Capital Gain on Securities — LTCG and STCG Rates After Budget 2024, Grandfathering, Debt Funds, NRI TDS & DTAA Advisory

Capital Gain on Securities in India

Budget 2024 made the most significant changes to capital gains taxation on securities in six years — increasing the STCG rate on listed equity shares from 15% to 20%, raising the LTCG rate from 10% to 12.5%, expanding the annual LTCG exemption from ?1 lakh to ?1.25 lakh, and restructuring the rates for unlisted shares, bonds, and other securities. These changes, effective from 23 July 2024, affect every investor — resident Indian, NRI, or foreign investor — who sold securities on or after that date. For transactions executed before 23 July 2024 in the same financial year (FY 2024-25), the old rates applied.

The complexity of capital gains on securities in India is not just the rate — it is the classification. Different rates apply depending on the type of security (listed equity, equity mutual fund, debt mutual fund, unlisted share, bond, ESOP), the holding period, whether STT was paid, and — for investors with pre-February 2018 holdings — the grandfathering provision. Getting the classification wrong means computing the wrong tax.

N D Savla & Associates provides complete capital gain on securities services for resident individuals, NRIs, and businesses across Mumbai and India — covering STCG and LTCG computation for all security types, Budget 2024 rate application, grandfathering computations, debt fund pre and post April 2023 treatment, ESOP tax planning, set-off and carry forward of capital losses, NRI capital gain TDS and DTAA advisory, and Schedule CG disclosure in ITR-2 and ITR-3 return filing.

Capital Gains Tax Rates on Securities After Budget 2024

Budget 2024 (Union Budget July 2024) restructured capital gains rates across most security types. The rates below are effective for transactions on or after 23 July 2024:

The Grandfathering Provision — How It Works for Pre-2018 Holdings

When the LTCG tax on listed equity shares and equity mutual funds was re-introduced by Budget 2018 (after being exempt since 2004), the government included a grandfathering provision to protect existing investors. The grandfathering provision deems the cost of acquisition of listed shares and equity mutual fund units held before 1 February 2018 to be the higher of:

• The actual cost of acquisition (what the investor originally paid), OR
• The lower of: (a) the Fair Market Value (FMV) of the asset as on 31 January 2018, and (b) the actual sale consideration received.

In practical terms, for shares held before 1 February 2018 and sold after 31 March 2018, the gain is only computed on appreciation from 31 January 2018 onwards — all earlier appreciation is exempt from LTCG.

Example: An investor bought shares in 2010 at ?100. The FMV on 31 January 2018 was ?400. The investor sells in FY 2025-26 at ?600. The taxable LTCG is ?600 minus ?400 (deemed cost under grandfathering) = ?200 per share — not ?500. The ?300 of appreciation from 2010 to January 2018 is fully exempt.

?? The grandfathering provision continues to apply under the Budget 2024 framework — the rate on the taxable LTCG is now 12.5% (instead of 10%), but the deemed cost calculation from 31 January 2018 is unchanged. For investors with large pre-2018 holdings in listed shares or equity mutual funds, the grandfathering computation remains highly valuable.

What Changed for Debt Mutual Funds — Finance Act 2023 Impact

Units Purchased Before 1 April 2023 — Old Rules Apply

For debt mutual fund units purchased before 1 April 2023, the old rules continue to apply: if held for more than 36 months, gains are treated as LTCG and taxed at 20% with the indexation benefit. The indexation benefit uses the Cost Inflation Index (CII) to adjust the purchase price for inflation — significantly reducing the taxable gain. These pre-April 2023 units are grandfathered under the old regime and should be evaluated carefully before redemption, as they carry significant tax advantages over equivalent post-April 2023 investments.

Units Purchased On or After 1 April 2023 — New Rules Apply

For debt mutual fund units purchased on or after 1 April 2023 (including gold funds, international fund of funds, and other specified categories), all capital gains — regardless of holding period — are taxed at the investor's applicable income tax slab rate. There is no LTCG benefit, no flat rate, and no indexation. This effectively removes the tax advantage that debt mutual funds had over bank fixed deposits and has significantly impacted the attractiveness of debt mutual funds for high-tax-bracket investors.

How Are ESOPs Taxed on Shares of Indian Companies?

Employee Stock Options (ESOPs) create two separate taxable events — and the tax treatment at each stage is fundamentally different:

Stage 1 — Perquisite Tax at Exercise

When an employee exercises their ESOPs, the difference between the Fair Market Value (FMV) of the shares on the exercise date and the exercise price paid is taxable as a perquisite — salary income in the year of exercise. The employer is required to deduct TDS on this perquisite under Section 192. For listed company ESOPs, the FMV is the average of the opening and closing price on the exercise date. For unlisted company ESOPs, the FMV must be determined by a merchant banker.

Stage 2 — Capital Gains at Sale

When the employee subsequently sells the ESOP shares, the capital gain is computed as the sale price minus the FMV at the time of exercise (which becomes the cost of acquisition). The holding period for STCG or LTCG starts from the date of exercise, not from the date of grant. For listed company ESOPs: if held for more than 12 months from exercise, LTCG at 12.5% (Section 112A). If held for 12 months or less, STCG at 20% (Section 111A). For unlisted company ESOPs: if held for more than 24 months from exercise, LTCG at 12.5%.

?? A special ESOP tax deferral benefit exists for employees of eligible start-ups — under Section 192(1C), the perquisite tax on exercise of ESOPs of DPIIT-recognised eligible start-ups can be deferred for 5 years or until the employee leaves the company or sells the shares, whichever is earliest. This deferral provides a significant cash flow benefit for start-up employees.

Set-Off and Carry Forward of Capital Losses

Capital losses from the sale of securities can be used to offset capital gains in the same financial year — reducing the overall capital gains tax liability. The set-off rules:

• Short-Term Capital Loss (STCL): Can be set off against both STCG and LTCG from any capital asset in the same financial year.
• Long-Term Capital Loss (LTCL): Can be set off only against LTCG — not against STCG, salary income, or any other income.
• Carry Forward: Unabsorbed capital losses can be carried forward for 8 assessment years. The return must be filed by the due date (31 July for individuals) to preserve the carry-forward benefit — late-filed returns lose the carry-forward.

Tax-loss harvesting — the deliberate realisation of capital losses to offset capital gains before year-end — is a legitimate and commonly used tax planning strategy. Securities with unrealised losses can be sold before 31 March to generate losses that offset gains realised earlier in the year.

NRI Capital Gains on Indian Securities — TDS Framework

For NRIs selling Indian securities — listed shares, mutual fund units, unlisted shares, or bonds — the buyer or the stock exchange is required to deduct TDS before remitting the sale proceeds. Our TDS and tax liability advisory covers the complete TDS framework for NRIs.

• Listed equity STCG (Section 111A): TDS at 20% (post Budget 2024) plus applicable surcharge and cess.
• Listed equity LTCG (Section 112A): TDS at 12.5% plus surcharge and cess on gains above ?1.25 lakh. Below the exemption, no TDS — but the NRI must still file an ITR to claim the exemption and any refund.
• Unlisted shares LTCG: TDS at 12.5% plus surcharge and cess (post Budget 2024) on the full gain — no annual exemption.
• Lower TDS Certificate (Section 197): NRIs whose actual tax liability is lower than the standard TDS rate can apply for a lower deduction certificate under Section 197 from their jurisdictional Income Tax Officer.

DTAA Relief on Capital Gains for NRIs

India's Double Taxation Avoidance Agreements (DTAAs) with many countries include specific provisions on the taxability of capital gains. Our DTAA advisory services cover the treaty analysis for NRI capital gains. Key DTAA considerations:

• Mauritius DTAA (old treaty, pre-2016 gains): Capital gains on shares of Indian companies acquired before 1 April 2017 by Mauritius tax residents are taxable only in Mauritius (not in India). Shares acquired after 1 April 2017 are taxable in India.
• Singapore DTAA: Similar to the Mauritius treaty amendment — shares acquired before 1 April 2017 by Singapore tax residents are taxable only in Singapore. Post-April 2017 acquisitions are taxable in India.
• Netherlands and other treaties: Some DTAAs provide that capital gains on shares are taxable only in the country of residence — potentially exempting the NRI from India capital gains tax entirely.
• US, UK, Germany: These DTAAs generally do not provide capital gains exemptions on Indian securities — capital gains are typically taxable in India under these treaties, with a foreign tax credit available in the NRI's country of residence.

Historical Context — How Capital Gains Tax on Securities Evolved in India

The most transformative change came in Budget 2004 which introduced the Securities Transaction Tax (STT) and simultaneously exempted long-term capital gains on listed equity shares from income tax entirely. STCG on listed equity was taxed at a flat 10% (later raised to 15%). This highly favourable tax regime persisted for 14 years and significantly incentivised retail participation in equity markets.

Budget 2018 re-introduced LTCG tax on listed equity — at 10% on gains above ?1 lakh per year, with the grandfathering provision. Budget 2023 removed LTCG with indexation benefits for debt mutual funds prospectively. Budget 2024 raised the rates further — STCG from 15% to 20%, LTCG from 10% to 12.5% — and standardised the LTCG rate at 12.5% across most security categories. For the official tax rates and ITR filing process, refer to the Income Tax Department portal at incometax.gov.in.

How We Handle Capital Gain on Securities — Our 5-Step Process

1. Security Type Classification and Holding Period Verification — We classify each security transaction and verify the holding period from purchase date to sale date. For debt mutual funds, we also verify whether the units were purchased before or after 1 April 2023 to determine which tax regime applies.
2. Grandfathering Computation for Pre-2018 Holdings — For listed shares and equity mutual fund units purchased before 1 February 2018, we compute the deemed cost of acquisition using the grandfathering provision — obtaining the FMV as on 31 January 2018 from stock exchange records. This computation can significantly reduce the taxable LTCG.
3. Capital Gains Computation and Tax Calculation — We compute the gross capital gains for each transaction and apply the correct tax rate: STCG at 20% (post 23 July 2024) or 15% (pre 23 July 2024 in FY 2024-25) for listed equity; LTCG at 12.5% on gains above ?1.25 lakh for listed equity (Section 112A); slab rate for debt fund units purchased post-April 2023.
4. Set-Off and Carry Forward of Capital Losses — We identify all capital losses during the year and apply the eligible set-off — STCL against STCG first, then STCL against LTCG; LTCL against LTCG only. We compute the unabsorbed capital loss eligible for carry forward and ensure the ITR is filed before the due date to preserve the carry-forward benefit.
5. Schedule CG Disclosure and ITR Filing — We prepare the complete Schedule CG disclosure for the ITR — listing each transaction with security type, purchase date, sale date, cost of acquisition, deemed cost (where grandfathering applies), sale consideration, and gain or loss. For NRIs, we also advise on TDS credit against the capital gains liability and DTAA claims where applicable. We file the ITR-2 or ITR-3 on the income tax portal within the prescribed due date.

Why N D Savla & Associates for Capital Gain on Securities

• Budget 2024 rate changes applied correctly. The split-year computation for FY 2024-25 and the Budget 2024 rate changes for various security types require careful attention. We apply the correct rates for each transaction based on both the date of transaction and the type of security — ensuring accurate tax computation.
• Grandfathering computation expertise. The 31 January 2018 grandfathering computation for pre-2018 holdings is time-consuming but highly valuable — we prepare the computation for every pre-2018 security in the client's portfolio, using verified FMV data from exchange records.
• NRI capital gain integrated with DTAA and TDS. NRI capital gain involves not just the computation but also the TDS credit claim, the DTAA analysis, and the Section 197 lower deduction certificate advisory where needed. We handle all three as part of a single integrated NRI tax engagement — consistent with our complete NRI taxation return filing practice.
• Tax-loss harvesting advisory. We review each client's capital gains position before year-end and advise on tax-loss harvesting opportunities — identifying securities with unrealised losses that, if sold before 31 March, can reduce the year's net capital gains tax liability.

Frequently Asked Questions — Capital Gain on Securities in India