When it comes to investing in equity shares in India, knowing how selling your stocks affects your taxes is crucial. The taxation on equity shares depends on the duration for which you hold them and is classified into Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG).
This guide will help you understand the tax rules for listed stocks and equity mutual funds traded on recognized Indian stock exchanges.
What are Short-Term Capital Gains (STCG)?
If you sell shares within 12 months of buying them, any profit is classified as Short-Term Capital Gains (STCG).
Selling your shares for more than you paid results in a gain, which is taxed at 15% for the financial year 2023-24. However, this rate will increase to 20% starting July 23, 2024.
This means now for the financial year 2024-25 (AY 2025-26), tax rate for short term capital gain is 20%
How to Calculate STCG?
To calculate your short-term capital gain, use this formula:
STCG = Sale Price − Expenses − Purchase Price
Example of STCG Tax Calculation:
Imagine Mr. Sanjeev buys 250 shares for ₹48,000 (₹192 each). After 5 months, he sells them for ₹200 each, totaling ₹50,000.
- Total Sale Value: ₹50,000
- Brokerage Fee: ₹40
- Purchase Price: ₹48,000
STCG Calculation: STCG = ₹50,000 – (₹48,000 + ₹40) = ₹1,960
Thus, Mr. Sanjeev’s STCG is ₹1,960.
What are Long-Term Capital Gains (LTCG)?
If you sell shares after holding them for more than 12 months, any profit is known as Long-Term Capital Gains (LTCG).
Before the 2018 Budget, LTCG from selling stocks was tax-free.
Now, if your long-term capital gains exceed ₹1 lakh, you pay a 10% tax on the amount above that.
This exemption limit has increased to ₹1.25 lakh for the financial year 2024-25, with the tax rate rising to 12.5% starting July 23, 2024.
Unlike other assets, equity shares do not allow for inflation adjustments when calculating LTCG.
This means, Long-term capital gains on equity shares are exempt up to ₹1.25 lakh for the financial year 2024-25 (AY 2025-26). If your total long-term gains exceed ₹1.25 lakh in a financial year, the amount over ₹1.25 lakh is taxed at 12.5%.
It’s essential to report all capital gains in your income tax return, even if they are exempt.
Example of LTCG Tax Calculation
Suppose, you buy shares for ₹20,000 and sell them for ₹1,50,000 after a year, the ₹1,30,000 gain is subject to LTCG tax.
Since your total LTCG in that financial year exceeds ₹1,00,000, only the amount over ₹1,00,000 (i.e., ₹30,000) will be taxed at 10%.
Starting from July 23, 2024, this rate will increase to 12.5%, and the exemption limit will rise to ₹1,25,000. Therefore, in this example, ₹5,000 will be taxed at the rate of 12.5%.
Losses from Selling Shares
Short-Term Capital Loss (STCL) occurs when you sell shares for less than what you paid within that 12-month period, resulting in a loss. You can use this Short-Term Capital Loss (STCL) to offset any future short-term or long-term capital gains. You can carry forward unused losses for up to 8 years, but you must file your tax return on time.
A Long-Term Capital Loss happens when you sell an asset that you have held for more than 12 months at a loss. A Long-Term Capital Loss can be used to reduce taxes on future long-term gains, but it cannot offset short-term gains. Similar to STCL, you can carry forward these losses for up to 8 years if you file your return on time.
Share Sale: Business Income or Capital Gains
When selling shares, you may classify your gains as either business income or capital gains. Frequent traders may have their income considered business income.
- Business Income: Expenses related to trading can be deducted, and profits are taxed as regular income.
- Capital Gains: You can also deduct selling expenses. STCG is taxed at 15% (or 20% later), while LTCG is taxed at 12.5% above the exemption limit.
Deciding if an investment in shares is a capital asset or part of your business inventory can be tricky and has led to many disputes. It’s best for taxpayers to carefully evaluate and classify their income correctly.
New Clarification from CBDT
Taxpayers can now decide how to classify their income from selling shares. Once you make this choice, you need to stick with it in future years unless your situation changes significantly. This applies only to listed shares.
To reduce confusion, the CBDT has set guidelines. If you treat your listed shares as business stock, your income will be classified as business income, regardless of how long you held the shares. The tax officer will accept this choice. (Ref: CBDT circular no 6/2016 dated February 29, 2016)
If you classify the income as capital gains, the tax officer will accept this as long as you held the shares for over 12 months. However, once you choose a classification for a tax year, you must use the same one in the future.
In other cases, whether your income is considered capital gains or business income depends on how often you trade and your intention behind holding the shares. These guidelines help avoid unnecessary questions from tax officers about your income classification.
Frequently Asked Questions (FAQs)
What is the exemption limit on long-term capital gains (LTCG) for equity shares?
The exemption limit for long-term capital gains on equity shares is currently ₹1,00,000. This means if your profit from selling shares is below this amount, you won’t have to pay any tax on it, provided you’ve paid the Securities Transaction Tax (STT) when buying or selling those shares.
Starting from the financial year 2024-25, this limit will increase to ₹1,25,000.
What is indexation in capital gains?
Indexation is a way to adjust the purchase price of an asset to account for inflation. This means it helps reflect how prices rise over time. By using this adjusted price, your profits seem smaller, which can reduce the tax you owe. In simple terms, it helps you pay less tax by taking into account the changing value of money.
How is income from futures and options taxed?
Income from futures and options is taxed as business income because it is treated as non-speculative business income. This means that any profits you make from trading these financial instruments are considered part of your regular business income and taxed accordingly.
What will be the tax rate on short-term capital gains from selling equity shares?
When you sell equity shares for a profit within one year, that profit is called short-term capital gains. Right now, the tax rate on these gains is 15%. This means you’ll pay 15% of your profit as tax.
However, starting on July 23, 2024, this rate will increase to 20%. So, if you’re planning to sell shares soon, keep this change in mind!
Can a long-term capital loss be set off against a short-term capital gain?
If you sell an asset you’ve held for over a year at a loss (a long-term capital loss), you cannot use that loss to reduce your short-term capital gains (profits from assets held for less than a year).
However, you can carry forward these long-term losses for up to eight years. This means that if you later make long-term gains, you can use those previous losses to lower your tax. This can help you save money on taxes in the future.
What if your tax rate is 10%, 20%, or 30%, and you have short-term capital gains from selling listed equity shares?
If you sell listed equity shares and make a profit (known as short-term capital gains), the tax you pay on that profit doesn’t depend on your regular income tax rate (whether it’s 10%, 20%, or 30%). Instead, short-term capital gains are taxed at a fixed rate of 15%.
Starting July 23, 2024, this rate will go up to 20%. So, regardless of your income tax bracket, you’ll pay these specific rates on your profits from selling those shares.
How much is exempt from long-term capital gains when selling listed shares?
Long-term capital gains over ₹1,00,000 from selling listed shares are taxed at 10%. So, ₹1,00,000 is exempt from tax. According to Budget 2024, long-term capital gains over ₹1,25,000 will be taxed at 12.5%.
The exemption limit has been raised to ₹1.25 lakhs for the whole year, while the new tax rate takes effect on July 23, 2024.
Has Budget 2024 proposed changes to tax rates on income from selling shares?
Yes, Budget 2024 has proposed some changes starting from the financial year 2024-25:
The tax rate on short-term capital gains from selling listed equity shares and equity-oriented funds will increase from 15% to 20%. Short-term capital gains from unlisted shares will still be taxed at normal slab rates.
To help lower and middle-income earners, the exemption limit for long-term capital gains from selling equity shares or related investments has increased from ₹1 lakh to ₹1.25 lakhs per year. However, the tax rate on these gains has increased from 10% to 12.5%. The tax on long-term capital gains from unlisted shares will decrease from 20% to 12.5%.
