Decoding Long-Term Capital Gains on Shares - Calculations & Tax Impact

Decoding Long-Term Capital Gains on Shares - Calculations & Tax Impact

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

Delve into the intricate world of long-term capital gains (LTCG) on shares, exploring calculations and tax implications that can significantly impact your investment strategy.

Understanding Long-Term Capital Gains on Shares

Equity shares, known for their high-risk nature, are a popular investment avenue in India. Investors embrace the entrepreneurial risk or reward associated with these instruments, aiming to capitalize on potential returns.

What are Long-Term Capital Gains on Shares?

Long-term capital gains result from the sale of qualifying investments held for over 12 months. In the realm of shares, listed equity shares qualify for LTCG if held for more than a year. Unlisted equity shares, however, require a holding period of 24 to 36 months or more to be considered long-term capital assets.

Investors often prefer long-term assets for the added advantage of tax benefits over short-term capital assets.

Calculating Long-Term Capital Gains on Shares

To calculate LTCG on shares, familiarize yourself with key terms:the

Sale Value: The amount received on the sale of a capital asset, excluding Securities Transaction Tax (STT) and brokerage charges for shares.

Cost of Acquisition: Calculated based on the fair market value on 31st January 2018 for shares acquired before that date. For shares not traded on this date, the highest value on the preceding trading day is considered.

Expenditure Related to Sale or Transfer: Includes registry and brokerage charges, excluding STT charges for shares.

Indexation: Adjusts the cost of acquisition based on the inflation factor, using the Cost Inflation Index (CII) with the base year as 1st April 2001.

Holding Period: The duration for which equity shares were held, starting from the acquisition date and ending on the day preceding the transfer.

Use the following formula for LTCG calculation:

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

Fair Market Value (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

Previously exempt under Section 10 (38), LTCG on equity shares now falls under Section 112A. The tax rate is 10% on gains exceeding Rs. 1 Lakh, excluding benefits of indexation and foreign currency gains for non-residents.

Compared to the 15% tax on short-term gains, LTCG on shares remains a favorable investment option.

Long-term Capital Gains Tax: 10% on gains exceeding Rs. 1 Lakh from the sale of equity shares.

Short-term Capital Gains Tax: 15% when STT is applicable.

While this tax aims to address GST collection shortages, investors still find LTCG advantageous despite the introduction of Section 112A. Consider these factors when shaping your investment decisions in light of evolving tax structures.

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

Delve into the intricate world of long-term capital gains (LTCG) on shares, exploring calculations and tax implications that can significantly impact your investment strategy.

Understanding Long-Term Capital Gains on Shares

Equity shares, known for their high-risk nature, are a popular investment avenue in India. Investors embrace the entrepreneurial risk or reward associated with these instruments, aiming to capitalize on potential returns.

What are Long-Term Capital Gains on Shares?

Long-term capital gains result from the sale of qualifying investments held for over 12 months. In the realm of shares, listed equity shares qualify for LTCG if held for more than a year. Unlisted equity shares, however, require a holding period of 24 to 36 months or more to be considered long-term capital assets.

Investors often prefer long-term assets for the added advantage of tax benefits over short-term capital assets.

Calculating Long-Term Capital Gains on Shares

To calculate LTCG on shares, familiarize yourself with key terms:the

Sale Value: The amount received on the sale of a capital asset, excluding Securities Transaction Tax (STT) and brokerage charges for shares.

Cost of Acquisition: Calculated based on the fair market value on 31st January 2018 for shares acquired before that date. For shares not traded on this date, the highest value on the preceding trading day is considered.

Expenditure Related to Sale or Transfer: Includes registry and brokerage charges, excluding STT charges for shares.

Indexation: Adjusts the cost of acquisition based on the inflation factor, using the Cost Inflation Index (CII) with the base year as 1st April 2001.

Holding Period: The duration for which equity shares were held, starting from the acquisition date and ending on the day preceding the transfer.

Use the following formula for LTCG calculation:

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

Fair Market Value (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

Previously exempt under Section 10 (38), LTCG on equity shares now falls under Section 112A. The tax rate is 10% on gains exceeding Rs. 1 Lakh, excluding benefits of indexation and foreign currency gains for non-residents.

Compared to the 15% tax on short-term gains, LTCG on shares remains a favorable investment option.

Long-term Capital Gains Tax: 10% on gains exceeding Rs. 1 Lakh from the sale of equity shares.

Short-term Capital Gains Tax: 15% when STT is applicable.

While this tax aims to address GST collection shortages, investors still find LTCG advantageous despite the introduction of Section 112A. Consider these factors when shaping your investment decisions in light of evolving tax structures.

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