Capital Gain on Sale of Shares
Learn about all the taxation implications of earning income from shares.
How Taxation on Shares Income Is Calculated?
Investing in the stock market can be pretty exciting, and nowadays, this aspect of earning money has gained significant traction. Individuals buy shares of different companies, hoping they'll grow and make them some extra cash.
But what about the taxes on the money you make from these investments? Do you know how these are taxed?
This article will cover different aspects related to shares income taxation. Let’s begin!
What are Capital Gains?
Capital gains are the profits earned by selling capital assets, such as investment properties, cryptocurrencies, shares, homes, cars, bonds, NFTs, stocks, and collectibles. In simple terms, anything you own that increases in value over time can be considered a capital asset.
When you sell a capital asset for more than what you paid for it, the difference between the sale price and the purchase price is your capital gain. For example, if you bought a piece of share for ₹1,000 and later sold it for ₹1,500, your capital gain would be ₹500.
Now, income is classified into two types under “Capital Gains.”
Long-term capital gains
Short-term capital gains
Taxation on Short-Term Capital Gains (STCG)
Short-term capital gains arise when you sell equity shares within 12 months of purchasing them.
If you sell shares at a price higher than the purchase price within 12 months, you make a short-term capital gain.
Short-term capital gains are taxable at a fixed rate of 15%, regardless of your regular income tax slab.
STCG: Sale price - (Purchase price + Expenses on sale) |
Let’s understand with an example how taxation on Short-term capital gains is calculated.
Vijay bought shares worth ₹30,000 in August 2023 and sold them for ₹40,000 after 5 months. The calculation would be.
Sale price: ₹40,000
Brokerage at 0.5%: ₹200
Purchase price: ₹30,000
The STCL would be ₹40,000 - (₹30,000 + ₹200) = ₹9,800.
Taxation on Long-Term Capital Gains (STCG)
Long-term capital gains arise when you sell equity shares after holding them for over 12 months. Here's what you need to know.
Previously, long-term capital gains from equity shares were tax-exempt. However, from April 1, 2018, gains exceeding Rs. 1 lakh are liable to a 10% tax rate. (including cess)
Also, Section 10 (38) was replaced by another section, i.e., Section 112A. The government introduced the “grandfathering rule”, which demonstrates that the new tax on share profits applies only to gains made after February 1st, 2018.
Let’s understand with an example how taxation on Long-term capital gains is calculated.
In May 2019, Sunil invested in company shares and purchased them for ₹200. Then, in May 2022, he decided to sell those shares for ₹300, which made him a profit of ₹100 from the sale.
Since he held the shares for more than a year, this profit will be classified as a long-term capital gain on shares.
The stock value on the 1st January 2020 was Rs. 250, which means the appreciation in value was Rs. 50 per share (₹250 - ₹200). Out of the total capital gains of Rs. 100 per share, Rs. 50 per share, is not taxable, and the remaining amount will be taxable as per capital gains tax rate of 15%, without indexation.
Below is the table for the tax rates summary.
Particulars | Applicable Tax Rate |
Selling listed shares on recognized stock exchanges and Mutual Funds with STT-paid | 10% tax on capital gains exceeding ₹ 1 Lakh |
Selling bonds, debentures, shares, and other listed securities without STT paid | 10% tax |
Calculation of Capital Gain on Equity Shares
When it comes to computing capital gains on equity shares, there are specific factors to consider, whether the investment is short-term or long-term.
Sale Value of Assets
The sale value of equity shares is the amount you receive when you sell them. This includes the gross selling price minus any brokerage fees incurred during the sale transaction.
Cost of Asset Acquisition
This encompasses the total expenses incurred when purchasing the shares. It includes the price paid for the shares and any brokerage fees or transaction costs.
Expenses Incurred Due to Sale or Transfer
Various expenses, such as registry charges, brokerage fees, and any other costs associated with the transaction, are incurred when selling shares. For shares sold with STT charges, these charges are added to the calculation of capital gains.
Holding Period
The holding period refers to the duration an investor holds the equity shares before selling them. It starts from the asset acquisition date and continues till the date immediately preceding the asset transfer.
By considering the above factors – sale value, acquisition cost, selling expenses, and holding period – you can accurately compute the capital gains on equity shares. If it all seems a bit confusing, don't worry! Karrtax professionals can provide clarity and guidance according to specific situations.
Frequently Asked Questions (FAQs)
Which ITR form is used to report Capital Gains on shares?
ITR-2 is used to report Capital Gains on shares. This form is specifically for individuals and covers different types of income, including the profits made from selling shares.
2. How much income earned from shares is tax-free?
Income from shares is taxed differently depending on how long you've held them. Long-term gains from equity above Rs 1 lakh are taxable annually, while short-term gains are taxed at 15%.
3. What are LTCG and STCG?
LTCG stands for Long-Term Capital Gains, which refers to the profits made from selling assets like shares, real estate, or mutual funds that were held for more than one year.
STCG stands for Short-Term Capital Gains, which are the profits earned from selling assets held for one year or less.
You have reached the end of this article.