Legal Way to Avoid LTCG Tax on Shares Above ₹1.25 Lakh by Using Family Members

1. Core Idea

Long Term Capital Gain (LTCG) on listed equity shares and equity mutual funds is taxed at 12.5 percent when the gain exceeds ₹1.25 lakh in a financial year.

The important point many investors miss is that the ₹1.25 lakh exemption is available per individual, not per family.

This creates a legal tax planning opportunity. If investments are transferred to eligible family members through gifting, each person can utilize their own LTCG exemption limit.

Under Section 56(2)(x) of the Income Tax Act, gifts received from specified relatives are completely tax free.

This allows families to distribute investments and reduce overall tax liability while staying fully compliant with tax laws.

2. How the Tax Flow Works

Step 1 – Gift Transfer

When shares or mutual fund units are gifted to a relative, no tax arises for the donor or the recipient at the time of transfer.

Step 2 – Sale by the Relative

Capital gains tax will arise only when the relative sells the shares or mutual fund units from their own account.

Step 3 – Cost of Acquisition

For taxation purposes, the cost of acquisition will remain the same as the original purchase cost of the donor.

Step 4 – Holding Period

The holding period of the donor will also be included for the recipient. This means the investment will continue to qualify as long term.

As a result, the relative can use their own LTCG exemption when selling, while the original purchase price and holding period of the investment remain the same.

3. Example: ₹3.75L LTCG

Scenario 1 – If One Person Sells

Total LTCG = ₹3.75 lakh

Exemption available = ₹1.25 lakh

Taxable LTCG = ₹3.75 lakh – ₹1.25 lakh = ₹2.50 lakh

Tax payable = ₹2.50 lakh × 12.5% = ₹31,250

Scenario 2 – Gift to Specified Relative

Gift shares worth ~₹1.25L LTCG to Specified Relative → No tax

You sell remaining → Your LTCG ₹1.25L → Fully exempt

Specified Relative sells gifted shares → Their LTCG ₹1.25L → Fully exempt

Result: ₹2.50L total LTCG realized → ₹0 tax.

Tax planning works best when done before selling investments. Consult a tax professional to ensure proper documentation and compliance.