Your hard-earned investment gains can dwindle due to taxes. Explore with us effective strategies on how to save capital gain tax on sale of shares.
Gain insights into the exemptions, deductions and options that can help you minimize capital gains tax on your share sales, ensuring you keep more of your profits.
Capital Gains Tax & Its Applicability on Sale of Shares
Before we delve into how do you offset capital gains tax on shares, let’s understand capital gains tax.
Capital gains tax applies to profits made from the sale of capital assets, including shares. It is of two types based on the holding period of the asset:
Types of Capital Gains
- Short-Term Capital Gains (STCG): Gains from the sale of shares held for less than 12 months.
- Long-Term Capital Gains (LTCG): Gains from the sale of shares held for more than 12 months.
Calculation of Capital Gains
To calculate capital gains, the following formula is used:
| STCG = Sale Price − (Cost of Acquisition + Sale Expenses) |
| LTCG = Sale Price − (Cost of Acquisition + Sale/ Transfer Expenses) |
How to Save Capital Gain Tax on Sale of Shares: 12 Effective Methods
Let’s take a look at the various strategies to reduce capital gains tax on the sale of shares in India:
Holding Period Assessment:
Try to hold the share for more than 12 months, so that you can benefit from the lower tax rate:
- STCG is taxed at 15%.
- LTCG above Rs 1.25 lakh are taxed at 12.5%
Split Sale to Utilise Rs 1.25 Lakh Exemption
For long-term capital gains (LTCG), there is a tax exemption on the first Rs 1.25 lakh of gains in a financial year.
If possible, spread the sale of shares across multiple financial years to utilize the ₹1.25 lakh exemption limit each year.
By splitting sales, investors can keep their taxable gains within this limit, thereby avoiding capital gains tax altogether.
Indexation Benefit
To save capital gains tax on the sale of shares in India, investors can utilize the indexation benefit, which adjusts the purchase price for inflation.
This adjustment lowers the taxable capital gains, as it effectively increases the cost of acquisition, resulting in reduced profits subject to tax.
Sellers have the option of choosing between two tax rates – 12.5% without indexation and 20% with indexation.
Grandfathering Clause:
The price you paid to buy shares can be adjusted using the grandfathering rule for shares acquired before January 31, 2018.
This means your cost of acquisition can be calculated as the higher of the actual purchase price or the market value on January 31, 2018, reducing your taxable capital gain.
Reinvesting Gains on Residential Property:
You can reinvest long-term capital gains into buying or constructing a residential property under
This reinvestment can provide exemptions from LTCG tax, allowing you to defer or eliminate their tax liabilities.
Averaging:
If you have accumulated a substantial amount of shares over time, averaging the cost of acquisition can help reduce taxable gains.
By selling high-cost shares first, you can reduce the overall capital gains by increasing the cost of acquisition.
Tax-Loss Harvesting:
If you have shares that are currently underperforming, you can sell them to realize a loss, which can be used to offset your capital gains.
This is known as tax-loss harvesting and helps reduce the total taxable capital gains.
It can be especially useful in minimizing taxes at the end of the financial year.
Consult a Professional
If your capital gains are substantial, consider reaching out to a tax professional or a financial advisor firm like PKC Management Consulting.
Professionals can help you structure your investments and sales in a way that minimizes capital gains tax.
They can provide insights on timing sales, reinvestments, and other strategies, helping you make tax-efficient decisions.
Annual Income Exemption
If your total taxable income ((including capital gains) is below Rs 5 lakh, you don’t have to pay tax on capital gains.
You can plan your share sales accordingly if you fall under this bracket, ensuring that the capital gains do not push your total income beyond the exemption limit.
Capital Gains Bonds
You can invest proceeds from the sale of shares into specific bonds under Section 54EC to claim exemptions on long-term capital gains.
These bonds have a lock-in period and must be purchased within six months of selling the asset.
It allows investors to defer or eliminate their capital gains tax liabilities.
Capital Gain Account Scheme (CGAS)
The scheme allows taxpayers to deposit unutilized capital gains in a designated account to claim exemptions.
This scheme is beneficial for those who plan to reinvest but need time to identify suitable investments.
Gift and Estate Planning:
You can gift shares to your family members (who may fall under lower tax brackets), where gifts to certain family members are tax-free.
Similarly, transferring shares through estate planning can help avoid capital gains taxes during your lifetime and pass on assets without triggering immediate tax liability.
Frequently Asked Questions
- What is the difference between short-term and long-term capital gains on shares?
Short-term capital gains (STCG) are realized from shares held for less than 12 months and taxed at 15%, while long-term capital gains (LTCG) are from shares held over 12 months and taxed at 12.5% on gains exceeding Rs 1.25 lakh.
- What is the grandfathering clause and how does it reduce tax?
The grandfathering clause sets January 31, 2018 as the reference date . The gains accrued until then on shares purchased prior are exempt from LTCG tax.
- Can I sell stock and reinvest without paying capital gains?
Yes, by reinvesting the gains in certain assets like residential property or specified bonds under Sections 54 and 54EC, investors can claim exemptions from capital gains tax.
- How much capital gain is tax-free?
Long-term capital gains up to Rs 1.25 lakh in a financial year are exempt from tax, meaning any gains within this limit do not incur any tax liability.
- How can gifting shares to family members save tax?
Gifting shares to family members in lower tax brackets or who haven’t used their LTCG exemption limits can reduce overall tax when those shares are eventually sold.
