Any income an individual accrues is liable to taxation in the country. There are slabs set by the Income Tax Department under the purview of the Government of India that determine what percentage of tax will be applicable to a certain person based on their income.
Just like salary, income from investments in assets like property, stocks, mutual funds, art collectibles, etc., are also taxable, the rate dependent on the holding period. This article takes a deep dive into long term capital gains tax on equity investments, its applicability and calculation.
Capital gains from shares
Any profit booked from selling of a capital asset such as shares, is known as capital gains. Capital gains on an investment generally occurs when the selling price of a share is higher than the purchase price. While the goal of investors when engaging in the stock market is to increase their wealth over time, one often forgets that there is a gaping hole called taxes that widens in line with your profits.
The profit made by selling shares also accounts as ‘income’, and hence, is liable to taxes, called capital gains tax.
For instance, if you bought shares worth Rs 1 lakh and sold them for Rs 1.5 lakh, the Rs 50,000 is considered your capital gain on which tax is applicable depending on your holding tenure.
Holding tenure as deciding factor for taxation of shares
The investment horizon, or the duration for which an investor holds the stock, determines what kind of capital gain it is. Capital gains can be either short-term capital capital gains, or long term capital gains.
Profits made from selling stock held to less than 12 months from purchase are termed short-term capital gains and short-term capital gains tax is applicable on them.
For a detailed understanding of STCG tax in India, refer to our article on Short Term Capital Gains Tax in India on the Angel Broking Knowledge Centre.
When the holding period is more than 12 months, the profit is termed long term capital gains, and long term capital gains tax (ltcg tax) is applicable on such gains.
Long-term Capital Gains Tax Rate in India
The long term capital gains tax (LTCG tax) in India was reintroduced in the 2018 budget. The ltcg tax rate in India currently is 10%, levied on profits of over Rs 1 lakh made from selling shares that were held for more than 12 months (LTCG) without any indexation benefits. Indexation benefit is where the price of the asset is adjusted for inflation and the same monetary benefit is passed to the investor.
For example, suppose an individual bought shares worth Rs 5 lakh on 12th September 2019. Until January 2021, the price of the shares jumped to Rs 7 lakh. The investor in this scenario made gains of Rs 2 lakh. If they sell it now (after the 12-month threshold), they will have to pay a 10% tax on the Rs 2 lakh profit made.
Note here that only your profits are taxed and not the full amount you redeem from the sale of shares.
Calculation of long term capital gains tax
Indexation benefits can be claimed by the investor for gains made before January 31, 2018. In this case, long-term capital gains are calculated by subtracting the indexed purchase price of the shares and the brokerage paid on it by the investor from the selling price of the share.
However, as per the latest income tax rules, indexation benefits will not apply on gains made after January 31, 2018. Here, long-term capital gains are calculated by subtracting the actual purchase price of the shares and the brokerage paid on it by the investor from the selling price of the share.
Case 1: Gains made before January 31, 2018
If an investor bought shares of a company worth Rs 5,00,000 in September 2014 and sold it in October 2016 at the price of Rs 6,00,000, the investor makes a profit of Rs 1,00,000 on it.
Assuming a brokerage of 0.5%, the investor will have to pay Rs 3,000 as brokerage to the trading firm.
The Govt. of India releases the Cost Inflation Index (CII) for each year using which, an indexed cost can be arrived at. The CII for 2014-15 is 1024 and the CII for 2015-16 is 1081. Hence:
Indexed price purchase: Rs 5,00,000 x 1081/1024= Rs 5,27,832
Therefore, the investor’s long-term capital gains will be:
Full sales value – Rs 6,00,000
Brokerage at 0.5% – Rs 3,000
Purchase price: 5,00,000 Rs
Indexed purchase price: Rs 5,27, 832
Hence, long-term capital gains turn out to be: 6,00,000- (5,27,832 + 3000) = Rs 69,168 with indexation benefits.
Long-term capital gains made over Rs 1 lakh are liable to 10% taxation. Long-term gains under Rs 1 lakh are exempt to taxation.
Case 2: Gains made after January 31, 2018
If an investor bought shares in February 2019 worth Rs 5,50,000 and sold it in January 2021 at Rs 7,00,000, the investor made gains of Rs 1,50,000 on the sale. With indexation benefits, the investor’s gains will be taxed at 10%. Profit over Rs 1 lakh will be taxed at 10%, any gains under Rs 1 lakh will be tax exempt
Hence, while calculating the long-term capital gains tax on profit of Rs 1,50,000, gains of Rs 1 lakh will be tax exempt. The remaining portion of Rs 50,000 will be taxed at 10% bringing the tax liability of the investor to Rs 5,000.
There is a saying that goes, ‘two things are certain in life – death and taxes.’ Any income earned is liable to tax payments in the country but the government also makes provisions to save some amount of tax. Long-term capital gains from shares are taxed at a flat 10% without indexation benefit for profits above Rs 1 lakh. This is nonetheless a better option than paying short-term capital gains tax that is 20% with indexation benefit in India. This also feeds into the thought that holding investments for the longer term bodes well for investors.