Understand the Process of Calculating the Long-Term Capital Gain on Shares

If you want to sell your shares after the completion of 12 or more months, then you must be aware of the tax, which is also known as the Long -Term Capital Gain Tax. If you are unaware of the nitty-gritty of the Long-Term Capital Gains Tax, then you must refer to this piece, as we have covered everything for you!

Introduction 

As the name connotes, it is the long-term capital gains which is accrued to investor after they have decided to sell their shares after the completion of 12 months or more. The opposite of the same is different where the investor chooses to sell their share before the completion of the 12 months and in such a scenario, the tax that will be levied is the Short Term Capital Gain Tax. 

The assets are classified as long-term if they are held for more than 24 months, though there are certain exceptions to this in cases where the period is shorter. Listed Securities and the Equity -Equity-oriented funds qualify as long-term assets if held for more than 12 months. On the other hand, the other assets are required to be held for more than 24 months in order to be considered as the Long-Term Assets. 

Introduction to Long-Term Capital Gains

As we have already covered in the last parts, capital gains arise from the transfer of long-term capital assets. Section 112 and Section 112 A divide the capital gains taxation into two parts;

Section 112A 

Section 112A is applied in the cases of the following assets:

• Equity Shares in a Listed Company
• Unit of Equity Oriented Fund
• Unit of Business Trust 

Section 112 

Section 112 is applicable to all the other cases of the long-term gains that are not covered under Section 112A. 

What is the applicable Percentage of the Long-Term Capital Gains? 

• On the Listed Equity Shares, Equity-Oriented Funds and the Units of Business Trust, the applicable long-term capital gains are 12.5% in excess of Rs. 1.25 Lakhs 

• Any other assets: 20% 

What is the Procedure for Calculating the Long-Term Capital Gains? 

• Determining the Full Value of the Consideration: The First step in the procedure is to determine the full value of the consideration, which is the total amount received from the transfer of the capital assets. This also includes the payments received or the fair market value in case of certain specified circumstances. 

• Determining the Net Value of the Consideration: The next step in the procedure is determining the net value of the consideration by deducting the expenses related to the transfer, for instance, brokerage or commission, etc. 

• Calculating the Cost of the Acquisition: The Purchase Price of the Asset is to be determined and in the case of the assets that get indexation benefits, the adjustment of the cost of the acquisition using the cost of the inflation index, which is notified by the government every year. Indexation Benefits have been removed for the transfers that are made after 23 July 2024. 

The formula that states the calculation of the indexed cost of the acquisition stands as:

Indexed Cost of the Acquisition = Cost of the Acquisition (CII of the year of transfer/CII of the year of the acquisition) 

The Indexation Benefits are not available in the case of the Long-Term Capital Gains, which are taxable under Section 112A. 

• Deducting the Exemptions under Section 54/54B/54D/54EC/54F: With this, certain types of long-term capital gains are eligible for the exemptions under some specific conditions, such as the reinvestment in certain assets, for example, residential property. 

• Long-Term Capital Gains Chargeable to Tax: The formula for the long-term capital gains chargeable to the tax formula is: 

Long-Term Capital Gain Chargeable to Tax = Net Sale Consideration – (Indexed Cost of the Acquisition + Indexed Cost of Improvement) – Exemptions under Section 54/54B/54D/54EC/54F. 

Understanding the Process of the Calculation of the Long Term Capital Gains in a Tabular Format 

Particulars	Amount (Debit)	Amount (Credit)
Full Value of the Consideration	xxx
Less: Expenses which have been incurred wholly and exclusively for such transfer	(xxx)
Net Sale Consideration		xxx
Less: Indexed Cost of Improvement (Indexation benefit removed for sale made from 23 July 2024)	xxx
Long-Term Capital Gains (LTCG)		xxx
Less: Exemptions under Section 54/54B/54D/54EC/54F		xxx
Long Term Capital Gains chargeable to tax

Long Term Capital Gain Tax on the Sale of the Shares 

The long-term capital gains accruals from the selling of the shares held for a period of more than 12 months. This long-term capital gain tax is determined after subtracting the purchase price from the sale price of the shares, which are held for over a year. This gain shows the net profit of the investor, which has been accrued to them from the sale of such shares. 

Listed Equity Shares qualify as long-term capital assets if held for at least 12 months. On the other hand, the gains from the sale of the unlisted equity shares are categorised as long-term only in the case where the holding period is a minimum of 24 months.  

Long-Term Capital Gain Tax on Mutual Funds 

The Long Term Capital Gain in terms of Mutual Funds refers to the profits made upon the redemption or the sale of the mutual fund units which are held for a duration of more than one year. These gains are subject to taxation but different rates are applicable to equity and non-equity mutual funds. 

Equity Funds 

Equity Funds are the type of mutual funds that are designed for investing in the equity shares of various companies and Equity Funds are divided into two types Tax Saving Equity Funds and Non-Tax Saving Equity Funds. 

• Tax Saving Equity Funds: ELSS is the type of tax saving equity funds that impose a lock-in period of 3 years. During the period of years, the investors cannot either transfer or sell their funds which leads to accrual of the long-term capital gain tax. 

Long Term Capital Gain Tax on ELSS Example 

 Equity Linked Savings Schemes also known as ELSS are the mutual funds that invest primarily in equity and thereby offer tax benefits under Section 80C of the Income Tax Act, 1961. The long-term capital gain tax levied upon these Equity Linked Savings Scheme on the profits earned from the sale of the ELSS units which are held for more than 1 year. 

Let’s assume that Mr. A invested Rs. 1,50,000 in April 2021. After the completion of the lock-in period of 3 years, Mr. A decided to redeem the investment on 1st April 2024. Assume the value of the investments has grown to Rs. 2,10,000

1. The Cost of the Acquiistion = Rs. 1,50,000
2. Redemption Value = Rs. 2,10,000
3. Long-Term Capital Gain = Rs. 60,000

Now, the Long-Term Capital Gain is less than Rs. 1.25 which is the exemption amount no tax will be levied. But if the gains were Rs. 1,50,000 the amount taxable would be Rs. 20,000 on 12.5%. 

• Non-Tax Saving Equity Funds: As the name of the type of the mutual fund implies these funds are just opposite of the ELSS and they are not required to have a lock-in period of 3 years. With regards to the short-term capital gain or long-term capital gain, it is totally dependent upon the period of holding. Usually, all the Equity Funds are subject to a 12.5% tax on gains that are above Rs. 1.25 lakh without indexation benefits after the completion of 12 months. 

Long-Term Capital Gain Tax Rates on Mutual Funds 

Type of the Asset	Older Rules	New Rules
Equity Mutual Funds	.12 months	10% (no indexation)
Debt Mutual Funds purchased before April 1, 2023	> 36 months	20% with Indexation
Debt Mutual Funds purchased after April 1 2023	Always Short -Term	Slab rates
Domestic Equity ETFs	>12 months	10% no indexation
International Equity ETFs (listed in India) before April 1, 2023	> 36 months	20% with Indexation
International Equity ETFs (listed in India) after April 1, 2023	Always Short-term	Slab rates
International Equity ETFs (outside of India)	> 36 months	20% with Indexation
Domestic Debt ETFs purchased before April 1, 2023	> 36 months	20% with Indexation
Domestic Debt ETFs purchased after April 1, 2023	Always Short-term	Slab rates
International Debt ETFs purchased before April 1, 2023	> 36 months	20% with Indexation
International Debt ETFs purchased after April 1, 2023	Always Short-term	Slab rates
Equity-oriented (Invests minimum of 90% in the equity-oriented fund and such equity-oriented fund also invests 90% of proceeds in listed equity shares in India)	> 12 months	10% with no indexationon
Other funds purchased after April 1, 2023 (less than 65% in debt)	Always Short-term	Slab rates
International fund of funds	> 36 months	Slab rates
Gold Mutual Fund before April 1, 2023	> 36 months	20% with Indexation
Gold Mutual Fund after April 1, 2023	Always Short-term	Slab rates
Gold ETFs before April 1, 2023	> 36 months	20% with Indexation
Gold ETFs after April 1, 2023	Always Short-term	Slab rates
Aggressive Hybrid Fund	>12 months	105 with no indexation
Balanced Hybrid Fund	> 36 months	20% with indexation
Conservative Hybrid Fund (Purchased before April 1, 2023)	> 36 months	20% with indexation
Conservative Hybrid Fund (Purchased after April 1, 2023)	Always Short-term	Slab rates

Debt Funds 

Debt Mutual Funds are the funds that are used to invest in the debt instruments from the market. The long-term capital gain tax on such kind of mutual funds is 12.5% after indexation which also keeps the adjustments of the acquisition cost for inflation by using the Cost Inflation Index (CII)

Debt Oriented Balance Funds 

In these types of funds reinvestment of more than 60% of the funds towards debt instruments is done and which are subject to a tax of 12.5% without indexation and it is very essential to stay updated with the prevailing tax regulation as the rates of the taxes are tend to change over time. 

Long-Term Capital Gain Tax on the Sale of the Properties 

As we have already mentioned in the above parts of the section, the long-term capital gains accrue from the sale of the property, which is held for more than 24 months. The rates will be 20% for the transfer made on or before 22 July 2024 after the indexation benefit. 

For any subsequent transfers, the tax rate will be at 12.5% without the indexation benefit. As pointed out above, there are certain tax benefits that will reduce the long-term capital gain chargeable to tax. 

In the case of a sale of the building and the land that has been made after 23 July 2024, the taxpayer has the option to pay tax at 20% with indexation benefit and at 12.5% without indexation benefit in the case where the acquisition of a building or the land has been made on or before 22 July 2024. 

Example of the Long-Term Capital Gain with indexation  

Let’s suppose Mr. Yash bought a house for Rs. 20,00,000 in the year 2005 and sold the house in June 2024 for Rs. 65,00,000. The Taxable capital gain by assuming the Cost of the Inflation Index (CII) for 2005-2006 is 117 and for 2024-2025 is 363.

The Indexation benefit has been considered in the below-mentioned example as the sale is made before 23 July 2024 and the tax on such transfer is applicable at the rate of 20%

Particulars	Amount	Amount
Full Value of the Consideration	65,00,000
Less: Expenses incurred exclusively and wholly for the transfer	NIL
Net Sale Consideration		65,00,000
Less: Indexed Cost of the Acquisition (20,00,000 * 363/117)	62,05,128
Less: Indexed Cost of the Improvement	NIL
Long-Term Capital Gains		2,94,872
Less: Exemptions under Section 54/54B/54D/54EC/54F		NIL
Long-Term Capital Gains chargeable to tax		2,94,872

Example of the Long-Term Capital Gain with indexation  

Let’s suppose Mr. Yash bought a house for Rs. 20,00,000 in the year 2005 and sold the house in August 2024 for Rs. 65,00,000. 

The Indexation benefit has not been considered in the below-mentioned example as the sale was made after 23 July 2024 and the tax on such transfer is applicable at the rate of 12.5%

Particulars	Amount	Amount
Full Value of the Consideration	65,00,000
Less: Expenses incurred exclusively and wholly for the transfer	NIL
Net Sale Consideration		65,00,000
Less: Cost of the Acquisition	20,00,000
Less: Cost of the Improvement	NIL
Long-Term Capital Gains		45,00,000
Less: Exemptions under Section 54/54B/54D/54EC/54F		NIL
Long-Term Capital Gains chargeable to tax		45,00,000

Filing of the Long-Term Capital Gain in the ITR-2 

All the details of the capital gains during the year are required to be filed in Schedule CG of Part A of ITR-2 FORM. The total amount of the capital gains is required to be filed in Part- B- Total Income, which will be picked automatically after filing the details in the other schedules. 

What are the Exemptions to Long-Term Capital Gain Tax?

We have curated a tabular format to help you navigate through the exemptions available for the Long Term Capital Gains Tax 

Applicable Sections of the Income Tax Act

The Assets Sold

To whom it is applicable

Section 54	The Profit on the sale of the property, which is used for residence  Type of the Asset Transferred  Type of the Transfer  Purchase of the New Asset  Time Limit for Investment in New Assets  Amount of the Exemption Capital Gains Account Scheme  Additional Conditions	Assesses = Individual/HUF  Residential House Property  Long-Term Capital Gains One Residential HouseFrom Annual Year 2021-2022, if the Capital Gains are less than or equal to 2 crores, two residential houses can be purchased  Purchase within 1 year before or 2 years after the construction of the transfer within 3 years from transfer The cost of the New Asset or the Long-Term Capital Gain, whichever is less (the maximum exemption is limited to Rs. 10 crore)  Deposit by the return filing due date   If a new asset is being sold within 3 years, the exempted amount under this Section will be reduced from the Cost of Acquisition for calculating the capital gains  If the amount in the Capital Gains Account Scheme is not utilised within the prescribed time limit, such unutilised amount is taxed as capital gains.
Section 54B	Capital Gain on the Transfer of Land Used for Agricultural Purposes  Type of the Transferred Asset  Type of the Transfer  Purchase of the New Asset  The time limit for investing in the new asset  The Amount that is Exempted  Capital Gains Account Scheme Additional Conditions	Assesse = Individual/HUF The Land used for agricultural purposes by the HUF/an individual/parents prior to 2 years of the transfer  Long-Term Capital Gain/Short-Term Capital Gain  Agricultural land  Within 2 years from the date of the transfer  The cost of the New Asset or the Long-Term Capital Gain, whichever is less Deposit by the return filing due date   If a new asset is being sold within 3 years, the exempted amount under this Section will be reduced from the Cost of Acquisition for calculating the capital gains  If the amount in the Capital Gains Account Scheme is not utilised within the prescribed time limit, such unutilised amount is taxed as capital gains.
Section 54D	Compulsory acquisition of the building and land used in an industrial undertaking  Type of the Asset  Type of Transfer  Purchase of New Asset  The time limit for the investment in the new asset  Amount of Exemption  Capital Gains Account Scheme Additional Comments	Assessee = Any Assessee Land or building that forms a part of an industrial undertaking used for the same purpose in the last 2 years prior to the date of the transfer   Long Term Capital Gain Building or Land for the shifting or the re-establishing of the industrial undertaking  The time limit is within 3 years from the date of the transfer  Cost of the New Asset or the Long-Term Capital Gain, whichever is Less  The deposit is required to be filed by the filing due date  If a new asset is being sold within 3 years, the exempted amount under this Section will be reduced from the Cost of Acquisition for calculating the capital gains  If the amount in the Capital Gains Account Scheme is not utilised within the prescribed time limit, such unutilised amount is taxed as capital gains.
Section 54EC	Investment in Certain Bonds Type of the Asset Transferred Type of the Transfer    Purchased New Asset  Time Limit for the investment in new asset  Amount of Exemption  Capital Gains Accounts Scheme  Additional Conditions	Assessee = Any Assessee Building or Land or both  Long Term Capital Gain  RECL Bonds, or the National Highway Authority of India Bonds, which are redeemable after the span of 5 years issued on or after 1.04.2028 The time limit for the investment in the new asset is within 6 months from the date of the transfer of such asset  The Cost of New Asset * Net Consideration/Capital Gain (Maximum upto the Capital Gain) Not available  If the new asset is sold within the period of 5 years, whereas 3 years before the Financial Year 2018-2019, the earlier exempted amount will be reduced from the Cost of Acquisition in order to calculate the capital gains  If the loan is obtained on the security of the new specified asset within the period of 5 years and the same will be treated as capital gains The Investment in the specified bonds should not exceed Rs. 50 Lakh during the succeeding and current financial year.
Section 54EE	Investment in the Units of the Specified Fund  Type of the Transferred Asset  Transfer Type Purchased New Asset  The time limit for the investment in the new asset  Exempted Amount  Capital Gain Accounting Scheme Available  Additional Conditions	Assessee = Any Assessee Long-Term Capital Asset  Long Term Capital Gain  The Units notified by the Central Government  The time limit for the investment in the new asset is within 6 months from the date of the transfer  Cost of New Asset * Capital Gain/Net Consideration (maximum upto the capital gain) No  If a new asset is being sold within 3 years, the exempted amount under this Section will be reduced from the Cost of Acquisition for calculating the capital gains. If the loan is obtained on the security of the new specified assets within the 3 years and the same will be treated as the Capital Gains  The Investment in specified units shall not exceed Rs. 50 Lakhs during the succeeding and the current financial year.
Section 54F	Investment in Residential House  Type of the Transferred Asset  Transfer Type  The Newly Purchased Asset  The Time Limit for Investing in the New Asset Exempted Amount   Capital Gain Acounting Scheme Applicability Additional Conditions	Assessee = Individual/HUF The type of the asset should be any other long-term capital asset  apart from a residential house  Long Term Capital Gain Residential House Property The time limit for investing in the new asset is in the case of :  Purchase within 1 year before or 2 years   Construction Transfer: Within 3 years from the date of the transfer Cost of the New Asset * Net Consideration/Capital Gain (the maximum upto is the capital gain) The Maximum Exemption is limited to only Rs. 10 crores.   Yes, the deposit by the filing of the return due date If a new asset is being sold within 3 years, the exempted amount under this Section will be reduced from the Cost of Acquisition for calculating the capital gains. If the amount specified in the CGAS is left unutilised within the prescribed time, then such an amount will be taxable as capital gains tax.  The HUF/Individal can never own more than 2 house properties. If another House is purchased, the earlier exemption amount charged will be chargeable as the capital gains
Section 54G	Shifting of the Industrial Undertaking from an Urban Area to a Rural Area	Assessee = Any Assessee
Section 54GA	Shifting of the Industrial Undertaking from an Urban Area to SEZ  Type of the Transferred Asset  Transfer Type  Purchase of the New Assets  New Asset Investment Time Limit Amount of Exemption  Capital Gain Accounting Scheme Availability  Additional Conditions	Capital Assets such as Plants, Machinery, buildings, land, or the rights in such land or buildings that are used in the industrial undertakings situated in such urban area Short-Term Capital Gain or Long-Term Capital Gain  The Shifting of an industrial undertaking to an area other than the urban, rural or SEZ involves the below-mentioned steps:   Purchase of the New Plant and Machinery  Construction of a Building or an Acquisition of the Land Shifting Old Assets to a New Area  Incurred Specified Expenses  1 year before and 3 years after the date of the transfer  Cost of the New Asset or the Long-Term Capital Gain, whichever is less  Yes, it must be deposited by filing the return by the due date If a new asset is being sold within 3 years, the exempted amount under this Section will be reduced from the Cost of Acquisition for calculating the capital gains. If the amount specified in the CGAS is left unutilised within the prescribed time, then such an amount will be taxable as capital gains tax.

Long-Term Capital Gains Tax Rates based upon the Assets 

Before 22 July 2024 

Type of the Asset	Holding Period	Tax Rates
Listed Equity Shares or Equity MF	More than 1 year	10% (On exceeding Rs. 100,000 gains)
Unlisted Equity Shares, land or Buildings	More than 2 years	20% rate with Indexation Benefits
Other Capital Assets	More than 3 years	20% rate with Indexation Benefits

23 July 2024 onwards 

Type of the Asset	Holding Period	Tax Rates
Listed Equity Shares or Equity MF	More than 1 year	12.5% (On exceeding Rs. 1,25,000 gains)
Unlisted Equity Shares, land or Buildings	More than 2 years	12.5% rate with Indexation Benefits
Other Capital Assets	More than 3 years	12.5% rate with Indexation Benefits

Conclusion

Long-Term Capital Gains Tax is levied if the capital assets are held by the taxpayers for a period over 24 months. Ho,wever in specific cases, it can be cut down to 12 months. There are certain exemptions which has been provided by the Act itself which helps the taxpayers to absolve their liabilities and plan accordingly for maximising their tax benefits. 

Frequently Asked Questions 

Q1. How do you calculate capital gains on shares sold?

Ans1. To calculate the capital gains or the loss on the shares sold, it is essential that the original cost of the asset and its associated expenses be deducted from the selling price. 

Q2. What is the formula for calculating long-term capital gains?

Ans2. It is essential that the cost of the assets be determined, which also includes the improvements and deducting any depreciation from them. 

Q3. What is the formula for calculating LTCG?

Ans3. The formula for calculating the LTCG chargeable to tax = Net Sale Consideration – (Indexed cost of acquisition + indexed cost of the improvement) – exemptions under Section 54/54B/54D/54EC/54F. 

Q4. Can you deduct brokerage fees from capital gains?

Ans4. No, any fees paid for buying, selling or holding an asset or collecting any dividends or interests are not eligible for the deduction of the income tax. 

Q5. How much amount of LTCG is tax free?

Ans5. Rs. 1.25 Lakhs of the amount is tax-free. 

Q6. How to avoid LTCG tax on shares?

Ans6. In order to avoid the tax on shares, it is very important that the investments must be made for the Long Term rather than the short term. 

Q7. What expenses can be deducted from capital gains on shares?

Ans7. The Stamp Duty or the exchange levy, etc are some of the charges that can be deducted from the capital gains on the shares. 

Q8. Can management fees be deducted from capital gains?

Ans8. No, capital gains tax deductions are not allowed for the project management and the introduction fees. 

Q9. Is LTCG tax automatically deducted?

Ans9. No, an investor is required to file the LTCG at the time of filing the income tax returns. 

Q10. What is the limit of dividend tax free?

Ans10. Rs. 5,000 is the limit for tax-free dividends.