Maximizing Returns: Long-Term Capital Gains on Shares - Calculation and Tax Implications

Dive into the complexities of long-term capital gains (LTCG) on shares to understand the calculations and tax implications that are crucial to shaping your investment approach.

Understanding Long-Term Capital Gains on Shares

Equity shares are a favored investment option in India because of their high-risk, high-reward potential. Investors take on the risks or rewards of these instruments, aiming to maximize returns.

What are Long-Term Capital Gains on Shares?

Long-term capital gains arise when investments that qualify are held for over 12 months. Listed equity shares are considered long-term if held for more than a year, while unlisted equity shares require a holding period of 24 to 36 months to qualify as long-term.

Investors are inclined towards long-term holdings for the tax benefits they offer over short-term capital assets.

Calculating Long-Term Capital Gains on Shares

To compute LTCG on shares, it's essential to know the following terms:

• Sale Value: The amount obtained from selling a capital asset, not including Securities Transaction Tax (STT) and brokerage for shares.
• Cost of Acquisition: Based on the fair market value as of 31st January 2018 for shares acquired before that date. For shares not traded on that day, the highest value from the previous trading day is used.
• Expenditure Related to Sale or Transfer: This encompasses registry and brokerage charges, excluding STT for shares.
• Indexation: Adjusts the acquisition cost according to inflation, using the Cost Inflation Index (CII) with a base year of 1st April 2001.
• Holding Period: This is the duration equity shares are held, from acquisition until the day before transfer.

Use this formula for calculating LTCG:

LTCG = Sale Value - (Indexed Cost of Acquisition + Indexed Cost of Asset Improvement + Expenses Incurred)

Illustrations for Calculation of LTCG on Equity Shares

• Scenario 1: Purchase Price: Rs. 500, FMV on 31st Jan 2019: Rs. 700, Sale Price on 1st April 2019: Rs. 850, LTCG: Rs. (850 - 700) = Rs. 150
• Scenario 2: Purchase Price: Rs. 500, FMV on 31st Jan 2019: Rs. 700, Sale Price on 1st April 2019: Rs. 600, LTCG: NIL (Sale value < FMV on 31st Jan 2019)
• Scenario 3: Purchase Price: Rs. 500, FMV on 31st Jan 2019: Rs. 300, Sale Price on 1st April 2019: Rs. 600, LTCG: Rs. (600 - 500) = Rs. 100
• Scenario 4: Purchase Price: Rs. 500, FMV on 31st Jan 2018: Rs. 700, Sale Price on 1st April 2019: Rs. 300, LTCG: Loss of Rs. (300 - 500) = Rs. 200

Tax Implications on LTCG from Shares

Initially covered under Section 10 (38), LTCG on equity shares now falls under Section 112A. The applicable tax rate is 10% on gains exceeding Rs. 1 Lakh, without indexation benefits and foreign currency gains for non-residents.

Despite the 10% tax rate on long-term gains exceeding Rs. 1 Lakh—far lower than the 15% on short-term gains—investors continue to find LTCG on shares a preferred option. While the tax aims to mitigate GST collection gaps, LTCG remains attractive. Be conscious of these aspects when planning your investments as tax policies evolve.