Investing in the stock market can be a powerful way to grow your wealth over time. When you sell your stocks for a profit, the income you earn is known as a capital gain. The Income Tax Act treats these gains differently based on how long you held the shares before selling them. For long-term investors, the most relevant concept is LTCG tax. So, what is a Long Term Capital Gain (LTCG) tax on stocks? It is the tax you have to pay on the profit you make from selling listed equity shares or equity-oriented mutual fund units that you have held for more than one year. Understanding the rules for LTCG tax in 2026 is crucial for every stock market investor to accurately calculate their tax liability and plan their investments.
What is a Long Term Capital Gain (LTCG)?
A Long Term Capital Gain (LTCG) on stocks is the profit earned from the sale of equity shares listed on a stock exchange or units of an equity-oriented mutual fund, where the investment was held for a period of more than 12 months (one year). If you sell these assets within one year of buying them, the profit is classified as a Short Term Capital Gain (STCG), which is taxed differently.
The ‘holding period’ is the key factor that determines whether your gain is long-term or short-term. For listed shares, this period is 12 months. The clock starts from the date you acquired the shares and ends on the date you sold them.
LTCG Tax on Stocks: The Current Rules for 2026
For a long time, LTCG on listed equity shares was completely tax-free in India. However, this changed in 2018 with the reintroduction of LTCG tax under Section 112A of the Income Tax Act. The current rules are as follows:
- Tax Rate: LTCG on the sale of listed equity shares and equity mutual funds is taxed at a flat rate of 10%.
- Exemption Limit: There is a basic exemption on these gains. The 10% tax is levied only on the portion of your LTCG that is above ₹1 lakh in a financial year.
- No Indexation Benefit: The benefit of indexation is not available for calculating LTCG on the sale of these assets. Indexation is a process that adjusts the purchase price of an asset for inflation, which reduces the capital gain. This benefit is available for other assets like debt funds or real estate, but not for listed stocks under Section 112A.
How to Calculate Long Term Capital Gain (LTCG) Tax on Stocks
The calculation of LTCG involves three simple steps. Let’s understand it with an example.
Example:
Suppose in the financial year 2025-26, you have the following transactions:
- You sold 100 shares of Company A for ₹3,00,000.
- You had bought these shares two years ago for ₹1,50,000.
Step 1: Calculate the Total Long Term Capital Gain
LTCG = Full Sale Price – Cost of Acquisition
- Sale Price = ₹3,00,000
- Cost of Acquisition = ₹1,50,000
- Total LTCG = ₹3,00,000 – ₹1,50,000 = ₹1,50,000
Step 2: Apply the Exemption Limit
The first ₹1 lakh of LTCG in a financial year is exempt from tax.
- Total LTCG = ₹1,50,000
- Exemption = ₹1,00,000
- Taxable LTCG = ₹1,50,000 – ₹1,00,000 = ₹50,000
Step 3: Calculate the Tax Liability
The taxable portion of the gain is taxed at 10% (plus applicable cess).
- Taxable LTCG = ₹50,000
- Tax @ 10% = 10% of ₹50,000 = ₹5,000
- Total Tax Payable = ₹5,000 (+ cess)
The Grandfathering Clause for LTCG
When the LTCG tax was reintroduced from April 1, 2018, a ‘grandfathering’ clause was included to protect the gains made by investors up to that point. This means that for any shares purchased on or before January 31, 2018, the cost of acquisition for calculating LTCG will be the higher of:
- The actual cost of acquisition.
- The lower of:
- The Fair Market Value (FMV) of the share as on January 31, 2018.
- The full sale price of the share.
This complex rule ensures that any appreciation in the value of your shares up to January 31, 2018, is not taxed.
Reporting LTCG in Your ITR
You must report your long-term capital gains when you file your income tax return. This is typically done in the ‘Capital Gains’ schedule of the ITR-2 or ITR-3 form. You need to provide a scrip-wise breakdown of your sales, reporting the sale price, cost of acquisition, and the dates of purchase and sale for each transaction. It is similar to reporting dividend income, which used to be tax-free under the old Dividend Distribution Tax (DDT) regime but is now taxable.
Frequently Asked Questions (FAQs)
1. Is the ₹1 lakh exemption for LTCG per transaction or for the whole year?
The ₹1 lakh exemption is an aggregate limit for the entire financial year. It applies to the total long-term capital gains from the sale of all your listed equity shares and equity mutual funds combined. It is not a per-transaction or per-scrip limit.
2. Can I set off my long-term capital loss from stocks against other income?
A Long Term Capital Loss (LTCL) from the sale of stocks can only be set off against a Long Term Capital Gain (LTCG) from any asset. It cannot be set off against short-term capital gains or any other income like salary or interest income. You can carry forward the unadjusted LTCL for up to 8 assessment years.
3. Do I need to pay advance tax on my LTCG?
Yes, you are liable to pay advance tax on your capital gains. However, since it is difficult to predict these gains in advance, you can pay the tax on the capital gains you have made in a particular quarter in the subsequent advance tax installment.
4. Is the LTCG tax rate of 10% applicable irrespective of my tax slab?
Yes, LTCG on stocks under Section 112A is taxed at a special flat rate of 10% (on gains above ₹1 lakh). This rate is independent of your income tax slab. So, whether you are in the 5% slab or the 30% slab, the tax rate on your taxable LTCG remains 10%.
5. Is Securities Transaction Tax (STT) deductible when calculating LTCG?
No, the Securities Transaction Tax (STT) that you pay when you sell shares on a stock exchange is not allowed as a deduction from your capital gains. The gain is calculated simply as the sale price minus the cost of acquisition.