Does LTCG Tax Impact You?

For Indian investors, understanding taxation is crucial for maximising returns. Among the many tax implications on investments, Long-Term Capital Gains (LTCG) tax plays a key role. Whether you're a seasoned trader or just starting out in the share market, knowing how LTCG tax affects your earnings helps you plan smarter.

In this guide, we’ll break down what LTCG tax is, when it applies, how it impacts your returns, and tips to minimise your tax burden. The article is tailored for Indian traders and investors, especially those involved in equity markets.

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What is Long-Term Capital Gains (LTCG) Tax?

LTCG tax is the tax you pay on profits made from the sale of capital assets held for a long period, generally more than 12 months for listed equity shares and equity mutual funds.

In Budget 2018, the Government of India reintroduced LTCG tax on equity instruments. Since then, profits exceeding ₹1.25 lakh in a financial year from the sale of long-term listed equity shares and equity-oriented mutual funds are taxed at 12.5% without indexation.

Assets Covered Under LTCG

• Equity Shares listed on recognised stock exchanges
• Equity-Oriented Mutual Funds
• Listed Debentures or Bonds
• Real Estate (with a holding period of 24 months or more)
• Gold and Other Assets (with a holding period of 36 months or more)

For the purpose of this article, we’ll focus mainly on listed equity shares and equity mutual funds, which are most relevant to Indian retail traders.

LTCG Tax Rules for Equity Investments

• No LTCG tax on gains up to ₹1.25 lakh per financial year
• Gains above ₹1.25 lakh taxed at 12.5% flat
• No benefit of indexation
• Securities Transaction Tax (STT) must be paid at the time of sale and purchase for the tax benefit to apply

For example, if you made ₹1.5 lakh in gains from selling shares after one year of holding, you’ll pay 12.5% on ₹25,000 (₹1.5 lakh – ₹1.25 lakh exemption), i.e., ₹3,125 in LTCG tax.

Key Impacts of LTCG Tax on Indian Traders

1. Reduced Net Gains

LTCG tax directly reduces your take-home profits. While 12.5% may seem low, over multiple trades or years, this amount can be substantial.

2. Threshold Management 

You get a ₹1.25 lakh exemption each year. Traders often plan exits in tranches across financial years to stay under the threshold.

3. Incentive to Hold

Since LTCG tax only applies after 12 months of holding, traders may consider holding promising stocks longer for favourable tax treatment compared to short-term capital gains (STCG), which are taxed at 20%.

4. Impact on Mutual Fund Returns

Equity mutual funds also attract LTCG if held for more than a year. Many investors miss this point when switching between funds or opting for growth plans.

5. Tax Harvesting Opportunity

Smart traders sometimes sell and repurchase shares to realise gains up to ₹1.25 lakh—this is called LTCG harvesting. It helps in resetting the purchase price and locking in tax-free gains.

LTCG on SIP Investments

For mutual fund investors using Systematic Investment Plans (SIPs), each SIP is treated as a separate investment. This means the holding period is calculated individually for each SIP date.

Tip: Keep track of SIP dates and plan redemptions accordingly to minimise tax.

Exemptions and Deductions: What’s Allowed?

Under current rules, there is no indexation benefit on listed equity assets. You also cannot claim deductions under Section 80C for LTCG tax.
However, if you're a senior citizen with no other income, you might not pay tax if the total income (including LTCG) is below the basic exemption limit.

LTCG on Real Estate and Gold: Brief Overview

While the focus here is on shares, note that LTCG on real estate and gold is taxed at 20% with indexation. For real estate, the holding period is 2 years, and for gold or jewellery, it’s 3 years.

How to Minimise LTCG Tax Legally

• Use the ₹1.25 Lakh Exemption Smartly: Exit in parts over different financial years.
• Invest via ELSS Funds: While ELSS has a lock-in of 3 years, they provide tax benefits under Section 80C, though LTCG still applies on gains.
• Opt for LTCG Harvesting: Book profits within the exemption limit and reinvest.
• Invest in Gifting and Inheritance Strategy: Capital gains tax is not applicable on gifts to relatives or inherited assets at the time of transfer (but applies when the recipient sells the asset).
• Monitor and Plan SIP Redemptions: Keep track of individual SIP dates to optimise tax savings.

Common Mistakes Indian Traders Make

• Not tracking gains across multiple Demat accounts
• Ignoring LTCG when switching between mutual funds
• Selling large chunks of stocks at once without considering thresholds
• Assuming indexation benefit on equity LTCG (not applicable)
• Believing that long-term gains are fully tax-free (only up to ₹1.25 lakh)

Final Thoughts

The LTCG tax is here to stay, and it plays a critical role in your net earnings. For Indian traders, especially those active in equity markets and mutual funds, understanding LTCG rules is essential.

Plan your investment exits, monitor thresholds, and make use of legal tax-saving strategies. A smart tax approach can add significantly to your real returns over time.