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The Tax That Came Back, and Changed Again
Long-Term Capital Gains (LTCG) tax on equity in India has had an eventful history. It was abolished in 2004, reintroduced in 2018, and then revised again in Budget 2024. Each change has required equity investors to rethink their planning. This article covers the full arc and, more importantly, how to plan under the current rules.
The Pre-2018 Era: No LTCG on Equity
From 2004 to January 2018, equity gains held for more than one year were completely exempt from tax in India. Short-Term Capital Gains (STCG) on equity held for less than 12 months were taxed at 15%. This generous treatment of long-term equity gains was widely credited with encouraging retail participation in the stock market. Long-term investors had a clean deal: hold for 12+ months, and the gains were yours to keep tax-free.
The 2018 Budget: LTCG Returns at 10%
In Union Budget 2018, LTCG tax on equity was reintroduced. Long-term gains exceeding Rs 1 lakh per financial year became taxable at 10% without the benefit of indexation. Gains up to Rs 1 lakh per year remained exempt. A grandfathering provision protected gains accrued up to January 31, 2018: the cost of acquisition for tax purposes was set at the higher of the actual purchase price or the stock’s price on January 31, 2018.
Budget 2024: The Revised Rates
Budget 2024 brought two significant changes to capital gains taxation on equity, effective July 23, 2024 onwards:
LTCG rate increased from 10% to 12.5%, with the annual exemption increased from Rs 1 lakh to Rs 1.25 lakh. Gains above Rs 1.25 lakh on equity and equity mutual funds held for more than 12 months are taxed at 12.5%.
STCG rate increased from 15% to 20%. Gains on equity or equity mutual funds held for less than 12 months are now taxed at 20%.
Using the Rs 1.25 Lakh Annual LTCG Exemption
The Rs 1.25 lakh annual LTCG exemption is one of the most underutilised tax planning tools available to equity investors. Each financial year, you can realise up to Rs 1.25 lakh in long-term equity gains without paying any tax. If you have significant unrealised gains, you can systematically book up to Rs 1.25 lakh each year, pay zero tax, and immediately reinvest in the same stock or fund to reset your cost of acquisition.
By reinvesting, you reset your cost of acquisition to the current price. Future gains are calculated from the new, higher cost base. Over a long investment horizon, this systematic booking and reinvestment can meaningfully reduce your eventual tax liability.
This is one of the simplest and most powerful tax planning moves available to long-term equity investors, use the Rs 1.25 lakh exemption every year without fail.
Tax-Loss Harvesting to Offset Gains
If some positions in your portfolio are sitting at a loss, you can sell them to realise those losses and use them to offset capital gains elsewhere. Short-term capital losses can be used to offset both STCG and LTCG. Long-term capital losses can only offset LTCG. For a detailed walkthrough of set-off rules, see how to do tax-loss harvesting in India.
Planning Redemptions Across Financial Years
If you have large gains to realise, timing the sale across two financial years can double your exemption benefit. Selling part of your holding before March 31 and part after April 1 uses two years of the Rs 1.25 lakh exemption. For an investor splitting a Rs 10 lakh gain across two financial years, this saves tax on Rs 2.5 lakh of gains, a saving of Rs 31,250 at the 12.5% LTCG rate.
Equity vs Equity Mutual Funds: Same Rules Apply
The LTCG and STCG rules described above apply equally to direct equity (shares) and equity mutual funds (where at least 65% of the portfolio is in equities). Both are subject to the 12-month holding threshold, the Rs 1.25 lakh annual exemption, and the 12.5% LTCG rate post Budget 2024.
Debt mutual funds lost their indexation benefit in Budget 2023 and are now taxed as per income slab rate regardless of holding period (for investments after April 1, 2023). For tax-efficient alternatives in other asset classes, see how SGB is taxed.
New Tax Regime Consideration
LTCG and STCG rates on equity apply regardless of whether you have opted for the new or old income tax regime. Capital gains from equity are taxed at the specified rates irrespective of your slab. However, the Rs 1.25 lakh exemption still applies under both regimes. Where the regime choice matters more is for salary deductions and other investment-related deductions, covered in tax-saving investments beyond 80C.
Disclaimer: This article is for educational purposes only and does not constitute financial advice. Please consult a SEBI-registered advisor before making investment decisions.