Capital Gains on Shares

Updated: 03-09-2019 05:35:39 AM

Among potentially high risk-high return investments, equity shares have always been among the most popular. Keeping aside the fact whether they work or not as a suitable investment option, any profits from sale of shares is subject to capital gains taxation rules. If shares have been held for 1 year or less before being sold for a profit, those profits are subject to short term capital gains on shares rules. Similarly, if shares have been held over 1 year from date of purchase, those profits will be subject to long term capital gains on shares rules. But first let’s understand what capital assets are and why shares are classified in that category.         

What are Capital Assets?

Capital assets in the simplest terms are investments that can potentially provide returns when sold for a profit at a later date. Examples of such investments include residential property, stocks, bonds, mutual funds, gold, collectibles, art, etc. When an investor buys a capital asset, the value he pays for the investment is known as the cost of acquiring the asset and includes all expenses such as transportation, installation or insurance costs related to the asset.

What are Capital Gains?

If an investor sells the capital asset for a price and makes a profit on the investment then the difference between the selling cost and acquiring cost is called the capital gain. Along the same lines, if the capital asset is sold at a lower price than the cost of acquiring the asset, it is known as a capital loss.

Capital gains are taxable according to the Income Tax Act, 1961 and the rate depends on the type of capital asset as well as the type of capital gain. The tax is aptly termed as “Capital Gains Tax”. However, it is important to note here that capital gains taxation rules are not applicable to capital assets received as gifts by way of inheritance or will at the time they are acquired since there is no “acquisition” of the asset, only a transfer of ownership. Capital gains tax is only applicable when the acquirer actually completes the sale of the capital asset in question.

What are the Types of Capital Gains on Shares?

Capital gains on shares can be either short term capital gains on shares or long term capital gains on shares. Different taxation rules are applicable depending on whether capital gains on shares are short term or long term in nature. They are defined as follows:

• Short term Capital Gains on Shares: If equity shares is held for a period of 12 months or less and then sold for profit, such gains are known as short-term capital gains (STCG). STCG on equity-oriented mutual fund investments follows the same rule as shares. However, the STCG applicability time period varies in case of other capital assets for immovable properties such as land, residential house, etc. 

 

• Long-term Capital Gains: If shares are held for longer than 12 months from the date of allocation and then sold for a profit, the profit or gain is known as a long-term capital gain on shares. Long term capital gains on shares have different taxation rules as compared to short term capital gains on shares. 

 

Short Term Capital Gains Tax on Shares

Rules regarding short term capital gains tax on equity shares are covered under Section 111A of The Income Tax Act, 1961. The following are key rules regarding its applicability:

• • STCG from the sale of equity shares is applicable to shares listed on a recognised stock exchange in the country that have incurred Securities Transaction Tax
  • STCG is applicable on sale of units of equity-oriented mutual fund sold through a recognised stock exchange that have featured Securities Transaction Tax
  • STCG from the sale of units of a business trust
  • STCG from the sale of equity shares, units of an equity-oriented fund or units of business trust through a recognised stock exchange in any of the International Financial Services Centre and consideration is payable in foreign currency

 

 

 

 

Short-term Capital Gains from non-equity investments feature a different tax treatment and are not covered by Section 111A of the Income Tax Act, 1961.

When is Short-term Capital Gains Applicable to Equity Shares?

STCG tax is applicable to equity shares if they are sold within 12 months of acquiring them. The same 1 year time period counted from the date of unit allocation is applicable to all equity-oriented mutual fund schemes.  

What is the Short Term Capital Gains Tax Rate on Equity Shares?

Short-term capital gains made on equity shares (funds) and debt funds are treated differently. In case of equity shares, the applicable STCG tax rate is 15% as per Section 111A of the Income Tax Act, 1961. There is no basic exemption limit in case of short term capital gains on shares, hence taxes are payable any time such profits are achieved. The dividend received from equity shares of up to Rs. 10 lakh is exempt under Section 10 (34) of the Income Tax Act, 1961. The investor can deduct the broker’s commission related to the shares sold as an expense from the profit made from selling the shares (i.e. STCG) before calculating the tax liability.

What is the Long Term Capital Gains Tax Rate on Equity Shares? 

The long term capital gains tax rate for shares is 10% as of AY 2019-20, however it is notable that this is applicable only if long term capital gains (LTCG) from equity and equity-oriented investments including mutual funds exceeds Rs. 1 lakh for the applicable financial year. Additionally, long term investors also get the benefit of grandfathering up to 31st January 2018. The grandfathering clause essentially means that in case of investments in equity share made before 31st January 2018, any gains made till the applicable date will be exempt from LTCG tax.  

Which Income Tax Return Form to File if I Have Short-term Capital Gains from Equity Shares?

Investors with income from salary and capital gains from equity shares and stocks, whether short-term or long-term, must fill ITR Form 2. This is irrespective of whether the annual income of the tax assessee is greater than or less than Rs. 50 lakh. If you are a self-employed tax payer with short term capital gains from shares, you will be required to file your returns using ITR Form 3.  

Are any Section 80 Deductions Applicable to STCG tax on shares?

No deductions under Section 80C to 80U are allowed from short term capital gains on shares under Section 111A of the Income Tax Act, 1961. On the other hand, short term capital losses can be carried forward by the tax payer and be used to offset STCG on shares in subsequent financial years.