InvestorQ : Can you explain with an example the calculation of long term capital gains?
Arti Chavan made post

Can you explain with an example the calculation of long term capital gains?

2 years ago

Anand Ranganathan is a salaried employee in a PSU company. In the month of February 2016, he purchased 150 shares of Tarmat Ltd. at Rs 100 per share. Shares of Tarmat Ltd have been listed on Bombay Stock Exchange. These shares were sold in April 2018 at Rs 130 per share. Let us look at the approach to calculating the capital gains tax. This will be long term capital gains tax because the stock has been held for a period of more than 1 year.

Now for the actual solution! The shares were held for a period not less than 12 months. Only profits above Rs.1 lakh in a financial year will be taxed as LTCG and in the absence of other information we are assuming that he has not other equity capital gains. So, the profit of Rs.4,500 being below the threshold will be entirely tax free. Therefore, they will be exempt as the 10% charge is levied only if gains from selling shares are exceeding Rs 1 lakh.

You may wonder as to why the government is giving special treatment to the long term capital gains compared to STCG. The government wants to encourage long-term investment and hence has charged differential rates of tax on the incomes from the sale of short and long-term capital assets along with reliefs and exemptions. Thus, one has to pay tax on any income from selling shares which are of short-term holding, and only on the amount exceeding Rs 1 lakh when gains are from long-term stock holdings.