In India, equity shares are the most attractive investment option. When individuals invest in equity shares of a company, they accept the utmost profit or development associated with that business venture. When an investor decides to invest in stocks, bonds, stocks, or any other type of capital asset, including real estate, they do so with the expectation of making a profit. When the asset’s sale price exceeds its acquisition price, the sale results in a capital gain.
Capital gains are of two types: long-term capital gains on shares and short-term capital gains on shares. Here you will get a full explanation of LTCG, how to calculate it, and the tax implication in gains.
Any profit generated from the sale of a qualified investment is considered a long-term capital gain. The period of long time capital gain is more than a year from the time of sale. It is calculated by subtracting the purchase price of assets owned for more than a year from the market price.
This profit represents the net profit made by investors when they sell their assets. Listed equity shares are acceptable investment options when it is held for more than a year after producing LTCG on shares. Privately held equity shares must be owned for at least 24 to 36 months to classify as a long-term capital asset.
Most investors choose to invest in long-term assets to maximise their return on investment. Because they provide tax benefits over earnings from short-term capital assets and enable long-term capital gains on equity shares.
An individual who makes a profit from selling a capital asset that isn’t an inventory item is subject to capital gains tax. The sale of securities such as stocks, bonds, precious metals, real estate, and personal property typically results in capital gains. Not every country levies a capital gains tax. The majority of nations have distinct tax rates for both individuals and companies.
There are two sorts of capital gains taxes: long-term capital gains tax and short-term capital gains tax. Any asset kept for less than 36 months is considered a short-term asset for purposes of the short-term capital gains tax. Property cannot be sold or transferred within 24 months.
A long-term asset has been kept for longer than 36 months. Profits realised from the sale of these assets would be considered long-term capital gains and subject to tax as a result.
Assets like preference shares, stocks, UTI units, securities, equity-based mutual funds, and zero-coupon bonds are also categorised as long-term capital assets if they are kept for more than a year. According to the Income Tax Act of India, transactions involving any such capital asset are subject to taxation, as well as any additional surcharges that could be imposed on the sale.
Previously, the LTCG on equity shares was free from taxation under Section 10(38) of the Income Tax Act of 1961. To establish the tax ramifications of LTCG on the sale of equity shares, Section 10 (38) would be repealed and replaced by Section 112A, according to the Annual Budget of 2018. The long-term capital gains (LTCG) on shares are taxed at a special rate of 10% for gains beyond Rs. 1 lakh. In this instance, the sum does not take into account the benefits of indexation or the formula used to determine foreign currency capital gains for non-residents. Long-term capital gains are a considerably better investment choice than profits from short-term capital assets, which are taxed at a rate of 15%.
The basic exemption limit defines the amount of income below which an individual can avoid paying any tax. It also indicates that there will be no tax due if the taxpayer’s income is below the basic exemption limit. For the fiscal year 2021–2022, a person may only get the following basic exemptions:
Imagine that the taxpayer could change the standard exemption amount for long-term capital gains. How does that operate? The steps are described below.
Only a resident individual or resident HUF may request a change to the long-term capital gain exemption limit. As a result, a non-resident person or HUF could not change the exemption ceiling for long-term capital gains. The short-term capital gain adjustment can only be made by a resident person or HUF after the other income has been modified. According to the Finance Act of 2020’s amendments, income other than long-term capital gains would be subtracted from the exemption limit before the residual limit could be subtracted from long-term capital gain rate.
To avoid paying taxes on long-term capital gains, one might alternatively buy brand-new residential property. Sections 54 and 54F are related to these exclusions. If a person or Hindu Undivided Family sells a built-up residence and uses the capital gain to purchase or construct a new residential property, they are unquestionably free under Section 54 from paying long-term capital gains tax.
The “fresh” or new property must be acquired either a year before or two years after the “existing” or current property is sold. The seller must finish building the new property within three years after selling the previous one.
If you wish to save money on taxes, you can use Section 54EC to lower long-term capital gains tax by moving the full value to bonds issued by NHAI and RECL. You may see a list of these bonds on the Income Tax Department of India’s official website.
There is some special and exceptional capital gain rate on some assets.
Gains on art, antiques, jewellery, old cars, precious metals, stamp collections, coins, and other collectables are taxed at a rate of 12% to 28% in India, regardless of your income.
A qualifying small business stock’s (QSB) tax status is determined by the stock’s acquisition date, holder, and holding period. The stock must have been purchased from a QSB after August 10, 1993. The investor must be a non-corporate entity that owned the shares for at least five years to be eligible for this exemption.
A domestic C company that has never had its total gross assets surpass $50 million since August 10, 1993, is commonly referred to as a qualified small business stock. Cash held by the business and the adjusted bases of all other assets it owns are both included in aggregate gross assets. The QSB must also submit all mandatory reports.
Certain types of businesses fall within the QSB category. Companies in the technology, retail, wholesale, and manufacturing sectors are eligible to be QSBs, while those in the hotel, personal services, banking, agriculture, and mining sectors are not.
Under this exemption, the taxpayer may initially exclude 50% of any gain. It has been done from the sale of the shares of the small business that qualifies. Later it increased to 100% for QSB shares acquired after September 27, 2010, and to 75% for shares purchased between February 18, 2009, and September 27, 2010. 11. The maximum gain subject to this treatment shall not exceed $10 million or ten times the adjusted basis of the shares, whichever is greater.
If you sell your principal residence, you can take advantage of a special capital gains arrangement. In India, the first Rs. 250,000 of an individual’s capital gains on the sale of their primary residence are excluded from taxable income if the seller has owned and has to pay 5% tax if they have 2.5 lakh to 5 lakh. This loss is not considered if you sold your home for less than you bought it since capital losses from the sale of personal property, such as your home, are not deductible.
According to the degradation of their properties, real estate owners typically qualifies for deductions from their total taxable income. This decrease, which lowers the original purchase price of the property, is meant to symbolise how the property would gradually deteriorate as it ages.
Your taxable capital gain will increase as a result of the property’s sale.
The net investment income tax is another capital gains tax to which high-income persons may be liable. This law imposes an additional percentage tax on your investment income.
Before understanding how to calculate long-term capital gains on shares by long-term capital gains tax calculator or LTCG calculator, it is essential to be familiar with several key phrases. These include
The sale value is the amount that is due or received when a capital asset is sold. For shares, it is determined by the asset’s gross selling price minus Securities Transaction Tax (STT) and brokerage fees.
The following processes are used to determine the cost of acquisition for equity shares bought before 1 February 2018:
These costs cover things like brokerage fees, registration fees, and other costs related to selling an item. When calculating long-term capital gains on equity shares, the Securities Transaction Tax (STT) costs that are levied on sale transactions are not allowed to be subtracted.
To guarantee that the gains are calculated using the current worth of money, indexation helps to integrate the time value of money (with an adjustment for inflation) in the calculation of LTCG on shares. The base year for the indexation is 1.4.2001, and the index used is the Cost Inflation Index (CII).
The number of months that the assessee owned the equity shares is used to calculate the holding period. This period starts the day an asset is purchased and concludes the day before an equity share is transferred.
These are the primary sources of income; thus, both short-term and long-term capital gains are subject to taxation. On the other hand, the proper exemptions for persons are laid forth in the Income Tax Act.
The table below illustrates how long-term and short-term capital gains compare to one another. The primary distinctions between these two capital gains are in the holding period, profit, and risk.
Long-term capital gain | Short-term capital gain |
Short-term capital gain is the profit made from the sale of short-term investments. | The long-term capital gain comes from the sale of long-term capital assets. |
On long-term capital gains, excluding cess and surcharge, a 20% tax is applied. In exchange for fulfilling certain requirements that must be met for shares listed on a stock market or mutual fund, eligible taxpayers can reduce it to 10%. | 15% tax is applicable on short-term capital gains that fall under section 111, excluding surcharge and cess. The same tax rate that applies to regular income is applied to STCGs that are not covered by section 111A. |
Investing in long-term investments entails more risk because of the protracted waiting time and probable lack of liquidity. | Because the holding time is very brief, the dangers are smaller. |
Since the assets have been held for more than a year and are well-known in the market, the sellers anticipate making a bigger profit. | Due to the short holding duration and the assets’ lack of market traction, sellers may see reduced earnings. |
Investors keep a long-term outlook on the market, which results in bigger earnings when they sell their assets. | Traders may sell for shorter periods of time and see the market from a short-term perspective, making them more profitable. |
Long-term capital assets are those that investors hold onto for more than two years in the case of immovables and three years in the case of moveables. | Short-term assets are immovable assets held for less than two years and transportable assets for under three years. |
Capital gains may be taxed in India depending on the asset type and the duration of the investment holding period. On realised profits surpassing Rs. 1,000,000 in a fiscal year, there is a 10% long-term capital gains tax if you have owned shares for longer than a year.
By estimating the impact of inflation, indexation is a technique for decreasing your capital gains for taxable reasons. As the cost of goods and services rises due to inflation, your buying power steadily decreases.
As a result, you can collect indexation benefits on long-term investments in debt funds and some other assets from the government. You can minimise your tax obligation by adjusting the purchase price of your investments, thanks to this benefit.
According to the Income Tax Act, the following items are excluded from the definition of capital assets:
Losses that are considered "capital gains" cannot be used to offset other forms of income, such as wages or company earnings, only other losses that are also considered capital gains. If you own shares, you can write off short-term capital losses from both the STCG and the LTCG, but only the LTCG may be used to offset long-term capital losses.
If you are unable to offset all of your losses within the current fiscal year, you also have the option to carry them over to the next year. For a total of eight assessment years, STCG and LTCG can both be carried over and set off.
For domestic investors, capital gains from stock investments are not subject to TDS (Tax Deducted at Source). The full dividend will be subject to a 10% TDS deduction if a resident shareholder receives dividend income over Rs. 5,000 in a fiscal year.
However, a resident will be subject to a 20% TDS penalty if they fail to submit their PAN or do so with an incorrect PAN. No TDS will be taken from a resident shareholder's declaration if it is submitted using Form 15G or Form 15H.
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