Long Term Capital Gains (LTCG) on the Sale of Stocks, Shares etc.

Tax implications on sale of shares and stocks depend on many factors such as holding period, listing status, etc. If shares and stocks are listed and held for more than 12 months, their sale attracts long term capital gains under section 112A. Long term capital gains on sale of listed equity shares and equity oriented funds are taxed at 12.5%, over and above exemption of Rs. 1.25 lakhs (10% if the sale is made before 23rd July, 2024). 

For other stocks and shares, the capital gains are taxed at 12.5% without any indexation benefits. This article explains in detail about the meaning of section 112A, period of holding, tax rates and exemptions, grandfathering provisions, losses and their tax implications.   

What is Section 112A?

Section 112A is applicable for long-term capital gains on the sale of listed equity shares, equity-oriented mutual funds, and business trust units. It was introduced in the year 2018. It is applicable for securities held for a period more than 12 months. The schedule for Section 112A of the Income Tax Act, which requires the taxpayer to fill out the scrip-wise data of securities sold during the year, is included in the income tax form.

Applicability of Section 112A

The following conditions apply for availing the benefit of the concessional rate under section 112A of Income-tax Act,1961:

1. The securities transaction tax (STT) has been paid on the acquisition and transfer of an equity share of a corporation.
2. The STT was paid when the asset was sold in the case of units of an equity-oriented fund or units of a business trust.
3. The securities should be long-term capital assets. (Long-term capital assets are those held for more than 12 months).
4. No deduction under Chapter VI A is available for such long-term capital gain.
5. A rebate under section 87A cannot be claimed in respect of long-term capital gain tax due under section 112A.

Section 112A Tax Rate

The below table explains the tax rate on long term capital gains on sale of \

• Listed equity share
• Equity oriented fund
• Units of business trust

Grandfathering Provisions Under Section 112A of Income-tax Act

In the Budget 2018, there has been a proposal to Grandfather investments made on or before 31 January 2018. 

What is the concept of Grandfathering?

When a new clause or policy is added to a law, certain persons may be relieved from complying with the new clause. This is called “grandfathering”. “Grandfathered” persons enjoy the right to avail the concession because they have made their decisions under the old law. 

The concept of grandfathering in the case of LTCG on the sale of equity investments works as follows:

A method of determining the Cost of Acquisition (COA) of such investments has been specifically laid down as per the said method, COA of such investments shall be deemed to be the higher of:

• The actual COA of such investments; and
• The lower of-
  • Fair Market Value (‘FMV’) of such investments; and
  • the Full Value of Consideration received or accruing as a result of the transfer of the capital asset i.e. the Sale Price

Further, the FMV would be the highest price quoted on the recognised stock exchange on 31 January 2018. 

In case there is no trading of the said asset in such stock exchange, the highest price on a day immediately preceding 31 January 2018 shall be considered to be the FMV. In effect, the taxpayer can claim the highest price quoted on the recognised stock exchange on 31 January 2018 as the COA and claim the deduction for the same. 

The computation mechanism has been further explained by way of the following examples

Capital Gain/ Loss = Sale Price – Revised Cost of Acquisition on 31.1.2018

Fair Market Value

a. The Fair Market Value (FMV) of a listed security is the highest price quoted on a recognised stock market.

b. If the security was not traded on 31 January 2018, the FMV is the highest price quoted on a date immediately before 31 January 2018 when the security was traded on a recognised stock exchange.

c. In the case of unlisted units on January 31, 2018, the net asset value of the units on that date.

d. The FMV of an equity share listed after January 31 2018, or acquired through a merger or other transfer under Section 47 will be: Purchase price *Cost inflation index for fiscal year 2017-18 / Cost inflation index for the year of purchase or fiscal year 2001-02 (whichever is later).

Example 1

Mr X bought equity shares on 15th Dec 2016 for Rs. 10,000. FMV of the shares was Rs. 12,000 as of 31st Jan, 18. He sold the shares on 10th May 2020 for Rs. 15,000. What will be the long-term capital gain/ loss?

Cost of Acquisition (COA) 

Higher of –

• Original COA i.e. Rs. 10,000, and  
• Lower of –
  • FMV on 31.1.18 i.e. Rs. 12,000, and
  • Sale Price i.e. Rs. 15,000

Hence, COA = Higher of (Rs. 10,000 or Rs. 12,000) Rs. 12,000

 Capital Gain/ (Loss)

• Sale Price – Cost of Acquisition
• Rs. 15,000 – Rs. 12,000
• Rs. 3,000

Example 2

Mr A purchased equity shares on 20th Jan 2018 for Rs. 16,000. FMV of the shares was Rs. 11,000 as of 31st Jan, 2018. He sold the shares on 26th Apr 2022 for Rs. 26,000. What will be the long-term capital gain/ loss?

Cost of Acquisition (COA)

Higher of –

• Original COA, i.e. Rs. 16,000, and  
• Lower of –
  • FMV on 31.1.18, i.e. Rs. 11,000, and
  • Sale Price, i.e. Rs. 26,000

Hence, COA = Higher of (Rs. 16,000 or Rs. 11,000) Rs. 16,000 

Capital Gain/ (Loss)

• Sale Price – Cost of Acquisition
• Rs. 26,000 – Rs. 16,000
• Rs. 10,000

Example 3

Mr. D bought equity shares on 11th Nov 2016 for Rs. 19,500. FMV of the shares was Rs. 12,000 as of 31st Jan, 2018. He sold the shares on 21st May 2018 for Rs. 9,000. What will be the long-term capital gain/ loss?

Cost of Acquisition (COA) 

Higher of –

• Original COA i.e. Rs. 19,500, and  
• Lower of –
  • FMV on 31.1.18 i.e. Rs. 12,000, and
  • Sale Price i.e. Rs. 9,000

Hence, COA = Higher of (Rs. 19,500 or Rs. 9,000) Rs. 19,500 

Capital Gain/ (Loss)

• Sale Price – Cost of Acquisition
• Rs. 9,000 – Rs. 19,500
• Rs. (10,500)

Example 4

Mr. D bought equity shares on 23rd Oct, 2016 for Rs. 14,500. FMV of the shares was Rs. 18,000 as on 31st Jan 2018. He sold the shares on 18th May, 2018 for Rs. 7,000. What will be the long-term capital gain/ loss?

Cost of Acquisition (COA) 

Higher of –

• Original COA i.e. Rs. 14,500, and  
• Lower of –
  • FMV on 31.1.18 i.e. Rs. 18,000, and
  • Sale Price i.e. Rs. 7,000

Hence, COA = Higher of (Rs. 14,500 or Rs. 7,000) Rs. 14,500 

Capital Gain/ (Loss)

• Sale Price – Cost of Acquisition
• Rs. 7,000 – Rs. 14,500
• Rs. (7,500)

Example 5

Mr J bought equity shares on 13th Nov 2010 for Rs. 12,000. FMV of the shares was Rs. 30,000 as of 31st Jan, 2018. He sold the shares on 11th May 2019 for Rs.25,000 What will be the long-term capital gain/ loss?

Cost of Acquisition (COA) 

Higher of –

• Original COA i.e. Rs. 12,000, and
• Lower of below i.e Rs. 25,000-
  • FMV on 31.1.18 i.e. Rs. 30,000, and
  • Sale Price i.e. Rs. 25,000

Hence, COA = Higher of (Rs. 12,000 or Rs. 25,000) Rs. 25,000 

Capital Gain/ (Loss)

• Sale Price – Cost of Acquisition
• Rs. 25,000 – Rs. 25,000
• Nil

Given below is further analysis of the LTCG implications of certain other scenarios, which will help understand the proposed amendment better:

Note: The above table has been prepared with a presumption that all gains are long-term.

LTCG on Transfer of Bonus and Rights Shares Acquired on or Before 31 January 2018

The LTCG for these shares shall be calculated by considering the FMV on 31st January 2018 as the COA of such shares, thereby exempting gains until 31st January 2018 from tax.

Eg: You have Reliance shares purchased on 1st April 2016 and issued bonus shares as on 1st April 2017. Now if such bonus shares are sold after 31st Jan 2018, then FMV as of 31st Jan 2018 will be considered as the Cost of acquisition of such shares.

Carry Forward of Long-Term Capital Losses (LTCL) on Sale of such Shares

 A short-term capital loss might be set off against both short term and long term capital gains. However, Long-term capital loss, may only be offset against long-term capital gain.

Losses from any other heads of income cannot be set off against capital gains. Likewise, capital losses cannot be set off against any any income other than capital gains. A tabular explanation of this concept is presented below.

Reconciliation of Capital Gain Statement vs AIS

As part of its digital initiative, the Income tax department have started receiving the details on the sale of your shares  directly from Depositories like CDSL and NSDL. Such data is reflected in your AIS - Annual Information Statement.

Thus it is very important that you reconcile the capital gain statement that you have with the data available in AIS before you file your ITR. Any Mismatch in ITR and AIS will result in a notice from the Income tax department

Rebate under 87A

Rebate under Section 87A of the Income Tax Act is allowed on income tax computed on all income, excluding the income tax payable on LTCG specified under Section 112A i.e. LTCG on listed  equity shares, equity-oriented funds and units of business trust.

Therefore, rebate is not allowed for capital gains under section 112A.

Exhaustion of Basic Exemption Limit

For resident individuals and HUF, if their total income minus capital gains under section 112A is less than basic exemption limit, they can claim deduction on the capital gains to the extent of the difference between the income other than capital gains and their basic exemption limit. Let us understand this situation by an example.

Mr Ram has the following income

Business Income = Rs. 2 lakhs

Capital Gains under section 112A = Rs. 3 lakhs

Assume he has opted for new regime. Basic exemption limit for new regime (FY 2024-25) is Rs. 3 lakhs. 

In this case,  the income other than capital gains is less than Basic exemption limit. Short fall of basic exemption limit:

Rs. 3 lakh - Rs. 2 lakh = Rs. 1 lakh (can be reduced from taxable capital gains)

 He can already claim exemption of Rs. 1.25 lakhs. Now the taxable capital gains after claiming these deductions would be: Rs. 3 lakh - Rs.1.25 lakh - Rs.1 lakh = Rs. 75,000.