Government may change LTCG tax on shares. How much could your post-tax gains change?

The government is examining a possible restructuring of long-term capital gains (LTCG) tax on equities, a move that could affect how much investors retain when they sell shares at a profit. While no change has been announced, the review could have implications for retail investors as well as foreign portfolio investors. Currently, LTCG on the sale of listed equity shares is taxed at 12.5 percent on qualifying gains exceeding Rs 1.25 lakh in a financial year, subject to applicable conditions. The tax applies to eligible gains from shares held for more than 12 months. Unlike the earlier regime, the current framework does not provide indexation benefits. According to a Moneycontrol report citing sources familiar with the discussions, the government is examining the LTCG framework, including how India's tax rates compare with those in major economies. What if the government changes the rate? To understand the potential impact, consider a hypothetical scenario in which the tax rate falls to 10 percent, while the Rs 1.25 lakh exemption remains unchanged. On Rs 5 lakh in qualifying gains, taxable gains would remain Rs 3.75 lakh. Tax would fall to Rs 37,500, leaving the investor with Rs 9,375 more than under the current rate. Further, on Rs 5 lakh in qualifying gains, taxable gains would remain Rs 3.75 lakh. Tax would fall to Rs 18,750, leaving the investor with Rs 4,81,250 after LTCG tax, before other applicable charges. This would mean a tax saving of Rs 28,125 compared with the current 12.5 percent rate. Similarly, for an investor realising Rs 10 lakh in qualifying long-term capital gains, taxable gains would be Rs 8.75 lakh after the Rs 1.25 lakh exemption. If the tax rate falls to 10 percent, the tax liability would be Rs 87,500, leaving the investor with Rs 9,12,500 after LTCG tax, before other applicable charges. This would translate into a tax saving of Rs 21,875 compared with the current 12.5 percent rate. If the tax rate falls to 5 percent, while the exemption remains unchanged, the tax on Rs 8.75 lakh in taxable gains would decline to Rs 43,750. The investor would retain Rs 9,56,250 after LTCG tax, before other applicable charges. This would mean a tax saving of Rs 65,625 compared with the current 12.5 percent rate. If the LTCG tax rate is reduced to nil, an investor with Rs 5 lakh in qualifying long-term capital gains would pay no LTCG tax and retain the entire Rs 5 lakh. This would mean a tax saving of Rs 46,875 compared with the current 12.5 percent rate. Similarly, on Rs 10 lakh in qualifying gains, the investor would save Rs 1,09,375 in tax and retain the full Rs 10 lakh, before other applicable charges. This is only an illustration, not an announced proposal. The actual impact would depend on whether the government changes the tax rate, exemption threshold or other provisions. Also read: Centre may take call on LTCG tax restructuring on equities in coming weeks Should investors change their strategy? Investors should avoid selling shares or restructuring portfolios solely on expectations of a tax change. Selling decisions should reflect financial goals, asset allocation, valuations and liquidity needs. Investors should also remember that LTCG tax applies to realised gains, not simply to an increase in portfolio value. Those planning a sale should calculate their likely tax liability under existing rules and consult a tax adviser where necessary. Until an official announcement clarifies the proposed changes, investors should plan around the current tax framework rather than an anticipated benefit. Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.