We all know that income from salary, rental income and business income is taxable. But what about income from the sale or purchase of shares? Many homemakers and retired people spend their time gainfully buying and selling shares but are unsure how this income is taxed. Income/loss from the sale of equity shares is covered under the head ‘Capital Gains’.
Budget 2024 Updates
Budget 2024 has proposed the following amendments effective from FY 24-25 -
- There will only be two holding periods for classifying assets into long-term and short-term: 12 months and 24 months. The 36-month holding period has been removed.
- The holding period for all listed securities is 12 months. All listed securities with a holding period exceeding 12 months are considered Long-Term. The holding period for all other assets is 24 months.
- The taxation of Short-Term Capital Gain for listed equity shares, a unit of an equity-oriented fund, and a unit of a business trust has been increased to 20% from 15%
- For the benefit of the lower and middle-income classes, the limit on the exemption of Long-Term Capital Gains on the transfer of equity shares or equity-oriented units or units of Business Trust has increased from Rs.1 Lakh to Rs.1.25 lakh per year. However, the rate at which it is taxed has increased from 10% to 12.5%.
Under the head ‘Capital Gains’, income is further classified into:
(i) Long-term capital gains
(ii) Short-term capital gains
This classification is made according to the holding period of the shares. The holding period means the duration for which the investment is held, starting from the date of acquisition till the date of sale or transfer.
It should be noted that the holding periods of shares and securities are different for different classes of capital assets. For income tax purposes, holding periods of listed equity shares and equity mutual funds is different from the holding period of debt mutual funds. Their taxability is also different.
In this article, we will cover the tax implications on the listed securities like listed equity shares, bonds and debentures listed on a recognized Indian stock exchange, units of UTI and Zero-coupon bonds.
Taxation of Gains from Equity Shares
Short-Term Capital Gains (STCG)
If equity shares listed on a stock exchange are sold within 12 months of purchase, the seller may make a short-term capital gain (STCG) or incur a short-term capital loss (STCL). The seller makes short-term capital gains when shares are sold at a price higher than the purchase price. Short-term capital gains are taxable at 15%. This has been increased to 20% with effect from 23rd July, 2024.
Calculation of short-term capital gain = Sale price minus Expenses on Sale minus the Purchase price
Let's take a look at an example of STCG tax:
In October 2015, Kuldeep Singh paid Rs.38,750 for 250 shares of a publicly traded firm at a price of Rs.155 a share. He sold them for Rs.192 a share after 5 months for Rs.48,000. Let's see how much money he makes in the short run.
- Full sales value - Rs.48,000
- Brokerage at 0.5% - Rs.240
- Purchase price - Rs.38,750
Therefore short-term capital gain made by Kuldeep will be: Rs.48,000 - (Rs.38,750+ Rs.240) = Rs.9,010
Long-Term Capital Gains (LTCG)
If equity shares listed on a stock exchange are sold after 12 months of purchase, the seller may make a long-term capital gain (LTCG) or a long-term capital loss (LTCL).
Before the introduction of Budget 2018, the long-term capital gain made on the sale of equity shares or equity-oriented units of mutual funds was exempt from tax, i.e. no tax was payable on gains from the sale of long-term equity investments.
The Financial Budget of 2018 took away this exemption. Henceforth, if a seller makes a long-term capital gain of more than Rs.1 lakh on the sale of equity shares or equity-oriented units of a mutual fund, the gain made will attract a long-term capital gains tax of 10% (plus applicable cess). Also, the benefit of indexation will not be available to the seller. These provisions will apply to transfers made on or after 1 April 2018.
Also, this new provision was introduced prospectively, i.e. gains starting from the 1st of Feb 2018 will only be considered for taxation. This is known as the ‘grandfathering clause’. Any long-term gains from the equity instruments purchased before the 31st of January 2018 will be calculated according to this ‘grandfathering clause’. Click here to read about it in detail.
The tax will be leviable at a concessional rate of 10% on Capital gains exceeding Rs. 1,00,000 earned from selling listed equity shares.
Example: If you have a capital gain of Rs. 5,00,000. then your tax liability would be = Rs. 40,000 (5,00,000-1,00,000)*10%.
It is to be noted that Budget 2024 has brought about a change in taxation of long-term Capital Gain with effect from 23rd July 2024. For the benefit of the lower and middle-income classes, the limit on the exemption of Long-Term Capital Gains on the transfer of equity shares or equity-oriented units or units of Business Trust has increased from Rs.1 Lakh to Rs.1.25 lakh per year. However, the rate at which it is taxed has increased from 10% to 12.5%. The exemption limit to Rs.1.25 lakhs has been increased for the whole of the year, whereas the tax rate changed on 23rd July 2024.
Loss From Equity Shares
Short-Term Capital Loss (STCL)
Any short-term capital loss from the sale of equity shares can be offset against short-term or long-term capital gain from any capital asset. If the loss is not set off entirely, it can be carried forward for eight years and adjusted against any short term or long-term capital gains made during these eight years.
It is worth noting that a taxpayer will only be allowed to carry forward losses if he has filed his income tax return within the due date. Therefore, even if the total income earned in a year is less than the minimum taxable income, filing an income tax return is a must for carry forward of these losses.
Long-Term Capital Loss (LTCL)
Long-term capital loss from equity shares until Budget 2018 was considered a dead loss – It could neither be adjusted nor carried forward. This is because long-term capital gains from listed equity shares were exempt. Similarly, their losses were neither allowed to be set off nor carried forward.
After the Budget 2018 has amended the law to tax such gains made more than Rs 1 lakh at 10%, the government has also notified that any losses arising from such listed equity shares, mutual funds, etc., would be carried forward.
Long-term capital loss from a transfer made on or after 1 April 2018 will be allowed to be set off and carried forward in accordance with existing provisions of the Act. Therefore, the long-term capital loss can be set off against any other long-term capital gain. Please note that you cannot set off long-term capital loss against short-term capital gains.
Also, any unabsorbed long-term capital loss can be carried forward to the subsequent eight years for set-off against long-term gains. To set off and carry forward these losses, a person has to file the return within the due date.
Grandfathering Clause
A grandfathering clause is a provision that states that an old rule will continue to apply to some existing instances while a new rule will apply to all future cases. Individuals who are not subject to the new rule are said to have grandfather rights, acquired rights, or have been grandfathered in.
Long-term capital gains (LTCG) on the transfer of listed equity shares and equity-oriented mutual fund schemes were tax-free until the 2017-18 fiscal year.
The Finance Act, 2018 reinstated the LTCG tax on the sale of listed shares and equity-oriented mutual fund schemes with effect from April 1, 2018, i.e. the fiscal year 2018-19, with a grandfathering clause.
While the LTCG was reintroduced on 1st February 2018, the CBDT (Central Board of Direct Taxes) grandfathered gains up to 31st January 2018, i.e. no tax would be paid on gains accrued until 31st January 2018.
Grandfathering Clause Formula
The acquisition cost is calculated as follows:
- Value I is the fair market value (FMV) as of January 31, 2018, or the actual selling price, whichever is lower.
- Value II equals Value I or the actual purchase price, whichever is greater.
Long-Term Capital Gain = Sales Value - Acquisition Cost (as calculated above)
Tax responsibility = In a year, LTCG of Rs 1 lakh is tax-free. Thus, after subtracting Rs 1 lakh from the total tax gain, the tax burden will be 10% (plus applicable surcharge and cess).
Example: An equity share is acquired @ Rs.100 on 1st January 2017, its FMV is Rs.200 on 31st January 2018 and it is sold on 1st of April 2023 @ Rs.50.
As per the grandfathering clause,
Value 1 - lower of the sale value(0) and FMV as on 31st January 2018(200) ; 0
Value 2 - Higher of the Value 1(0) or the actual purchase price (100); Rs. 100
Therefore, the actual cost of Rs.100 will be taken as the cost of acquisition in this case. Hence, the long term capital loss will be Rs. 50(Rs.50-Rs.100) in this case.
Securities Transaction Tax (STT)
STT is applicable on all equity shares sold or bought on a stock exchange. The above tax implications are only applicable to shares listed on a stock exchange. Any sale/purchase on a stock exchange is subject to STT. Therefore, these tax implications discussed above are only for shares on which STT is paid.
Expenses incurred during the sale of shares:
Registration charges, brokerage charges & various other charges are deducted from the sale of shares to arrive at the net gain or loss arising from transfer of such shares.
Share Sale as Business Income or Capital Gain Income
Certain taxpayers treat gains or losses from the sale of shares as ‘income from a business, while others treat it as ‘Capital gains’. Whether your gains/losses from the sale of shares should be treated as business income or be taxed under capital gains has been a matter of much debate.
In case of significant share trading activity (e.g. if you are a day trader with lots of activity or regularly trade in Futures and Options), your income is usually classified as income from the business. In such a case, you are required to file an ITR-3, and your income from share trading is shown under ‘income from business & profession’.
Calculation of Income From Business
When you treat the sale of shares as business income, you can reduce expenses incurred in earning such business income. In such cases, the profits would be added to your total income for the financial year and, consequently, charged at tax slab rates.
Calculation of Income From Capital Gains
If you treat your income as capital gains, expenses incurred on such transfer are allowed for deduction. Also, long-term gains from equity above Rs 1 lakh annually are taxable at 10%, while short-term gains are taxed at 15%.
Deciding whether a specific investment in shares or other securities qualifies as a capital asset or as stock-in-trade is a matter that hinges on specific facts. This determination has historically caused considerable uncertainty and has been a source of litigation. Therefore, it is advisable to taxpayers to carefully assess and classify the income under the appropriate head.
New Clarification from CBDT
Taxpayers have now been offered a choice of how they want to treat such income. Once they choose, they must, however, continue the same method in subsequent years, too, unless there is a major change in the circumstances of the case. Note that the choice has been made applicable only to listed shares or securities.
To reduce litigation in such matters, CBDT has issued the following instructions (CBDT circular no 6/2016 dated 29th February 2016)– If the taxpayer himself opts to treat his listed shares as stock-in-trade, the income shall be treated as business income. Irrespective of the period of holding of listed shares. The AO shall accept this stand chosen by the taxpayer.
If the taxpayer opts to treat the income as capital gains, the AO shall not put it to dispute. This is applicable for listed shares held for more than 12 months. However, this stand, once taken by a taxpayer in a particular assessment year, shall also be applicable in subsequent assessment years. And the taxpayer will not be allowed to take a different stand in subsequent years.
In all other cases, the nature of the transaction (whether capital gains or business income) shall continue to be decided basis the concept of ‘significant trading activity’ and the intention of the taxpayer to hold shares as ‘stock’ or as ‘investment’. The above guidance would prevent unnecessary questioning from Assessing Officers regarding income classification.
How to Treat the Sale of Unlisted Shares in This Context
However, in the case of the sale of unlisted shares for which no formal market exists for trading, the department has given its view. Income arising from the transfer of unlisted shares would be taxed under the head ‘Capital Gain’, irrespective of the holding period, to avoid disputes/litigation and maintain a uniform approach (as per CBDT circular Folio No.225/12/2016/ITA.1I dated the 2nd of May, 2016).
Related Articles:
1. Section 111A - Short Term Capital Gain on Shares
2. Speculative Income – Meaning, Taxability, Exceptions
3. Section 54 - Capital Gains Exemption
4. Section 54F - Capital Gains To Buy Residential House Property
5. Capital Gains Tax on the Sale of Property and Jewellery
6. Capital Gains Exemption
7. LTCG Calculator
8. Capital Gains for Beginners
9. SIP
10. UAN
11. SIP Calculator