan 2018 and sold later, use this method:

1. Determine the actual purchase cost.
2. Find the Fair Market Value (FMV) of the share on 31 Jan 2018.
3. Take the lower of the FMV or sale price, then choose the higher of this amount or the actual purchase cost. This becomes the acquisition cost.
4. LTCG = Sale Price – Acquisition Cost.

Example: Calculating LTCG After Grandfathering

Suppose you bought shares at ₹15,000 on 1 May 2017. Their market value on 31 Jan 2018 was ₹18,000. You sold them on 1 Feb 2018 for ₹20,000.

• The lower of FMV (₹18,000) and sale price (₹20,000) = ₹18,000.
• The higher of actual cost (₹15,000) and ₹18,000 = ₹18,000 (this is the new acquisition cost).
• LTCG = Sale price – acquisition cost = ₹20,000 – ₹18,000 = ₹2,000.

Because the gain is less than the ₹1 lakh exemption (prior rules), no tax would be due in this case.

Short‑Term Capital Gains (STCG) Calculation

To calculate STCG on listed shares, subtract the cost of acquisition and transfer expenses (such as brokerage) from the sale price. For example:

• Buy 250 shares at ₹155 = ₹38,750 (plus small brokerage).
• Sell at ₹192 within five months for ₹48,000.
• Net sale (after brokerage) = ₹47,760.
• STCG = Net sale – cost of acquisition = ₹47,760 – ₹38,750 = ₹9,010.
• Tax at 20 % = ₹1,802 (plus surcharge and cess).

Short‑term gains on unlisted shares are added to your normal income and taxed according to your income slab.

Exemptions Under Section 54F

You can reduce or even eliminate LTCG tax by reinvesting the sale proceeds in a residential property under Section 54F. Key conditions:

• You must invest the full or partial sale proceeds in up to two residential properties (one property if the sale occurred before Budget 2019).
• Buy the property within one year before or two years after the sale (or build a new house within three years).
• Hold the new property for at least three years; otherwise, the exemption is withdrawn.

Partial investments get proportional exemptions. The formula for exemption is:

Exemption = (Capital Gain × Cost of New House) ÷ Net Consideration Value

Offsetting and Carrying Forward Losses

• Short‑Term Capital Losses can be set off against both STCG and LTCG. If not fully used, you can carry them forward for eight years.
• Long‑Term Capital Losses could not be carried forward before 2018 because LTCG on listed shares was exempt. Now, losses from sales after 1 April 2018 can be set off against long‑term gains and carried forward for eight years.
• To carry forward a loss, you must file your income tax return on time.

Business Income vs Capital Gains

Frequent traders may treat gains from selling shares as business income instead of capital gains. The classification depends on your trading activity and intent. Once you choose a method (business income or capital gains) for listed shares, you should stick to it in subsequent years unless circumstances change.

Tax Filing Tips

• Check your capital gains: Keep records of purchase dates, sale dates, prices, brokerage and STT paid.
• Consolidate your gains: Since 2019, you can report the net capital gain in your tax return rather than segregating each sale.
• File on time: Carrying forward losses or claiming exemptions requires timely filing.

Use the right ITR form: Use ITR‑2 for capital gains; traders declaring business income from share trading may need to use ITR‑3.

Conclusion

Understanding how long‑term capital gains tax on shares works is crucial for investors. Recent budget changes have raised both the tax rates and exemption limits, so knowing whether your shares are listed or unlisted and how long you’ve held them will determine the tax you owe. By using the simplified tables above, planning your holding periods and exploring exemptions like Section 54F, you can manage your tax liability effectively while staying compliant with the law.