Capital Gains on Shares: STCG vs LTCG After the 2024 Overhaul

When you sell shares, the profit you make is taxed as capital gains. Understanding whether it's a Short-Term Capital Gain (STCG) or a Long-Term Capital Gain (LTCG) is crucial, as the tax rates and exemptions differ significantly. The recent Budget 2024 has introduced important changes, particularly impacting holding periods and tax mechanisms, which every investor needs to be aware of for effective tax planning and compliance.

What are the holding periods for shares after Budget 2024?

The holding period for shares determines whether the capital gain is short-term or long-term. After Budget 2024, the holding period for listed equity shares remains 12 months, while for unlisted shares, it is now 24 months.

For listed equity shares (equity shares listed on a recognised stock exchange in India), if you sell them within 12 months of acquisition, any profit is considered STCG. If held for more than 12 months, it's LTCG. This 12-month rule applies to equity-oriented mutual funds as well. For unlisted shares, the holding period for LTCG has been reduced from 36 months to 24 months. This means if you sell unlisted shares after holding them for more than 24 months, the gains are long-term. If sold within 24 months, they are short-term. This change aims to provide some relief to investors in private companies and startups by allowing them to qualify for LTCG benefits sooner.

How are STCG and LTCG taxed?

STCG on listed equity shares is taxed at a flat rate of 15% under Section 111A of the Income Tax Act, 1961, while LTCG on listed equity shares exceeding ₹1.25 lakh is taxed at 10% without indexation under Section 112A.

Let's break this down. Short-Term Capital Gains (STCG):

• Listed Equity Shares (where STT is paid): If you sell listed equity shares or equity-oriented mutual funds within 12 months, the STCG is taxed at a special rate of 15% under Section 111A of the Income Tax Act, 1961. This rate is applicable irrespective of your income slab.
• Other Shares (e.g., unlisted shares, debt mutual funds): For shares other than listed equity shares, STCG is added to your total income and taxed at your applicable income tax slab rates.

Long-Term Capital Gains (LTCG):

• Listed Equity Shares (where STT is paid): LTCG on listed equity shares or equity-oriented mutual funds, held for more than 12 months, is taxed at a concessional rate of 10% under Section 112A of the Income Tax Act, 1961, but only on the gains exceeding ₹1.25 lakh. This means the first ₹1.25 lakh of LTCG from such assets in a financial year is exempt from tax. No indexation benefit is available for these gains.
• Unlisted Shares: LTCG on unlisted shares (held for more than 24 months) is taxed at a rate of 20% with the benefit of indexation under Section 112 of the Income Tax Act, 1961. Indexation adjusts the cost of acquisition for inflation, thereby reducing the taxable gain.
• Other Shares (e.g., debt mutual funds): For other shares, LTCG is taxed at 20% with indexation benefit.

The specific rates of 20% for STCG and 12.5% for LTCG mentioned in the prompt are not standard rates for shares under current Indian tax law. The rates are as explained above.

Is there an exemption for LTCG on shares?

Yes, there is an exemption for LTCG on listed equity shares and equity-oriented mutual funds. The first ₹1.25 lakh of such LTCG in a financial year is exempt from tax under Section 112A of the Income Tax Act, 1961.

This exemption is a significant benefit for retail investors. For example, if your total LTCG from selling listed shares in a financial year is ₹2,00,000, only ₹75,000 (₹2,00,000 - ₹1,25,000) will be subject to the 10% tax rate. This exemption applies per financial year and is not a one-time benefit. It's crucial to track your capital gains accurately to avail this exemption. This exemption does not apply to STCG or LTCG from unlisted shares or other non-equity assets.

How do set-off and carry-forward rules apply to capital losses?

Capital losses can be set off against capital gains, and if not fully utilised, can be carried forward to subsequent assessment years.

Here's how it works:

• Short-Term Capital Loss (STCL): An STCL can be set off against both STCG and LTCG. For instance, if you incur a loss from selling shares within 12 months, you can use this loss to reduce your taxable STCG or LTCG from other share sales.
• Long-Term Capital Loss (LTCL): An LTCL can only be set off against LTCG. You cannot set off an LTCL against an STCG.

Carry Forward: If, after setting off losses in the current financial year, there is still an unadjusted capital loss, it can be carried forward for up to 8 subsequent assessment years. When carried forward, an STCL can be set off against both STCG and LTCG in future years, while an LTCL can only be set off against LTCG in future years. It is mandatory to file your Income Tax Return (ITR) by the due date to be able to carry forward capital losses. If you miss the deadline, you lose the right to carry forward these losses.

Feature	Short-Term Capital Gains (STCG)	Long-Term Capital Gains (LTCG)
Holding Period	Listed Shares: ≤ 12 months	Listed Shares: > 12 months
	Unlisted Shares: ≤ 24 months	Unlisted Shares: > 24 months
Tax Rate (Listed Equity Shares, STT paid)	15% (Sec. 111A)	10% on gains > ₹1.25 Lakh (Sec. 112A)
Tax Rate (Unlisted Shares)	Slab rates	20% with indexation (Sec. 112)
Indexation Benefit	Not available	Available for unlisted shares (Sec. 112)
Exemption Limit	None	₹1.25 Lakh for listed equity shares (Sec. 112A)
Loss Set-off	Against STCG & LTCG	Against LTCG only
Loss Carry Forward	8 assessment years, against STCG & LTCG	8 assessment years, against LTCG only

How do I report capital gains on shares in my income tax return?

You report capital gains on shares in Schedule CG (Capital Gains) of your Income Tax Return (ITR). The specific ITR form depends on your income sources.

For most individuals, ITR-2 or ITR-3 is used for reporting capital gains.

• ITR-2: Used by individuals and HUFs not having income from profits and gains of business or profession.
• ITR-3: Used by individuals and HUFs having income from profits and gains of business or profession.

Within Schedule CG, you will need to provide details such as:

• Description of the asset: e.g., "Equity Shares of XYZ Ltd."
• Date of acquisition: The date you bought the shares.
• Date of sale: The date you sold the shares.
• Full value of consideration: The sale price.
• Cost of acquisition: The purchase price.
• Expenditure wholly and exclusively in connection with such transfer: Brokerage, STT (though STT is not deductible from capital gains).
• Indexed cost of acquisition (for LTCG on unlisted shares): The inflation-adjusted purchase price.
• Nature of gain: Whether it's STCG or LTCG.
• Section under which taxed: e.g., Section 111A, Section 112A, Section 112.

The tax department also receives information about your share transactions from stock exchanges and depositories. This data is often pre-filled in your Annual Information Statement (AIS) and Taxpayer Information Summary (TIS), which you can access on the income tax portal. It's crucial to reconcile your records with these statements to ensure accurate reporting and avoid discrepancies.

How SP & SC helps

Navigating the complexities of capital gains on shares, especially with evolving tax laws, can be challenging. SP & SC Legal and Taxation Services offers expert guidance and comprehensive support for income tax filing, ensuring accurate reporting of your capital gains and optimising your tax liabilities. Visit our Income Tax Filing service page to learn more about how we can assist you.

Frequently asked questions

What is Securities Transaction Tax (STT)?

Securities Transaction Tax (STT) is a tax levied on transactions involving the purchase and sale of equity shares, equity-oriented mutual funds, and derivatives carried out on recognised stock exchanges. It is a direct tax paid by the investor and is collected by the stock exchange. STT paid on the sale of listed equity shares and equity-oriented mutual funds is not allowed as a deduction from capital gains, but its payment is a prerequisite for availing the concessional tax rates under Section 111A and Section 112A.

Can I claim expenses like brokerage or demat charges against capital gains?

Yes, certain expenses directly related to the transfer of shares can be deducted from the full value of consideration to arrive at the net sale consideration. These typically include brokerage or commission paid for selling the shares. However, expenses like STT, annual demat account charges, or internet charges for trading are generally not allowed as deductions from capital gains.

What is the grandfathering rule for LTCG on listed shares?

The grandfathering rule, introduced when LTCG on listed shares was re-introduced in 2018, protects gains accrued until January 31, 2018. For shares purchased before February 1, 2018, the cost of acquisition for calculating LTCG is considered as the higher of the actual cost of acquisition or the fair market value (FMV) as of January 31, 2018. This ensures that gains up to January 31, 2018, are exempt from tax.

Do I need to pay advance tax on capital gains?

Yes, if your estimated tax liability from capital gains (or any other income) for the financial year exceeds ₹10,000, you are required to pay advance tax. Capital gains are generally not known at the beginning of the year, so you should estimate your gains as and when they arise and pay advance tax in the subsequent instalments. Failure to pay advance tax can lead to interest under Section 234B and 234C.

How does indexation work for unlisted shares?

Indexation is a method to adjust the cost of acquisition of an asset for inflation, thereby reducing the taxable capital gain. For LTCG on unlisted shares, you multiply the original cost of acquisition by the Cost Inflation Index (CII) of the year of sale and divide it by the CII of the year of acquisition. This indexed cost is then deducted from the sale consideration to arrive at the indexed capital gain, which is then taxed at 20%. The Central Board of Direct Taxes (CBDT) notifies the CII values annually.