If you sell shares for more than you paid for them, the profit may be taxable as a capital gain. The applicable tax rate depends on the type of shares, how long you held them and whether you treated them as investments or trading assets.
For listed equity shares held for more than 12 months, long-term capital gains above ₹1.25 lakh are generally taxed at 12.5%. This rate applies when the required Securities Transaction Tax, or STT, conditions are met.
This guide explains the long-term capital gain tax on shares, how to calculate it and the mistakes investors should avoid.
Tax note: This article is for educational purposes. Tax treatment depends on your transactions and financial circumstances. Consult a chartered accountant or tax professional before filing your return.
What Is Long-Term Capital Gain Tax?
A capital gain is the profit you make when you sell a capital asset for more than its eligible cost.
For example, suppose you purchase shares for ₹3 lakh and later sell them for ₹5 lakh. Your gain before eligible expenses would be ₹2 lakh.
Whether this profit is a long-term or short-term capital gain depends mainly on how long you held the shares.
The tax does not apply to the total sale value. It applies to the taxable gain after deducting the eligible acquisition cost, transfer expenses and applicable losses or exemptions.
When Are Shares Considered Long-Term?
Listed equity shares generally become long-term capital assets when you hold them for more than 12 months.
Unlisted shares generally require a holding period of more than 24 months.
The Income Tax Department confirms that listed securities generally use a 12-month test, while unlisted shares use a 24-month test. See the official holding-period guidance.
If you sell listed shares within 12 months, the profit will generally be a short-term capital gain instead.
What Is the Long-Term Capital Gains Tax Rate on Shares?
For eligible listed equity shares, equity-oriented mutual funds and business trust units, long-term capital gains above ₹1.25 lakh are taxed at 12.5%.
The ₹1.25 lakh threshold applies to the aggregate eligible long-term gains for the year. It is not a separate threshold for every transaction or investment.
Surcharge may also apply to high-income taxpayers.
These rules apply to eligible transfers made on or after 23 July 2024. The Income Tax Department confirms the ₹1.25 lakh threshold and 12.5% rate in its official guidance on the sale of shares.
For tax years beginning on or after 1 April 2026, the relevant provision is Section 198 of the Income-tax Act, 2025. It replaces the provision commonly known as Section 112A under the Income-tax Act, 1961. The core ₹1.25 lakh threshold and 12.5% rate continue under Section 198.
When Does the 12.5% Rate Apply?
The concessional long-term capital gains tax rate applies when the required STT conditions are satisfied.
For listed equity shares, STT must generally have been paid when the shares were acquired and when they were sold. Certain acquisitions, such as some shares received through an IPO, ESOP or other approved transactions, may receive an exception from the acquisition requirement.
For equity-oriented mutual funds and business trust units, STT must generally have been paid when the units were sold.
If these conditions are not met, the transaction may be covered by a different capital gains provision. Do not assume every gain from listed securities automatically qualifies for the ₹1.25 lakh threshold.
How to Calculate Long-Term Capital Gains Tax on Shares
You can calculate the gain using the following basic formula:
Long-term capital gain = Sale value − Cost of acquisition − Eligible transfer expenses
After calculating your total eligible gains for the year:
Taxable LTCG = Aggregate eligible LTCG − ₹1,25,000
The resulting amount is generally taxed at 12.5%.
Eligible transfer expenses may include expenses directly connected with the sale, such as brokerage or commission. STT cannot be claimed as a deduction while calculating capital gains. The Income Tax Department explains these deductions in its capital gains guidance.
Long-Term Capital Gain Tax Calculation Example
Suppose you:
Purchase listed equity shares for ₹3,00,000.
Hold them for more than 12 months.
Sell them for ₹5,00,000.
Have no other eligible long-term equity gains or losses during the year.
Your calculation would be:
This example assumes that you do not have an unused basic exemption adjustment, other capital gains, eligible losses or a surcharge liability.
Are Indexation Benefits Available on Shares?
No. Indexation is not available when calculating long-term capital gains on listed equity shares covered by the concessional tax provision.
Indexation adjusts the purchase cost of an asset for inflation. The original version of this article incorrectly applied indexed acquisition costs to equity shares.
For eligible listed shares, you generally deduct the applicable acquisition cost without adjusting it for inflation.
What Is the Grandfathering Rule?
A special cost calculation may apply to listed equity shares or eligible units purchased before 1 February 2018.
For these assets, the eligible cost is generally the higher of:
The actual purchase cost; and
The lower of:
The asset’s fair market value on 31 January 2018; or
The sale value.
This rule prevents eligible gains accumulated before the introduction of the equity LTCG tax in 2018 from being taxed.
The calculation can become complicated when you have many transactions. You may need the closing market price from 31 January 2018 for each eligible security. The Income Tax Department provides more information through its Schedule 112A guidance.
Does Long-Term Capital Gain Tax Apply to Traders?
Capital gains treatment usually applies when you hold shares as investments.
If you treat shares as stock-in-trade, the profit may be classified as business income instead. Factors such as trading frequency, accounting treatment, intent, holding period and consistency can affect the classification.
Intraday equity trading does not create a long-term capital gain because you do not hold the shares beyond the trading day.
Futures and options also do not qualify for long-term capital gains treatment. F&O income is generally reported as business income, subject to the applicable rules.
It is possible to maintain separate investment and trading portfolios. However, your records and accounting treatment should clearly support the distinction. The Income Tax Department discusses this distinction in its guidance on the taxation of share transactions.
Can You Reduce Long-Term Capital Gains Tax on Shares?
You can use legitimate tax-planning methods to manage your capital gains liability.
1. Use the ₹1.25 Lakh Annual Threshold
The first ₹1.25 lakh of aggregate eligible long-term equity gains is not taxed under this provision.
Some investors realise gains gradually across different tax years to make better use of this annual threshold. However, you should also consider brokerage, STT, market movement and whether selling still supports your investment plan.
2. Set Off Eligible Capital Losses
A long-term capital loss can generally be set off only against long-term capital gains.
A short-term capital loss can generally be set off against both short-term and long-term capital gains.
Apply the loss set-off rules before calculating the final taxable amount.
3. Carry Forward Unused Capital Losses
Eligible capital losses that cannot be fully used in the current year may generally be carried forward for up to eight assessment years.
You normally need to file your income tax return by the applicable due date to carry the losses forward. The Income Tax Department explains these rules in its loss set-off and carry-forward guidance.
4. Keep Accurate Transaction Records
Maintain records of:
Purchase and sale dates.
Purchase and sale values.
Brokerage and eligible transaction expenses.
STT payments.
Corporate actions such as bonuses, splits and mergers.
Fair market values as of 31 January 2018, where applicable.
Previous capital losses carried forward.
Accurate records make it easier to calculate gains and match your return with the information reported by your broker.
5. Get Advice Before Claiming Property-Related Relief
The original article suggested that Sections 54 and 54EC could generally be used for gains from shares. That is incorrect.
The relief commonly known as Section 54 applies to gains from selling a residential house. Section 54EC is generally linked to long-term gains from land or buildings.
Residential reinvestment relief previously covered under Section 54F may apply to gains from other long-term assets in limited circumstances. It has strict conditions involving the taxpayer, investment amount, property ownership and deadlines.
Get professional advice before claiming any property-related capital gains relief against profits from shares.
Can You Claim an 80C or 80D Deduction Against LTCG?
Deductions under Sections 80C to 80U cannot generally be deducted directly from long-term capital gains taxable at the concessional rate.
This includes deductions commonly claimed for eligible investments, insurance premiums and medical insurance.
A resident individual or Hindu Undivided Family may be able to adjust an unused basic exemption limit against eligible capital gains, subject to the applicable conditions. This adjustment depends on the person’s other income and chosen tax regime.
How Should You Report Long-Term Capital Gains?
Report every applicable transaction in the capital gains section of your income tax return.
Depending on the relevant tax year, the return may refer to the listed-equity provision as Section 112A under the Income-tax Act, 1961, or Section 198 under the Income-tax Act, 2025.
Check the transaction information against:
Your broker’s capital gains statement.
Annual Information Statement.
Form 26AS, where relevant.
Purchase and sale contract notes.
Mutual fund or demat account statements.
Do not rely only on the profit displayed in a trading application. The figure may not account for the correct holding period, grandfathering cost, previous losses or tax classification.
Common LTCG Tax Mistakes
Avoid these common errors:
Using the old 10% tax rate and ₹1 lakh threshold.
Applying indexation to listed equity shares.
Treating the ₹1.25 lakh threshold as a per-transaction exemption.
Deducting STT from capital gains.
Treating intraday or F&O income as a capital gain.
Ignoring the grandfathering rule for shares purchased before February 2018.
Claiming Sections 54 or 54EC against ordinary share-sale gains.
Forgetting to report eligible capital losses.
Assuming the broker’s tax report is always complete.
Using the wrong income tax return or reporting schedule.
Conclusion
Long-term capital gains tax on shares is easier to understand when you separate the calculation into three parts: the holding period, the eligible gain and the applicable tax rate.
Listed shares held for more than 12 months generally qualify as long-term assets. Eligible annual gains above ₹1.25 lakh are taxed at 12.5%, plus the applicable cess and surcharge.
Keep detailed transaction records and check whether your activity is classified as investing or trading. When the calculation involves grandfathering, business income or property-related relief, consult a qualified tax professional.
If you are developing a systematic trading strategy, use AlgoTest Backtesting to evaluate the strategy on historical data before putting capital at risk. Backtesting supports strategy research, but it does not calculate or determine your tax liability.