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5 Tips For Investors To Reduce The Impact Of Long Term Capital Gain (LTCG) Tax On Shares

Long Term Capital Gain
Long Term Capital Gain

Any profit/gain made from selling equity capital assets (and all other types of capital assets as well) is considered as ‘Income’ as is duly taxable and this is called LTCG on shares. The catch here, however, is something different. Based on nature, capital assets are classified into two categories, namely non-equity capital assets, and equity capital assets. Furthermore, capital assets are also classified on the basis of the time period for which they are held- Long Term Capital Assets and Short Term Capital Assets. Hence, combining the two, when profit is made from selling equities after a period of 12 months, it is called LTCG on shares.

Thanks to the preferential treatment given to equity capital assets, any profit made by selling equity after a period of 12 months falls under the same tax category as that to non-equities in which the gains are made by selling assets after 36 months.

Taxation on LTCG on Shares

Long Term Capitals Gains are cherished by many investors and taxpayers because of the fact they are completely tax-free. This means that any equity asset sold after holding for atleast 12 months will not be taxable. Hence, there are ways by which an investor can save taxes on Long Term Capital Gains, which we are going to discuss in the next section.

5 Tips to Save Taxes on LTCH on Shares

Invest for Long Term

The first and foremost is obviously to invest in shares for the long term, atleast 12 months (1 year). Selling your equities after holding for 12 months will allow you to avail the benefits of taxation on LTCG on shares. You are not required to pay any tax for gains made by selling equity assets in the long term (12 months).

Tax Harvesting

An investor can reinvest the gains of up to Rs 1 lakh by selling equities in the long term. The value at which the shares are reinvested is the new cost of acquisition. The investor can repeat this process every year and can enjoy an exemption of up to Rs 1 lakh in the case of LTCG on shares. Further, this exemption is also applicable for equity mutual funds.

Setting off Long Term Gains by Short Term Losses

First of all, one needs to know that since LTCG on shares is not taxable, any losses made by selling equities in the long term cannot be set off against profits made in the long term. However, losses booked in STCG can be written off against profits made in LTGC. Moreover, there is also no restriction in the setting off losses made in selling equities against the profit made in a different kind of capital asset. Let us understand both cases with two examples.

  • Example 1-  Suppose you have bought equities for Rs 20,000 and sold the same after 12 months at Rs 15,000 and booked a Rs 5,000 loss. Now obviously, this cannot be set off against any gain made either in STCG or LTCG. However, if you would have booked a profit of Rs 5,000 instead of loss, you can use that gain to set off any loss made in STCG. For instance, you can set off a Rs 5,000 loss made in STCG against a Rs 5,000 profit made in LTCG.


  • Example 2- If you have booked a loss of Rs 5,000 by selling equities in the long term, that can be set off against profit made by selling any other type of Capital like real estate property, jewelry, etc. (anything other than equities).

Invest in Equity Related Assets

Long Term Capital Gains tax benefits are not only applicable to equity shares but the term ‘Equity’ itself has a broader meaning that also includes primary market IPOs, equity related mutual funds, etc. Gains made from all such investments are not taxable if held for more than 12 months.

If in Loss: Book in Short Term

If you are at loss with your equity investments and the loss might continue for more than 12 months, you can book the loss early. This will allow you to enjoy the option to set off the losses against any gain made either in the short or long term. But carrying forward the loss to the long term will devoid you from availing the option to set off the booked loss with any other profit made from capital gains. 

You cannot or should try to avoid tax but that does not mean you will not avail the options of saving the much you can. Long Term Capital Gains are one such way by which you can save a lot of money legally. Further, following the tips mentioned above will allow you to add more to your tax savings and enjoy maximum profit from your investment in capital assets.