Capital Gains on Shares

Capital appreciation is the growth in the price of an asset which gives it a higher value than its purchase price. The price of assets fluctuates according to their performance in the market.

If investors end up selling this asset at a higher price than that at which he or she had purchased it, the profit is known as capital gain on equity shares.

Wealth gain on shares is divided into two categories depending on the time for which the shares are held by investors. It may be short term (if term of holding the assets less than 12 months) or long term (if the term of holding these assets is more than 12 months, 24 months or 36 months, depending on the type of asset) capital gain on shares.

Long Term Capital Gain on Shares

Long term capital gain on share is calculated by deducting the sale price and cost of acquisition of an asset that has been held for more than 12 months by an investor. This is given by the net profit that investors earn while selling the asset.

However, this span of 12 months is considered only in case of listed equity shares. These are the shares that are traded through exchanges like NSE, BSE, etc. For unlisted equity shares, long term capital gains are generated for assets held for 24 months to 36 months or more.

Short Term Capital Gain on Shares

Gains generated from shares held for a period shorter than 36 months (for unlisted equity shares) or 12 months (for listed equity shares) are considered short term capital gain on shares.

When it comes to profitability between long term capital assets and short term ones, investors often choose to invest in the long term equity shares because of the tax benefits offered on them.

What is Long Term Capital Gain?

Investments that provide returns over a longer period of time are called as long-term capital gains or LTCG. All the investments that offer returns in periods that range between 1 and 3 years can be called as long-term capital gains.

This means that if a person has held an investment for 3 years before transferring it, then the returns from the investment at the time of transfer it will be considered a long-term capital gains. Some of the investments that can generate long-term capital gains are:

  • Sale of Property
  • Sale of Agricultural Land
  • Mutual Fund Investments
  • Stocks

What is Short Term Capital Gain?

Short term capital gain refers to any capital gain/profit which an individual gets on sale of short term capital assets. Assets like shares that are listed on a recognised stock exchange and has been held for less than 12 months, are treated as short-term capitals. The proceeds earned through them are treated as short-term capital gains.

Such shares include Government securities, debentures, equity-oriented Mutual Funds, UTI units and Zero-Coupon Bonds

Calculation of Capital Gain on Equity Shares

Calculation of capital gain on equity shares is different for both short and long term assets. These values depend on a few factors; these are the following –

  • Sale Value of Assets

It is the value received on sale of a particular asset, irrespective of long or short term. For equity shares, the gross selling price minus brokerage charges and Securities Transaction Tax is its sale value.

  • Cost of Asset Acquisition

Cost of asset acquisition is the purchasing price of an asset that is sold. It also includes brokerage charges incurred during the purchase of asset. Following steps shows some crucial aspects related to the cost of acquisition of an asset –

  1. Fair market value of an investment is calculated.
  2. It is then compared to actual sale value of the asset, and the lesser amount between both is taken.
  3. This value is then compared with the purchase value of an investment. The higher value is the cost of acquisition of an asset.
  • Expenses Incurred Due to Transfer or Sale

These expenses include brokerage and registry charges along with any other expense incurred during asset sale. For equity shares with STT charges during sale transaction, the charges are included in computation of capital gain on equity shares.

  • Indexation

Indexation is applicable only during calculation of LTCG. It is a process of incorporating inflation into calculation of capital gains to determine the correct price. LTCG is calculated with the Cost Inflation Index (CII) as reference.

  • Holding Period

This is given by the number of days or months (in case of STCG) or years (for LTCG) for which investors held the asset. Holding period starts from date of acquisition of an asset and stretches to the date immediately preceding that of asset transfer.

With above factors in mind, the computation of capital gains, both long and short term, can be exhibited through the following tables –

Computation of LTCG on Shares

LTCG = Sale value of long-term equity assets – (the cost of acquisition of asset + expenses incurred due to their transfer or sale).

Computation of STCG on Shares

STCG = Sale value of short term equity assets – (cost of asset acquisition + expenses incurred from the transfer or sale of the assets).

Example of LTCG on Shares

Let us assume that Mr X purchased 100 shares of a listed company in October 2016 at the rate of Rs. 120 per share, and paid a total amount of Rs. 12,000 for them. He then sold the acquired shares for Rs. 150 per share on March 2018, after 1 year and 5 months, at Rs. 15,000.

In this case, to calculate the LTCG on shares purchased, the indexed purchase price of the asset needs to be calculated.

Cost Inflation Index (CII) from 2015-16 to 2022-23

Financial Year 

Cost Inflation Index

2015-2016

254

2016-2017

264

2017-2018

272

2018-2019

280

2019-2020

289

2020-2021

301

2021-2022

317

2022-2023

331

Thus, with reference to the table above, the indexed purchase price of the shares in the illustrated example will be = Rs. (12000x 271/264) = Rs. 12,318 approximately.

Therefore, Mr X’s LTCG based on the following numbers –

  • Sales value – Rs. 15,000
  • Brokerage value at 0.5% – Rs. 75
  • Indexed price of purchase – Rs. 12,318

Is given by –

LTCG on purchase of equity shares= Rs. 15,000 – Rs. (12,318+75) = Rs. 2607.

Example of STCG on Share

Let us assume that Mr Y bought 200 shares of a listed company in October 2016 at the rate of Rs. 150 per share, thus paying a total amount of Rs. 30,000. Next, he sold the shares for Rs, 180 per share on March 2017, after a period of 5 months, at a total of Rs. 45,000.

In this case, the short term capital gains made by MR. Y will be given by –

  • Sales value – Rs. 45,000
  • Brokerage at the rate of 0.5% – Rs. 225
  • Asset purchase price – Rs. 30,000

Therefore, STCG on the shares purchased by Mr Y= Rs. 45,000 – Rs. (30,000+225) = Rs. 14,775.

Capital Gains Tax on Shares

After the calculation of long and short term capital gains on shares, the most vital part of these investment options is the tax implications on them.

When investors earn capital gains from the sale of the equity assets, the profit is categorised as their income. Thus, in turn, investors are liable to pay tax on the gains, under the Income Tax Act, 1961, in the year of the transfer of the capital assets. This is known as capital gains tax and is levied on be both short and long term.

However, the capital gains tax is payable only if the asset is being sold. If investors choose to hold the asset with appreciating value but don’t sell it, they do not have to pay this tax.

  • Long Term Capital Gains Tax

Previously, long term capital gains included under Section 10(38) of the Income Tax Act were exempt from taxation. However, after the reforms introduced in the 2018-19 Union Budget, the previously exempt capital gains are now subject to taxation without indexing if the quantum of gain exceeds Rs. 1 Lakh.

The current rate of taxation for the above-mentioned circumstance is at 10%. However, this tax reform will not be applicable for the capital gains received up to January 31st, 2018.

  • Taxation of Short Term Capital Gains

There is a different rule for taxation of LTCG and STCG on shares. For instance, the STCG that falls under Section 111A of the Income Tax Act is liable to be charged at a rate of 15%. The STCG under this Section includes equity shares and equity-oriented Mutual Funds that were sold on or after 1st October 2004 on any recognised stock exchange, and fall under Securities Transaction Tax.

Apart from the above two tax regimes on capital gains, there is a third type of tax implication on capital gains that is levied on overseas investments.

  • Tax Implications of Capital Gains on Foreign Shares

Capital gains from foreign investment can be taxed twice, once in India and once in the country where the shares are held. Under this double taxation, the long term capital gains from foreign shares will be taxed at 20% while the short term capital gains are taxed at 30%. However, individuals can avoid the double taxation liability under Section 91 of the Income Tax Act, 1961.

Therefore, it is crucial for investors to conduct extensive research on their investments to ensure that they understand the tax liabilities on both their short term and long term assets.

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