The profit or capital gains you make from the sale of equity shares is subject to taxation as per the new tax regime that came into effect after 2018. If you have held equity shares for a period under 12 months, then it will be considered a Short Term Capital Gain (STGC). On the other hand, if sold shares after holding them for over a year, it would be taken as Long Term Capital Gain (LTCG). Let us understand some of the important aspects of tax on LTCG on shares.
1. Tax on LTCG on Shares Was Not Applicable Prior to 2018
Tax on long-term capital gains was not applicable prior to 1 April 2018. The government had kept the gains made from the sale of equity shares untaxable to encourage the people to delve more into investments. However, under the new tax regime that came into effect after 2018, now a tax on LTCG on shares has become mandatory. However, when it comes to STGC, it continues to remain taxable as it was before 2018.
2. Tax on LTGC on Shares is 10%
The gains you made upon the selling of equity shares after a period of 1 year is subject to taxation at the rate of 10% provided, the gains cross the threshold of Rs, 1,00,000. So, if you made a capital gain of let’s say Rs 2 Lakh, the tax levied on it at the rate of 10% will be Rs 20,000. An important thing to note here is that the benefit of indexation is not applicable to equity shares. For that, you will have to resort to debt funds. For short-term capital gains, on the other hand, the taxation rate of 15% remains the same as it was prior to 2018.
3. Calculating LTCG
Calculating tax on LTCG is not that complicated. You will have to deduce the cost of the acquisition of shares from the sale consideration ( the receivable amount on selling the shares). Whatever the outcome, 10% of the amount will be considered the taxation amount. However, the cost of acquisition is not that straightforward to calculate. It varies on the market value, purchase price and selling cost. Click here to know more about it.
4. No Indexation Benefit on LTCG on Shares
One of the major problems with the taxation on LTCG is that you do not get any benefit of indexation on it as you would on debt funds which are locked for at least 36 months. What indexation does is reduce the value of the capital gains and as a result, you have to pay less tax on your gains. Let us take an example to understand this clearly:
Suppose you purchased equity shares for Rs 5000 and after 3 years you sold it for Rs 10,000. The long term capital gain you made on the product will be 5000 and this will be the amount on which the taxation will be levied. However, your actual cost of acquisition would be much higher due to inflation. Here comes indexation to help you out of this. The rate of inflation as directed by the Cost Inflation Index (CII) would be applicable to the purchase value of your shares. With higher purchase value, the profit will be less and as a result, you will have to pay fewer taxes.
5. Set-off Your Capital Losses with LTCG
You can easily set off your capital losses by adjusting them with the capital gains you made. In case you are not able to cover the losses in the same year, you can carry forward them in the next year and then adjust with the capital gains. The process of carrying forward can continue for as long as 8 years. But the important thing to note here is that you must file your losses in the ITR each year even if there is no income.
After 2018, LTCG has changed completely as it has been incorporated into the taxation policy as per the Union Budget. Therefore, it is important to figure out the essentials of tax on LTCG on shares to utilize your expenditure in the proper manner.