Long-Term Capital Gains Tax on Shares: Rules, Examples and Tips

Long-term capital gains (LTCG) tax is what you pay on the profit earned from selling shares held for over 12 months. LTCG tax on listed equity shares is 12.5% on annual gains exceeding ₹1.25 lakh, with no indexation benefits.

Before executing any sale, you must understand your asset classification, key exemptions, and legal rules to calculate your actual liability.

This article explores all the details that you need to know about LTCG tax on shares to make informed investment decisions.

Key Takeaways

• Long-Term Capital Gains (LTCG) tax applies when you sell listed equity shares held for more than 12 months at a profit.
• The current LTCG tax rate on listed shares is 12.5% (without indexation).
• Gains up to ₹1.25 lakh in a financial year are exempt from LTCG tax.
• STCG on listed shares, held for 12 months or less, are taxed at 20%.
• STT must be paid on the sale of listed shares for the concessional LTCG rate.
• Grandfathering Clause protects LTCG accrued up to January 31, 2018, on eligible listed equity shares.

What is Long-Term Capital Gains Tax on Shares?

Long-Term Capital Gains tax is levied on profits earned from selling capital assets held beyond a threshold period.

For listed equity shares, any holding period exceeding 12 months results in the profit being treated as a long-term capital gain, as governed by Section 112A. Profits from shares sold within 12 months are classified as Short-Term Capital Gains (STCG) and taxed at 20%.

Basis	Long-Term Capital Gains (LTCG)	Short-Term Capital Gains (STCG)
Holding Period	More than 12 months (listed shares)	12 months or less (listed shares)
Applicable Section	Section 112A	Section 111A
Tax Rate	12.5% (without indexation)	20%
Exemption	₹1.25 lakh per financial year	No basic exemption in most cases

How is LTCG Tax Calculated on Shares?

Following tax reforms, transactions executed on or after July 23, 2024, attract a revised LTCG tax rate of 12.5% alongside an enhanced annual exemption threshold of ₹1.25 lakh (up from the older 10% rate and ₹1 lakh exemption limit).

• Sold before July 23, 2024 → old rule: 10% LTCG tax, ₹1 lakh exemption
• Sold on or after July 23, 2024 → new rule: 12.5% LTCG tax, ₹1.25 lakh exemption

The fundamental calculation formula is:

Long-Term Capital Gain = Full Value of Consideration − Cost of Acquisition − Expenses on Transfer

Once your net taxable gain is established after applying the threshold, the tax payable is computed as:

LTCG Tax Payable = 12.5% × (Long-Term Capital Gain − ₹1,25,000)

LTCG tax calculation involves three steps:

1. Determining the full value of consideration (the sale price you received).
2. Understanding the cost of acquisition and any related expenses.
3. Applying the LTCG exemption of ₹1.25 lakh and then taxing the remaining gain at 12.5%.

How to Calculate Long-Term Capital Gains Tax on Shares (Step-by-Step)

1. Step 1: Identify the holding period

   Suppose you bought 500 shares of a listed company in 2023 and sold them in 2026. Since the holding period exceeds 12 months, this qualifies as a long-term capital asset.

2. Step 2: Determine cost of acquisition

   If you bought the shares at ₹400 each, so your total cost of acquisition is ₹2 lakh.

3. Step 3: Determine sale value

   Assume you sold the shares at ₹700 each, so your total sale value is ₹3.5 lakh.

4. Step 4: Calculate the gain

   Long-Term Capital Gain = ₹3,50,000 − ₹2,00,000 = ₹1,50,000.

5. Step 5: Apply the exemption

   Taxable Gain = ₹1,50,000 − ₹1,25,000 = ₹25,000.

6. Step 6: Apply the tax rate (Health and Education Cess is 4%)

   LTCG Tax = 12.5% × ₹25,000 = ₹3,125.

Calculation Stage	Description / Formula	Amount (in ₹)
Total Profit (Gross Realisation)	Net profit realised after 18 months	3,00,000
Annual Exemption Threshold	Statutory tax-free limit for equity LTCG	1,25,000
Taxable LTCG	Total Profit minus Exemption Threshold	1,75,000
Base Tax Liability	Taxable LTCG multiplied by 12.5%	21,875
Total Tax Payable	Base Tax multiplied by 1.04 (inclusive of 4% Health and Education Cess)	22,750

Understanding the Grandfathering Clause

The grandfathering clause in LTCG is a rule that protects the profits that you made on investments made up to January 31, 2018. This clause lets you use a special cost price to figure out your tax.

When you sell a share bought before January 31, 2018, the cost of acquisition is the higher of the two values:

• The actual purchase price, or
• The lower of (fair market value as on January 31, 2018) and (actual sale price)

Example:

You bought shares for ₹1 lakh in 2015.

Their value on January 31, 2018 = ₹2.5 lakh.

You sold them in 2025 for ₹3 lakh.

This means that the appreciation of the asset before January 31, 2018, stays protected. So, your effective gains are only ₹50,000 that are subject to taxes.

Factors Affecting LTCG Tax Liability

• Annual threshold scope: The ₹1.25 lakh exemption applies globally across all your equity transactions within a single financial year. It is not calculated per stock or per Demat account.
• Loss set-off and carry forward: Long-term capital losses can only be offset against long-term capital gains. Unabsorbed long-term losses can be carried forward for up to eight assessment years, provided your income tax return is filed within the due date under Section 139(1).
• Section 54F exemptions: You can claim a full or proportionate exemption on your share LTCG by reinvesting the net sale consideration (not just the capital gains) into one residential house property in India within the specified statutory timeline.
• Automated compliance via AIS: Modern tax reporting relies on data feeds sent directly by depositories and brokers to the Income Tax Department. Ensuring your contract notes, Demat transfers, and bank statements match your Annual Information Statement (AIS) prevents scrutiny notices.
• Demat account operations & nomination compliance: Joint Demat accounts must reflect accurate tax obligations based on the primary fund provider. Adhere strictly to SEBI guidelines requiring single-holder demat accounts to register a valid nominee or submit an explicit opt-out declaration.
• Share Buybacks: Following structural tax amendments, buyback proceeds are taxed as capital gains directly in the hands of shareholders rather than as dividend income under company distribution tax rules.

Conclusion

Understanding long-term capital gains tax on shares helps investors make informed financial decisions while staying tax compliant. By using the ₹1.25 lakh annual exemption, setting off eligible capital losses, and adopting other applicable strategies, investors can legally reduce their tax liability. Staying informed about these rules can help you plan your investments more efficiently and avoid errors when filing your tax returns.