First, What Is Long-Term Capital Gains?
In simple terms, a capital gain is the profit you make from selling an asset for more than you paid for it. The 'long-term' part depends on how long you held the asset. For listed stocks and equity-oriented mutual funds, if you hold them for more than 12
months, your profit is considered a Long-Term Capital Gain. For other assets like property or unlisted shares, the holding period is generally more than 24 months. For debt funds, the rules have changed, and most are now taxed at your income slab rate regardless of holding period.
The Core Rules for Equity Investors
For most retail investors, LTCG comes from selling stocks or equity mutual funds. For the financial year 2025-26 (the return you file by July 2026), a significant rule under Section 112A applies. The first ₹1.25 lakh of your total LTCG from these assets in a financial year is completely exempt from tax. Any gain above this ₹1.25 lakh threshold is taxed at a flat rate of 12.5% (plus applicable cess). It is important to note that you do not get the benefit of indexation for these gains, which means the purchase cost is not adjusted for inflation.
The Grandfathering Clause Explained
A common point of confusion is the 'grandfathering' clause, introduced when LTCG tax on equities was brought back in 2018. This rule protects gains made on shares you bought on or before January 31, 2018. To calculate your gains on these old shares, your cost of acquisition is considered the higher of your actual purchase price or the stock's highest traded price on January 31, 2018 (but not more than your selling price). This complex-sounding rule simply ensures that you are not taxed on the gains your portfolio made before this tax was reintroduced.
How to Calculate Your Taxable LTCG
Let's break down the calculation. First, sum up all your long-term capital gains from equity sales during the financial year. For each sale, the gain is the 'Sale Value' minus the 'Cost of Acquisition'. For shares bought after Jan 31, 2018, the cost is your purchase price. For shares bought before, you use the grandfathered cost. Once you have the total gain, subtract the ₹1.25 lakh exemption. The remaining amount is your taxable LTCG. For example, if your total LTCG is ₹2,00,000, your taxable gain is ₹75,000 (₹2,00,000 - ₹1,25,000). Your tax would be 12.5% of ₹75,000.
Decoding the Income Tax Return (ITR) Form
Reporting is as important as calculating. Even if your LTCG is below the ₹1.25 lakh tax-free limit, you must report it in your ITR. For most investors with capital gains, ITR-2 is the correct form. Inside the ITR, you will find 'Schedule Capital Gains (CG)' and, specifically for equity LTCG, 'Schedule 112A'. This schedule requires you to provide scrip-wise details for each sale, including the share name, sale price, and cost of acquisition. Your broker's capital gains statement is essential for filling out this section accurately.
Beyond Equities: A Note on Other Assets
While Section 112A gets the most attention, remember that LTCG applies to other assets too. For sale of property, a uniform rate of 12.5% without indexation now applies for transactions after July 23, 2024. However, for properties acquired before that date, you may have the option to choose between the new rate or the old rate of 20% with indexation benefits, whichever is more favourable. Gains from new debt fund investments (bought after April 1, 2023) are simply added to your income and taxed at your slab rate. These different rules highlight the need to keep track of each asset type separately.
