Many salaried individuals, businesspeople, housewives, and former service members spend their free time trading shares for profit but are uncertain of how this money is taxed and they earn Capital Gains on Shares Trading. Equity share sale profits and losses are reported under the head “Capital Gains.”
Capital Gains on Shares is further divided into the following categories under the head “Capital Gains“:
(i) Long Term Capital Gain on Shares
(ii) Short Term Capital Gain on Shares
The duration of ownership of the shares affects this categorisation. The time elapsed between the date of purchase and the date of sale or transfer is known as the holding period.
It should be mentioned that the holding periods for shares and securities vary depending on the form of capital asset. Due to income tax considerations, the holding periods for listed equity shares and equity mutual funds are different from those for debt mutual funds. Additionally, their taxability varies.
Table of Contents
Short Term Capital Gain Tax On Shares
Short Term Capital Gain Tax on Shares or Loss may be realised by the seller if equity shares, stocks, Share Trading, equity-oriented mutual funds, and units of business trust listed on a recognised stock exchange and subject to the securities transaction tax (STT) are sold within a year of acquisition. No matter what tax bracket you are in, Short Term Capital Gain Tax on Shares will be 15%.
Short Term Capital Gain Tax on Shares is calculated as Sale price minus Expenses incurred minus Purchase price.
Let’s look at Short Term Capital Gain Tax on Stocks illustration:
Eg. Mahima Hande purchased Stocks in March 2014 for Rs. 2 lakh and sold them in January 2014 for Rs. 2.4 lakh. Let’s determine the short term capital gains tax on stocks she owes.
Capital Gains On Stocks: Full sales value minus brokerage at 0.5% plus the buying price equals 2,40,000 minus (1,200 + 2,00,000) and equals Rs. 38,800, means 38,800/- comes out to be Capital Gains On Stocks.
Taxes On Stock Gains: Tax rate multiplied by short term capital gain divided by 100 equals 38,800 * 15 / 100, or Rs. 5,820., means 5,820/- come out to be Taxes On Stock Gains.
However, The income from the sale of the Stocks, Funds or shares will be added to the owner’s regular income and taxed in accordance with standard individual I-T regulations if it is a short-term asset listed on the stock market that does not incur STT or a share that is not listed on a stock exchange, such as debt-oriented mutual funds and preference shares.
Long Term Capital Gain Tax On Shares
Gains from listed equity shares may qualify as long term capital gain on shares if kept for at least 12 months, but gains from unlisted equity shares will only qualify as long term if held for at least 24 months.
Before the announcement of Budget 2018, long-term capital gains from the sale of stock shares or units of mutual funds that are focused on equities were free from tax, which meant that no tax was owed on gains from the sale of long-term equity investments.
The 2018 Financial Budget eliminated this exception. The sale of equity shares or equity-oriented units of a mutual fund would now be subject to a 10% long-term capital gains tax (plus any relevant cess) if a long-term capital gain of more than Rs. 1 lakh is realised by the seller. Additionally, the seller will not be able to take advantage of indexation. Transfers done on or after April 1, 2018, will be subject to these provisions.
Additionally, this new provision was implemented prospectively, meaning that only gains occurring as of February 1, 2018, will be subject to taxation. This “grandfathering rule” will be used to determine the long-term gains on any equity instruments purchased before the 31st of January 2018 and sold after the first of April 2018.
Calculation of Long Term Capital Gain Tax on Shares as per Grandfathering Rule
The Cost of Acquisition serves as the key determinant for calculating Long Term Capital Gain on Shares in this instance. The following factors can be taken into account to determine it –
1.The true cost of purchase
2.The least of the following –
- On 31.1.18, the Fair Market Value (FMV)
- The sale price or full value of the security being considered
The FMV is the highest offered price as of 31.1.18. The quoted price on the day before 31.1.18 is taken into account if the security wasn’t listed on that day.
In that scenario, the Long Term Capital Gain on Shares would be calculated using the formula = Full value consideration – Acquisition Cost
Assume Mr. Shubham buys shares on 02.6.16 for Rs. 18000 and sells them on 02.02.18 for Rs. 20,000. On 31.1.18, Rs. 19000 was the highest quoted price for that security.
Before figuring out his LTCG on shares, it is important to first estimate the cost of acquisition. The higher of –
1.The actual buying cost, which is Rs. 8,000
2.And the lower of –
- FMV which is Rs. 19000
- Sale price which is Rs. 20000
As a result, the Fair Market Value, which is Rs. 19000, should be used as the purchase cost because it is higher than the actual acquisition cost and is lower than the FMV and sale price. Therefore, LTCG is sale price minus acquisition costs.
Or, LTCG = Rs. (20000 – 19000)
Or, LTCG = Rs. 1000
However, ordinary long-term capital gains tax regulations apply to debt-oriented mutual funds and preference shares. As a result, after indexing for inflation, they must pay a 20% tax on non-equity assets and a 10% tax otherwise. The purchase price rises as a result of indexation, whereas the capital gain goes down. You can estimate the 10% tax without indexation or use the indexation calculation to the purchase price to determine the 20% tax. The smaller of the two tax slabs is then yours to pick from.
To better illustrate, let’s look at an example.
Mahesh Kumar paid Rs. 1.6 lakh to purchase debt mutual shares in April 2012. In February 2016 he sold it for Rs. 3.4 lakh. These debt-oriented mutual fund products are taxable at 20% with indexation or 10% without indexation since they are debt-oriented.
According to the computation below, Mahesh made capital gains of Rs. 1,63,000 without indexation:
Full sales value – (Brokerage at 0.5% + purchase price) = 3,40,000 – (17000 + 1,60,000) = Rs. 1,63,000
Following indexation, the purchase price will be: 1,60,000 x 1081 / 852 = Rs. 2,03,005
The capital gains achieved by indexation is Rs. 1,23,183 as per the calculation below:
Full sales value – (Brokerage at 0.5% + indexed purchase price) = 3,40,000 – (17000 + 2,03,005) = Rs. 1,19,995
Comparing the long-term capital gains tax on the two amounts:
indexation and a long-term capital gains tax of 20% – Rs. 1,19,995 x 20 / 100 = Rs. 23,999 without indexation, a long-term capital gains tax rate of 10% – Rs. 1,63,000 x 10 / 100 = Rs. 16,300
The amount of long term capital gains tax on shares in this situation without indexation is less than the amount with indexation. Mahesh has the option of paying the tax in full at 10% without indexation.
The same calculation must be used to determine the long-term capital gains tax due on taxable non-equity assets such as equity shares, equity-oriented mutual funds, and business trust unit units. The appropriate tax for these assets will be 10%, without indexing.
Summary of Long Term Gains
Securities other than those listed in Section 112A are taxed as well. A long-term capital gains tax on Indian shares and other securities is described in the section below.
Particular – Shares listed on legitimate stock exchanges and mutual funds for which STT has been paid may be sold.
Applicable Tax – 10% tax is applied to gain amounts over Rs. 1 lakh.
Particular – Sale of listed securities such as bonds, debentures, shares, and stocks on which STT has not been paid.
Applicable Tax – 10%
Particular – sale of mutual funds focused on debt
Applicable Tax – 10% without indexation, 20% with indexation
Loss on Share Trading
Short-Term Capital Loss (STCL)
Sales of equity assets that provide either short-term or long-term capital profits can offset any equity share sales that cause short-term capital losses. The loss may be carried forward for eight years and offset against any short-term or long-term capital gains realised during these eight years if it is not totally set off.
It’s important to remember that a taxpayer can only carry losses forward if his income tax return was submitted by the deadline. Even if the entire amount of money produced in a given year is less than the minimum taxable income, an income tax return must be submitted in order to carry forward these losses.
Long-Term Capital Loss (LTCL)
Long-term capital losses on equity shares were regarded as dead losses up until Budget 2018 since they couldn’t be changed or carried forward. This is due to the exemption of long-term capital gains from listed equity shares. They were also denied the ability to set their losses off or carry them forward.
After the Budget 2018 changed the regulations to tax such gains made over Rs 1 lakh at 10%, the government said that any losses from such listed equity shares, mutual funds, etc. would be carried forward.
Long-term capital losses from transfers made on or after April 1, 2018, may be offset and carried forward in accordance with the Act’s present provisions. As a result, any other long-term capital gain may be offset by the long-term capital loss. Please be aware that long-term capital losses cannot be offset by short-term capital gains.
Additionally, any unabsorbed long-term capital loss may be carried over for set-off against long-term earnings for the following eight years. One must file the return by the deadline in order to set off and carry forward these losses.
Exemption from Long-Term Capital Gains Tax Under Section 54F, individuals are eligible for a long-term capital gain tax exemption on shares.