The tax on equity investment gains depends on how long the investments are held, making the holding period an important factor when planning withdrawals and managing long-term capital gains tax liability.
As per the rules, if the investments were held under 12 months, the gains are taxed as short term at 20%. But if the stocks or mutual funds are held for more than 12 months, the gains are taxed as long-term at 12.5% after the initial exemption.
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For equity investments, long-term capital gains are applicable only once the profit crosses the initial Rs 1.25 lakh value.
Example: Assuming a stock, held for over 12 months, was bought at Rs 3 lakh. After two years, its value becomes Rs 5 lakh.
This means, profit: Rs 5 lakh - Rs 3 lakh = Rs 2 lakh
Gain that qualifies for tax = Rs 2 lakh - Rs 1.25 lakh = Rs 75,000
Applicable tax = Rs 12.5%
Tax = 12.5% x Rs 75,000 = Rs 9,375
This means that you do not need to pay tax on entire gains after 12 months in case of equity investments.
How Are Foreign Stocks Taxed?
If you hold foreign company shares for more than 24 months, the gains are considered long-term capital gains. This is because foreign shares are considered “unlisted” on the Indian stock exchanges, so their holding period to qualify for lower tax significantly increases as with other unlisted domestic shares.
Once the 24-months holding period crosses, these shares are taxed like regular shares at 12.5% (plus applicable surcharge and cess). But investors need to understand that foreign shares do not come with the Rs 1.25 lakh exemption benefit. It only applies to listed domestic securities. This means that even after 24 months, your entire gains are taxable at 12.5%.
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