In India, you might have to pay income tax on earnings received from selling shares. One of the types of applicable tax is known as long-term capital gains tax on shares. When you hold shares for more than a year before selling them for a profit, you have made a long-term capital gain. The government taxes incomes beyond Rs. 1 lakh in a fiscal year at a rate of 10% plus surcharges and cesses.
In this guide, we will explore what you need to know about long-term capital gain tax.
Income tax on long-term capital gain on shares
Capital assets are taxed differently depending on how long they have been owned before being sold or transferred: long-term and short-term. If held for more than a year, the majority of securities are considered long-term capital assets. In India, if long-term capital gains on shares exceed Rs. 1 lakh in a given fiscal year, they are subject to 10% taxation (plus surcharge and cess).
Long-term capital gains tax exemption
Understanding the long-term capital gains exemptions is crucial before entering into the specifics of taxation. By reinvesting the net consideration received from the sale of shares in real estate developments, individuals can claim exemptions under Section 54F. For the full exemption to be claimed, the capital gain must be reinvested in its entirety within a particular period. Exemptions may be withdrawn if the reinvestment requirements are not met.
Calculation of long-term capital gain for Grandfathering
Grandfathering is a concept that emerged with the implementation of income tax on long-term capital gains on shares in 2018. The goal of this clause was to provide the least amount of challenges to those who chose to invest based on the previous tax system. Under the Grandfathering rule, taxable capital gains must be calculated by factoring in the acquisition cost and fair market value (FMV) on particular dates. Learning about these calculations is essential to determining accurate tax assessments.
What is long-term capital loss
When the sale price of a long-term capital asset is less than its acquisition cost, there is a long-term capital loss. The tax liability is reduced if this loss is deducted from long-term capital gains in the same assessment year. Should the whole loss continue unabated, it can be carried over for a maximum of eight years to subsequent assessment years.
Tax filing process changes after finance bill 2018
The way capital gains are reported on taxes was modified by the Finance Bill of 2018. Gains from investments have to be kept apart from equity shares and mutual funds with a focus on equity. Subsequent relaxations by the Central Board of Direct Taxes (CBDT) simplified the tax reporting process, enabling taxpayers to file income tax using only the net consolidated amount of capital gains.
Provisions regarding disclosure of LTCG in ITR filing
The updated Income Tax Return (ITR) forms take into account the modifications to tax laws. Anybody who has sold or transferred shares and has long-term capital gains is required to disclose such earnings in the relevant sections of the ITR forms. There are specific parts in non-residents' ITR documents for reporting LTCG. Providing accurate information is essential for complying with tax laws.
Tax exemptions on long-term capital gains on property
Long-term capital gains on property, like shares, are eligible for exemption under multiple sections of the Income Tax Act.
Tax exemptions available under section 54
By reinvesting the profits in residential real estate, individuals can utilise Section 54 to claim exemptions on long-term capital gains from their properties. Some conditions concerning the length of the reinvestment period and the use of the whole consideration amount must be satisfied to claim a full exemption:
- Within a predetermined amount of time, the proceeds from the sale of the property must be invested again in residential real estate. This reinvestment should normally happen either a year before or two years after the sale date.
- The entire consideration received from the sale of the property must be reinvested in the new residential property to be eligible for the full exemption. The exemption is reduced in proportion to any reinvested portion of the consideration value.
Tax exemptions available under section 54EC
If one invests in government-notified bonds within six months after selling a long-term capital asset, they can qualify for capital gains exemptions under Section 54EC. There are, however, a few requirements to be eligible for this exemption:
- Up to Rs. 50 lakh can be invested by taxpayers in bonds that have been announced by the government. Exemptions under Section 54EC do not apply to investments beyond this amount.
- Bonds acquired with capital gains need to be held for a minimum of five years. Exemptions will be lost if these bonds are prematurely withdrawn before the lock-in period expires.
Tax exemptions available under section 54B
If capital gains from the sale of agricultural property are reinvested in new agricultural land within certain timeframes, they are exempt under Section 54B. Reinvestment criteria and eligibility restrictions are important considerations for taxpayers hoping to use these exemptions. The following conditions must be satisfied by taxpayers to claim this exemption:
- The land must have been used for agricultural purposes by the taxpayer or their parents for a minimum of two years prior to the date of sale.
- There is a deadline for investing the proceeds from the sale of the agricultural property back into other agricultural land. This reinvestment should happen within two years from the date of sale.
