share market
If an investor has bought a share and held it for five years and now sells it, the tax charged on it is calculated under Long Term Capital Gain (LTCG). According to income tax rules, if equity shares or equity mutual funds are held for more than a year, then the profit earned from them comes in the long term category. Since the holding period here is five years, it will completely come under the purview of LTCG.
According to Section 112A of the Income Tax Act, tax on long-term capital gains on equity shares and equity mutual funds is applicable only if Securities Transaction Tax (STT) has been paid at the time of purchase and sale. If STT has not been paid, the tax benefits available under this section are not applicable.
As per the current tax rules, the first Rs 1 lakh earned in long term capital gains on equity in a financial year is tax free. That means, if the total LTCG of an investor is less than Rs 1 lakh, then he does not have to pay any tax. However, if the profits exceed this limit, then 10 percent tax is levied on the amount above Rs 1 lakh. There is no benefit of indexation in this tax and Health and Education Cess (4%) is levied separately on top of it. Additionally, the tax liability may increase further for high-income investors. Surcharge is also imposed as per applicable rules on investors whose total income exceeds the prescribed limit, due to which the total LTCG tax can effectively exceed 10 per cent.
Here’s an example
For example, if an investor bought shares for Rs 2 lakh five years ago and now sells them for Rs 5.5 lakh, the total profit will be Rs 3.5 lakh. Of this, Rs 1 lakh will be tax free, while the remaining Rs 2.5 lakh will be taxable. According to 10 percent LTCG tax, the tax on this is Rs 25 thousand, on which after adding cess, the total tax liability can reach around Rs 26 thousand. If the investor falls in the high-income slab, surcharge may also be applicable.
According to tax experts, it is important for investors to understand that tax is levied only on profits and not on the entire sales amount. Apart from this, LTCG exemption of Rs 1 lakh is available afresh every financial year, which can reduce the tax burden through proper tax planning. This is the reason why holding shares for a long time is not only considered beneficial in terms of returns, but also in terms of tax, it proves to be a better option than short-term investment.