What Is Long Term Capital Gain On Shares?
Long Term Capital Gain (LTCG) on Shares refers to the profit earned from selling equity shares that have been held for 1 year or more. LTCG on shares enjoys highly favorable tax treatment: gains up to ā¹1 lakh per financial year are completely tax-free, and gains above ā¹1 lakh are taxed at only 10% without indexation. This makes long-term share investments one of the most tax-efficient investment options, as most small to medium investors never pay tax on their equity gains due to the ā¹1 lakh annual exemption.
Key Features of LTCG on Shares
ā¹1 Lakh Exemption
Gains up to ā¹1 lakh per financial year are completely tax-free, making it highly beneficial for most investors.
10% Tax Rate
Gains above ā¹1 lakh are taxed at only 10%, which is lower than the 15% rate for short-term gains.
1 Year Holding
Shares must be held for 1 year or more to qualify for long-term treatment and tax benefits.
No Indexation
While indexation is not available, the ā¹1 lakh exemption and 10% rate make it tax-efficient.
How to Calculate LTCG on Shares
Calculation Steps
- 1. Calculate LTCG: LTCG = Sale Price - (Purchase Price + Brokerage + Other Expenses)
- 2. Check if LTCG > ā¹1 lakh: If yes, proceed to step 3. If no, no tax payable.
- 3. Apply Exemption: Taxable LTCG = LTCG - ā¹1,00,000
- 4. Calculate Tax: Tax = 10% Ć Taxable LTCG
Example:
Bought shares for ā¹2,00,000 and sold for ā¹4,00,000 after 1+ year.
LTCG = ā¹4,00,000 - ā¹2,00,000 = ā¹2,00,000
Taxable LTCG = ā¹2,00,000 - ā¹1,00,000 = ā¹1,00,000
Tax = 10% Ć ā¹1,00,000 = ā¹10,000
Effective tax rate: ā¹10,000 / ā¹2,00,000 = 5%
Benefits of Long-term Share Investment
Tax Efficiency
The ā¹1 lakh annual exemption and 10% tax rate make long-term share investments highly tax-efficient. Most investors never pay tax on their equity gains.
Lower Tax Rate
Long-term gains are taxed at 10% compared to 15% for short-term gains, providing better after-tax returns for long-term investors.
Compounding Benefits
Holding shares for the long term allows you to benefit from compounding returns, which can significantly increase wealth over time.
Reduced Trading Costs
Long-term holding reduces brokerage and transaction costs compared to frequent trading, improving overall returns.
Final Thoughts
Long Term Capital Gain on Shares offers highly favorable tax treatment, making it one of the most tax-efficient investment options. The ā¹1 lakh annual exemption means most investors never pay tax on their equity gains, while the 10% tax rate on gains above ā¹1 lakh is significantly lower than short-term gains taxed at 15%. By holding shares for at least 1 year, you not only qualify for these tax benefits but also benefit from compounding returns and reduced trading costs. Strategic planning, such as timing sales to maximize the ā¹1 lakh exemption and spreading sales across financial years, can further optimize your tax efficiency.