LTCG or Long Term Capital Gain is the tax you pay on the gains you make out of your stock market investments.
There are two kinds of capital gains for stock market investors in India:
- Short Term Capital Gain (STCG): 15% tax on shares sold within one year of purchase.
- Long Term Capital Gain (LTCG): 10% tax on shares sold after one year of purchase.
For example, let’s assume you buy 1 share of HDFC Bank for ₹ 1000 on January 1 2020:
- 10 months later (November 1 2020), the price of the share has risen to ₹ 1200. If you sell the share, you will be liable to pay STCG of 15% on the ₹ 200 gains you made. You will pay ₹ 30 as STCG tax.
- If you sell your shares after January 1 2021 (i.e one year or later), you are liable to pay LTCG of 10%. If the price of the share is ₹ 1200 when you sell, your gains will be ₹ 200. You will pay 10% of your gains i.e ₹ 20 as tax.
LTCG is exempt upto ₹ 1 lakh. If your gains is less than ₹ 1 lakh, you do not have to pay any tax.
If your gain is more than ₹ 1 lakh, then you would pay 10%.
Long Term Capital Loss
If you book loss in the stock market, your long term loss can be set off against long term capital gains.
Suppose your gain from sale of HDFC shares is ₹ 200, for which you are liable to pay tax of ₹ 20.
You also have another share in your portfolio, ITC Limited, which was purchased for ₹ 220 per share. The current price after one year is ₹ 200 per share. You sell the shares for ₹ 20 loss.
This loss of ₹ 20 can be adjusted with your long term capital gain of ₹ 20. Your tax liability will be zero.
Long term capital gain – Long term capital loss = Net payable LTCG Tax
If your losses are more than your gains for one financial year, the loss can be carried forward for the next 8 years.
In other words, if your long term loss in the current year is 100 and your long term gain is 60. The difference long term loss of 40 can be adjusted with the long term gains of financial year.
LTCG tax on listed equity shares was introduced by the Government of India during the 2018 Budget. It came into effect from 1 April 2018.