Investing in the stock market can yield great returns but when it is sold, the shares which is held for more than 12 months attracts taxation under the head Income from Capital Gains in India.
Key Takeaways
- LTCG up to ₹1 lakh is exempt per year.
- LTCG losses can only be set off against LTCG.
- Capital losses can be carried forward for 8 years.
- File your return on time to claim set-off/carry-forward.
- Report exempt and taxable LTCG in the ITR correctly.
What is Long-Term Capital Gain (LTCG)?
Long-Term Capital Gain (LTCG) refers to profits made by selling listed shares after holding them for more than 12 months. The gain is taxed at 12.5% if it exceeds ₹1 lakh in a financial year, as per Section 112A of the Income Tax Act.
Rules on LTCG Tax on Shares for AY 2025-26
| Particulars | Details |
| Type of Asset | Listed Equity Shares / Equity Mutual Funds |
| Holding Period for LTCG | More than 12 months |
| Exemption Limit | ₹1,00,000 per financial year |
| LTCG Tax Rate | 12.5% (over ₹1,00,000, no indexation allowed) |
| STT Requirement | STT must be paid on purchase & sale |
| Cess | 4% Health & Education Cess on tax amount |
| Surcharge | Applicable if income exceeds threshold |
New LTCG Tax Rate & Exemption for AY 2025–26
- LTCG Tax Rate: 12.5% (flat, no indexation) on gains exceeding ₹1.25 lakh
- Exemption Threshold: Up from ₹1 lakh to ₹1.25 lakh per financial year
- Applicability Date: Tax rate is applicable for transfers made on or after 23 July 2024; gains before that date remain taxed at the previous 10% rate.
What is Grandfathering in LTCG?
Grandfathering is a tax relief measure introduced by the Indian government when LTCG tax on equity shares and equity mutual funds was reintroduced from 1st April 2018.
Before this, LTCG on listed shares was completely tax-free. To protect gains made until that date, the government introduced “grandfathering” to exempt gains accrued up to 31st January 2018.
LTCG Calculation on Equity Shares
Assuming
Mr A bought 1,000 shares of ABC Ltd. at ₹100/share on 1st April 2023. And sold them at ₹250/share on 1st May 2024. Where These are listed shares, and STT is paid.
Computation:
- Purchase Cost = ₹100 x 1,000 = ₹1,00,000
- Sale Price = ₹250 x 1,000 = ₹2,50,000
- LTCG = ₹2,50,000 – ₹1,00,000 = ₹1,50,000
- Exempt LTCG = ₹1,00,000
- Taxable LTCG = ₹50,000
- LTCG Tax @10% = ₹5,000
- Cess @4% = ₹200
- Total Tax Payable = ₹5,200
Note: No benefit of indexation is allowed under Section 112A.
How to Calculate LTCG with Grandfathering?
| LTCG = Sale Price – Cost of Acquisition |
But Cost of Acquisition is determined as the higher of:
- Actual Purchase Price, and
- Lower of:
- Fair Market Value (FMV) as on 31-Jan-2018, and
- Sale Price
Grandfathering Example
Let’s say:
- You bought 100 shares of XYZ Ltd. at ₹100 each in Jan 2016
- FMV as of 31-Jan-2018 is ₹300
- You sell the shares in June 2024 at ₹400 each
Step-by-step LTCG Calculation:
- Actual Purchase Price = ₹100
- FMV on 31-Jan-2018 = ₹300
- Sale Price = ₹400
Cost of Acquisition = Higher of:
- ₹100 and
- Lower of (₹300, ₹400) = ₹300
So, Cost of Acquisition = ₹300
LTCG = ₹400 (Sale Price) – ₹300 (Cost) = ₹100/share × 100 = ₹10,000
Tax: If your total LTCG in the year exceeds ₹1 lakh, the amount above ₹1 lakh will be taxed at 12.5%.
Why No Indexation for Shares?
When the government re-introduced LTCG tax on shares in Budget 2018, it was set at a lower flat rate of 10% and excluded the benefit of indexation.
Section 112A (LTCG on Shares & Equity Mutual Funds)
The benefit of indexation shall not be available for capital gains arising from the transfer of equity shares or units of equity-oriented mutual funds.
Exemption on LTCG under Section 112A
- LTCG on listed equity shares and equity mutual funds is exempt up to ₹1,00,000 per financial year.
- Any LTCG above ₹1 lakh is taxed at 10% (without indexation).
- Applies only if STT (Securities Transaction Tax) is paid on both purchase and sale.
Set-Off of LTCG Losses
If you incur a long-term capital loss (LTCL) on sale of shares or equity funds, it can only be set off against:
- Long-Term Capital Gains (LTCG) – not against Short-Term Capital Gains (STCG)
- Cannot be set off against salary, business income, or any other heads of income.
Carry Forward of Capital Losses
If setoff is not available in that particular Assessment Year then Carry forward of losses can be availed.
- Carry forward the loss for 8 assessment years
- Use it to set off against future LTCG only
- Must file the Income Tax Return on or before the due date (usually 31st July for individuals) to claim carry-forward benefit.
Priority of Set-Off
The Income Tax Act follows this order of set-off:
| Type of Loss | Set-Off Against | Carry Forward Allowed |
| STCL | STCG & LTCG | Yes (8 years) |
| LTCL | LTCG only | Yes (8 years) |
Reporting LTCG, Exemptions & Losses in ITR
While filing ITR:
- Use Schedule 112A for LTCG reporting.
- Report FMV on 31-Jan-2018 for grandfathered gains.
- Use Schedule CG for capital gain/loss set-off and carry-forward.
FAQs
The LTCG rate is flat 12.5%
Yes. For AY 2025–26, LTCG on equity shares and equity mutual funds is exempt up to ₹1.25 lakh. Tax applies only on gains above this threshold.
Under the Income Tax Act, deductions under Sections 80C to 80U (which include investments like ELSS, LIC, PPF, medical insurance, etc.) are allowed only from “Gross Total Income”. However, LTCG on listed equity shares and equity mutual funds (taxable under Section 112A) is excluded from Gross Total Income for deduction purposes, if taxed at the special rate of 12.5%.
No, indexation is not allowed for shares taxed under Section 112A.
Yes. LTCG loss can be set off only against LTCG and carried forward for 8 years.
