Tax On LTCG on Shares: Overview & Tax Rates on Long-Term Capital Gains

When you make a profit by selling your shares for a price higher than their cost of acquisition, it is considered a capital gain. As capital gains are a form of income, they are taxable. The Income Tax, 1961 is applicable to the gains made by selling the share. However, taxes on capital gains are divided into two parts: short-term capital gains and long-term capital gains. The difference lies in the period of holding and the rate of taxation. Before moving to a brief understanding of tax on LTCG on shares, it is important to learn about short-term capital gains. So without further ado, let us proceed:

What is Short-term Capital Gain?

Short-term capital gain refers to the gain you made by selling your shares after holding them for less than 12 months. So, any share that is sold at a profit within a year is known as a short-term capital gain. Taxation on short-term capital gain is considered in the category of normal income and is charged according to the income slab of the person. In case, the securities transaction tax is applicable on short-term capital gain then the taxation would be charged at the rate of 15%. 

What is Tax on Long-term Capital Gain on Shares?

Long-term capital gain refers to the profit that you make by selling the shares after holding them for over 12 months. If the shares are unlisted, then the holding period for long-term capital gains would be 36 months. Tax on LTCG on shares is applicable at the rate of 10%. There are also exemptions on the same. If the gain on the sale of shares is less than Rs 1,00,000 then you will not have to pay any taxes for the profit made. On the other hand, if the gains are more than the stipulated exemption amount, then the exceeding amount will be charged at the rate of 10%. 

Let us take an example to understand tax on LTCG on shares: 

Let us assume that Rahul sold his shares worth Rs 1,00,000 after 1 year at the price of Rs 2,50,000. Clearly, the profit that he made was Rs 1,50,000. Now, according to the Income Tax Act, Rahul can get an exemption of up to Rs 1,00,000. So, here, the taxable amount would be Rs 1,50,000 – 1,00,000 = Rs 50,000. Hence, taxation will be levied on Rs 50,000 at the rate of 10%. The taxation amount that Rahul will pay will be Rs 5,000. 

How to Calculate Long-term Capital Gain? 

To understand tax on LTCG on shares better, it is important to understand how to calculate long-term capital gains in the first place. The method is pretty simple and anyone can learn it by giving the formula a quick glance. 

To calculate the long-term capital gain, two points are most important. They are as follows: 

  • Cost of Acquisition: The cost at which the shares were purchased initially is considered as the cost of acquisition. 
  • Sale Consideration: The price at which you sell the shares is considered the sale consideration of that share. To calculate the actual sale consideration, you will have to remove the Securities Transaction Tax and brokerage fee from the amount received upon the sale. 

Once you have understood these points about long-term capital gain, tax on LTCG on shares will not be hard to calculate. The important thing to keep in mind about the selling of shares is to take a look at the holding period and the nature of the shares. It is always better to sell the shares after holding them at least for a year. 

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