Long Term Capital Gain on Shares - Calculation and Tax Implications on LTCG from Shares

Introduction

Investing in shares is one of the most popular ways to grow wealth over the long term. When you buy shares and hold them for more than a year, any profit you earn from selling them is called Long-Term Capital Gain, or LTCG. Just like your salary is taxed, profits from selling shares can also be taxed. However, many investors are not fully aware of how this tax works or how to calculate it. The Indian government has made some changes in the recent budget regarding LTCG tax. These updates are important for anyone who buys and sells shares or equity mutual funds. In this blog, we will explain everything about LTCG on shares in simple language. You will learn how to calculate LTCG, understand the current tax rates, and explore the available exemptions. Whether you're a beginner or an experienced investor, this guide will help you make smarter and more tax-efficient decisions.

What Is Long-Term Capital Gain (LTCG)?

Long-Term Capital Gain, or LTCG, is the profit you earn when you sell an asset like shares after holding it for a long period. For listed shares and equity mutual funds, if you hold them for more than 12 months before selling, the gain is treated as LTCG. For unlisted shares, the required holding period is 24 months. These gains are not considered regular income like salary or rent—they are taxed separately under capital gains rules. Earlier, LTCG was fully tax-free, but now it is taxable if the gain crosses a certain limit in a financial year. The tax rate on LTCG is lower than that on short-term gains, which makes long-term investing more rewarding. Understanding LTCG is important if you regularly invest in the stock market. It helps you plan your taxes better and avoid last-minute confusion while filing your returns.

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What Counts as LTCG on Shares?

LTCG on shares means the profit you earn when you sell shares after holding them for a long time. For shares listed on stock exchanges, the holding period must be more than 12 months to qualify as long-term. If you sell them before completing 12 months, the profit is treated as short-term capital gain. For shares not listed on the stock exchange (unlisted shares), the required holding period is more than 24 months. Only after this period will your profit be treated as LTCG. This rule also applies to equity mutual funds—holding them for more than one year makes the gain long-term. LTCG is calculated only on the profit made, not on the entire selling price. Understanding what qualifies as LTCG helps you plan your investments and taxes more effectively.

Read more:Understanding LTCG and STCG

Current LTCG Tax Rate for Shares – Budget 2024 & AY 2025‑26

Starting July 23, 2024, the Indian government introduced a uniform LTCG tax rate of 12.5% on long-term capital gains from listed equity shares and equity mutual funds that exceed the exemption thresholdfor the financial year 2024–25 (Assessment Year 2025‑26):

• The first ₹1.25 lakh of LTCG in a financial year is fully exempt.
• Any gains above ₹1.25 lakh are taxed at 12.5%, without indexation benefits and plus applicable cess and surcharge

Before July 23, 2024, LTCG from listed equity shares and equity funds was taxed at 10% for gains above ₹1 lakh with no indexation. After the cutoff, the revised rate and higher exemption limit apply. Investors must check the sale date to determine which rules apply.This new tax regime aims to simplify taxation across all asset classes and make long-term investing more predictable and fairer.

LTCG Rules for Assessment Year 2025–26

For the Assessment Year 2025–26 (Financial Year 2024–25), the taxation rules for Long-Term Capital Gains (LTCG) from listed equity shares and equity mutual funds have changed. If these assets are sold on or after July 23, 2024, the LTCG will be taxed at a flat rate of 12.5% on gains exceeding ₹1.25 lakh, without any indexation benefit. Gains up to ₹1.25 lakh in a financial year will remain tax-free. However, if the sale took place before July 23, 2024, the old rules would apply—10% tax on gains exceeding ₹1 lakh, again without indexation. Since the rule changed mid-year, taxpayers must split their capital gains into two periods—before and after July 23—to apply the correct tax rate. Indexation benefits are not allowed under Section 112A, regardless of how long the asset was held. Also, the concessional LTCG tax rates apply only if the Securities Transaction Tax (STT) was paid at both the time of purchase and sale. New ITR forms require taxpayers to separately report gains made before and after the new rule took effect. ITR‑1 now allows reporting of LTCG up to ₹1.25 lakh if there are no carried-forward losses. If your total income is below ₹7 lakh under either the old or new tax regime, you may be eligible for a rebate under Section 87A, which can reduce or eliminate your tax liability on LTCG—but this rebate must be manually claimed. These updates are important for accurately planning and reporting your capital gains.

Also read: Smart ways to reduce or avoid LTCG tax on mutual funds

Step-by-Step: Calculating LTCG on Shares

1. Identify sale date (before or after July 23, 2024).
2. Compute total sale proceeds minus purchase cost (adjusted for grandfathering if needed).
3. Subtract the exemption threshold (₹1.25 lakh per year).
4. Apply a 12.5% tax rate on the remaining gain.
5. Add cess and surcharge if applicable.
   Make sure STT was paid at sale and purchase to qualify under Section 112A.

Understanding Grandfathering in LTCG

Grandfathering in LTCG means protecting gains made before a certain date from new tax rules. When the LTCG tax on shares was introduced in 2018, the government allowed investors to keep their past gains tax-free up to January 31, 2018. This means if you bought shares before this date and sold them later, your gains up to January 31, 2018, are not taxed. To calculate the taxable LTCG, the purchase price is considered as the higher of the actual cost or the share’s value on January 31, 2018. This helps reduce the tax burden for long-term investors who had already made profits before the new rule came into effect. Grandfathering ensures fairness and prevents old gains from being taxed under new rules. It is an important concept for those who invested before 2018 and are selling now.

Read more: New vs old tax regime

How to Calculate LTCG with Grandfathering

• To calculate LTCG with grandfathering, first check if your shares were bought before January 31, 2018.
• Then, find the actual purchase price and the highest price on January 31, 2018.
• Take the higher of these two as your cost of acquisition.
• Next, subtract this cost from your selling price.
• If the result exceeds ₹1 lakh in a financial year, LTCG tax will apply.
• You’ll pay 10% tax on the gains above ₹1 lakh, without indexation.
• This method protects your earlier gains from being taxed under the new rules.
• It’s especially useful for investors who held shares long before 2018 and are selling now.

LTCG Tax Exemptions & Benefits

• Exemption up to ₹1.25 lakh per financial year on gains from listed equity shares and equity mutual funds.
• Use of the grandfathering clause ensures earlier gains are not taxed.
• Unused capital losses (short or long term) can be carried forward for up to 8 years to set off against future gains.

LTCG Example (Without Indexation)

Scenario: Sell listed shares at ₹5 lakh after holding 18 months, bought at ₹2 lakh.

• LTCG = ₹3 lakh
• Less ₹1.25 lakh exemption = ₹1.75 lakh
• Tax = ₹1.75 lakh × 12.5% = ₹21,875 (before cess).

LTCG Example (With Grandfathering)

Scenario: Shares bought in 2012 at ₹50, FMV ₹150 on Jan 31, 2018, sold now at ₹300.

• Use ₹150 as cost basis (FMV).
• Gain = ₹150 per share. Exemption and tax apply only on excess over ₹1.25 lakh.
  This lowers your payable LTCG tax significantly.

Capital Gains Account Scheme (CGAS)

If you're unable to reinvest long-term capital gain before the ITR deadline, you can deposit the amount in a Capital Gains Account Scheme (CGAS). However, withdrawals before specified timelines may lead to 20% tax (with indexation) instead of 12.5%, triggering notices from tax authorities.

LTCG Tax on Other Assets

Long-Term Capital Gains (LTCG) tax isn’t just for shares — it also applies to assets like land, buildings, gold, and debt mutual funds. If you sell these assets after holding them for more than 2 years, the profit is treated as LTCG. For debt mutual funds, the holding period for LTCG was more than 3 years before April 1, 2023.
LTCG on these assets is usually taxed at 20% with indexation benefits. Indexation adjusts your purchase cost for inflation, helping you reduce tax liability.
For listed bonds or debentures, LTCG is taxed at 10% without indexation. Gains from real estate or gold are taxed at 20% with indexation if held long term. Knowing these rules helps you plan better when selling non-equity assets.

Conclusion

Understanding Long-Term Capital Gains (LTCG) is important for smart financial planning, as it helps you know how your profits from selling shares, property, or gold will be taxed. The grandfathering rule ensures that gains made before 2018 are protected from the new tax system. For non-equity assets like property or gold, indexation benefits can reduce your tax burden by adjusting the purchase cost for inflation. Knowing the required holding period helps you avoid paying higher short-term capital gains tax. Since LTCG rules differ across asset types, planning your investments and sales with these in mind can be beneficial. This knowledge not only supports better decision-making but also helps in accurate and timely tax filing. In short, being aware of LTCG rules helps you save more and stay financially smart.