What Are Capital Gains On Shares?
Capital Gains on Shares refer to the profit earned from selling equity shares listed on stock exchanges. These gains are classified as either short-term or long-term based on the holding period: shares held for less than 1 year generate short-term capital gains (taxed at 15%), while shares held for 1 year or more generate long-term capital gains (taxed at 10% above ₹1 lakh exemption). The ₹1 lakh annual exemption for long-term capital gains makes share investments highly tax-efficient, as most small to medium investors never pay tax on their equity gains.
Tax Rates on Share Capital Gains
| Holding Period | Type | Tax Rate | Exemption |
|---|---|---|---|
| Less than 1 year | Short-term (STCG) | 15% | No exemption |
| 1 year or more | Long-term (LTCG) | 10% (above ₹1 lakh) | ₹1 lakh per year tax-free |
Benefits of Long-term Share Investment
₹1 Lakh Exemption
Long-term capital gains up to ₹1 lakh per year are completely tax-free, making equity investments highly tax-efficient.
Lower Tax Rate
Long-term gains are taxed at 10% (above ₹1 lakh) compared to 15% for short-term gains, providing better tax efficiency.
Compounding Benefits
Holding shares for the long term allows you to benefit from compounding returns and reduces tax liability.
No Indexation
While equity shares don't get indexation benefit, the ₹1 lakh exemption and 10% tax rate make them tax-efficient.
How to Calculate Capital Gains on Shares
Short-term Capital Gains
STCG = Sale Price - (Purchase Price + Brokerage + Other Expenses)
Tax = 15% × STCG
Example: Bought shares for ₹1,00,000 (including brokerage) and sold for ₹1,20,000 within 1 year. STCG = ₹20,000. Tax = 15% × ₹20,000 = ₹3,000.
Long-term Capital Gains
LTCG = Sale Price - (Purchase Price + Brokerage + Other Expenses)
If LTCG > ₹1 lakh: Taxable LTCG = LTCG - ₹1,00,000
Tax = 10% × Taxable LTCG
Example: Bought shares for ₹1,00,000 and sold for ₹2,50,000 after 1+ year. LTCG = ₹1,50,000. Taxable = ₹1,50,000 - ₹1,00,000 = ₹50,000. Tax = 10% × ₹50,000 = ₹5,000.
Tax-Saving Strategies for Share Capital Gains
Hold for Long Term
Hold shares for at least 1 year to qualify for long-term treatment. This reduces tax rate from 15% to 10% and provides ₹1 lakh annual exemption.
Utilize ₹1 Lakh Exemption
Plan share sales to utilize the ₹1 lakh annual exemption. If you have multiple holdings, consider selling in different financial years to maximize exemption benefit.
Offset Losses
Use capital losses to offset capital gains. Short-term losses can offset both STCG and LTCG, while long-term losses can offset LTCG.
Timing of Sales
Consider timing share sales across financial years to maximize exemption benefit. Spread sales over multiple years if gains exceed ₹1 lakh annually.
Final Thoughts
Capital Gains on Shares are highly tax-efficient, especially for long-term investors. The ₹1 lakh annual exemption for long-term capital gains means most investors never pay tax on their equity gains. By holding shares for at least 1 year, you qualify for long-term treatment with lower tax rates and exemptions. Strategic planning, such as timing sales across financial years, utilizing the ₹1 lakh exemption, and offsetting losses against gains, can further optimize your tax liability. It's important to maintain proper records of purchase prices, sale prices, and expenses for accurate tax calculation and filing.