Most individuals are unaware of how income is taxed when it comes to buying and selling of equity shares.
If you are investing or planning to invest in equity shares, then you must have a very good understanding of the tax implication on sale of shares. This article will help you in understanding how income tax is charged on sale of listed equity shares.
When will the sale of equity shares be treated as business income?
If your main business is buying and selling equity shares in the stock market to make profit, then you are into the business of stock trading. In this case, profit or loss arising out of this business will be considered as your business income. It will not be considered as capital gain.
In case of business income, you will be allowed to claim expenses incurred for the business to find out income under the heading “Profits and gains from business or profession”.
Income tax will be levied on speculative and non-speculative business income as per the tax slabs applicable.
In this article, our focus will be on capital gain arising from the sale of listed equity shares.
Income from sale of equity shares is taxed in India under the head “capital Gain” if you are not into the business of trading in the stock market.
As per our tax laws, capital gain is classified into:
- Short term capital gain
- Long term capital gain
Gain from sales of equity shares will be classified as short term or long term based on the holding period of the equity shares.
Holding period will start from the date of purchase till the date of sale or transfer.
Short term capital gain (STCG) from selling equity shares.
If the holding period of equity shares is not more than 12 months, then gain from selling equity shares will be treated as short term capital gain (STCG).
For example, let us assume Mr Basu is a salaried employee of a private company. In the month of April, 2022 he purchased equity shares of a listed company and sold the same in January, 2023. In this case shares are capital assets for Mr. Basu. He purchased shares in April, 2022 and sold them in January, 2023, i.e., after holding them for a period of less than 12 months. Hence, shares will be treated as short-term capital assets. Any gain from this sale will be treated as short term capital gain.
Instead of gain, if selling equity shares turned out to be a loss, then it will be considered as short term capital loss.
As per present tax laws, short term capital gain arising from selling equity shares are taxed at the rate of 15%.
Please note, 15% is a special rate of tax charged on short term capital gain irrespective of tax rates applicable to you based on your slab rate.
Long term capital gain (LTCG) from selling equity shares.
Long term capital gain will come into picture when the holding period of your equity shares is more than 12 months. Which means if you sell equity shares after a period of holding it for more than 12 months, the gain arising out of such sale will be treated as long term capital gain.
For example let us assume Mr. Kumar is a salaried employee of a private company. In the month of May, 2021 he purchased equity shares of a listed company from National stock exchange (NSE) and sold the same in January, 2023. In this case shares are capital assets for Mr. Kumar. He purchased shares in the month of May, 2021 and sold them in January, 2023, i.e., after holding them for a period of more than 12 months. Hence, shares will be treated as long-term capital assets. Any gain from this sale will be considered as long term capital gain.
Instead of gain, if it’s a loss, then it will be considered as long term capital gain loss.
If the long term capital gain on sale of equity shares is more than 1,00,000 rupees then tax rate is 10% without the benefit of indexation.
Short term capital Loss (STCL)
Instead of a gain, if you have incurred a short term capital loss by selling equity shares, then it can be offset against any long-term or short-term capital gain.
If the short term capital loss is not set off entirely, then you can carry forward it for 8 years. Within these 8 years, you can adjust this short term capital loss against any short term or long term capital gain made during this period.
Carry forward of losses will be allowed only when you file your income tax return within the due date of filing.
In order to carry forward losses for 8 years, you need to file your income tax return on or before the due date of filing even if your taxable income is below the basic exemption limit.
Long term capital loss (LTCL)
Long term capital loss arises by selling equity shares that can be set off against any other long term capital gain.
You are not allowed to set off long term capital loss against short term capital gain.
If any long term capital gain remains unabsorbed after set off, then you can carry it forward up to subsequent 8 years to set-off against long term capital gain.
In order to carry forward such losses, you need to file your income tax return on or before the due date of filing. If you have not filed, then the benefit of carry forward of losses will not be available for the year.
If the gain is arised out of transfer of unlisted equity shares, then it will be taxed under the heading capital gain as we do not have any formal market where you can trade these shares as a business.
Frequently asked questions-FAQs
What is the Grandfathering clause in capital gain tax?
Till the financial year 2017-18, long term capital gain arises from transfer of listed equity shares and equity-oriented mutual funds were tax free. Investors were not required to pay any tax on such sales.
With effect from the financial year 2018-19, long term capital gain tax on sale of equity shares and equity oriented mutual funds has been reintroduced with a grandfathering clause.
As per the Grandfathering clause, the acquisition cost is calculated as follows;
Step 1: Find out fair market value as of 31/01/2018 and actual selling price. Whichever is lower out of these two is considered as value 1.
Step 2: Compare actual purchase price with value 1 as arrived in step 1. Whichever is higher is considered as acquisition cost for the purchase to calculate capital gain.
Step 3: Subtract acquisition cost as arise in step 2 from sales value to arrive at long term capital gain.
Grandfathering clause gives relief from LTCG tax on sale of equity shares and units of equity-oriented mutual funds that were acquired before 31st January 2018.
Gains in excess of Rs 1 Lakh, will be taxed at the rate of 10% under section 112A.
How to calculate fair market value of listed equity shares?
The Fair market value of listed equity shares shall mean its highest price quoted on the stock exchange as on January 31, 2018.
However, if there is no trading in such shares on January 31, 2018, the highest price of such shares on a date immediately preceding January 31, 2018 on which trading happens in that share shall be deemed as its fair market value.
Is the benefit of the basic exemption limit available for long term capital gain?
Yes, if as a resident individual your basic exemption is not fully exhausted by other incomes, then such long-term capital gain exceeding 1,00,000 rupees will be reduced by the unexhausted basic exemption limit and only the balance would be taxed at the rate of 10%.
