Capital Gains Tax on Shares: Long-Term & Short-Term A.Y. 2023-24

Capital Gains Tax on Shares: Long-Term & Short-Term A.Y. 2023-24/A.Y.2024-25: Capital gains on shares refer to the profit earned from the sale of shares or stocks. When you sell shares at a price higher than what you initially paid for them, you realize a capital gain. However, if you sell them at a price lower than what you paid, you experience a capital loss.

The tax treatment of capital gains on shares depends on the holding period of the shares. If you hold the shares for a short period, typically up to one year, any gain you earn is considered a short-term capital gain. On the other hand, if you hold the shares for more than one year, the gain is classified as a long-term capital gain.  The tax liability on short-term and long-term capital gains on shares is different.

In this article, we will discuss the latest updates regarding capital gains on shares, including long-term capital gains tax, and short-term capital gains tax, as well as the tax treatment of bonds, debentures, and other securities listed on stock exchanges.

Taxation of Capital Gains from Equity Shares

The tax treatment of capital gains on equity shares depends on whether they are classified as short-term or long-term capital gains. The holding period of the equity shares is used to determine this classification. If you sell your shares within 12 months of acquiring them, the resulting gain or profit will be treated as a short-term capital gain. On the other hand, if you sell the shares after holding them for more than 12 months, the gain will be classified as a long-term capital gain. Once the classification of the capital gain is determined, different tax rates or tax treatments may apply to short-term and long-term capital gains.

Holding Periods for Capital Gains on Different Assets

Short-Term Capital Gains on Equity Shares

The above table states that the period of holding listed equity shares for short-term capital gains is less than 12 months. If you sell your listed equity shares within 12 months of acquiring them, the resulting gain will be treated as a short-term capital gain. On the other hand, if you hold the shares for more than 12 months before selling, the gain will be classified as a long-term capital gain.

How to Calculate Short-term Capital Gains Tax on Equity Shares

To calculate the tax on short-term capital gains, you can follow this simple formula:  Short-term Capital Gains Tax = (Sale Price – Expenses on Sale) – Purchase Price

• • Sale Price: The amount you received from selling the equity shares.
  • Expenses on Sale: Any expenses directly related to the sale of shares (e.g., brokerage fees, transaction charges, etc.).
  • Purchase Price: The amount you originally paid to acquire the equity shares.

Once you have the figure for short-term capital gains, apply the applicable tax rate (e.g., 15% if it is the specified rate) to calculate the tax payable on the short-term gains.

Short-Term Capital Gain Tax on Shares

Examples of Short-term Capital Gain Tax Rates on Shares

Suppose you purchased 100 shares of a listed company on January 1, 2022, for ₹10 per share, making your total investment ₹1,000. On March 15, 2022, you decided to sell all the shares at a price of ₹15 per share.

To calculate the short-term capital gains tax, let’s convert the amounts into INR:

1. Determine the holding period: Less than 12 months.

2. Calculate the sale price: 100 shares x ₹15 = ₹1,500.

3. Subtract expenses on sale: Assuming no expenses were incurred.

4. Subtract the purchase price: ₹1,500 – ₹1,000 = ₹500.

Examples of STCG Covered under Section 111A

Short-term capital gains (STCG) are taxed at a flat rate of 15%. Additionally, deductions under Chapter VI of the Income Tax Act are not allowed against STCG.

This means that the entire amount of the short-term capital gain will be subject to tax at the applicable rate of 15%, without any deductions or exemptions being applicable.

• STCG arises on the sale of equity shares listed in a recognized stock exchange, which is chargeable to STT.
• STCG arises from the sale of units of equity-oriented mutual funds sold through a recognized stock exchange, which is chargeable to STT.
• STCG arises on the sale of units of a business trust.
• STCG arising on the sale of equity shares, units of equity-oriented mutual funds, or units of business trust through a recognized stock exchange located in any International Financial Services Centre, and consideration is paid or payable in foreign currency, even if the transaction of the sale is not chargeable to securities transaction tax (STT).

Examples: 

1. Example 1: Mr. Singh sold units of an equity-oriented mutual fund through a recognized stock exchange after holding them for 9 months. Similar to equity shares, the tax rate applicable on the STCG from the sale of equity-oriented mutual fund units would be 15%.
2. Example 2: Mrs. Gupta sold units of a business trust after holding them for 7 months. The tax rate applicable on the STCG from the sale of business trust units would also be 15%.

Examples of STCG not covered under section 111A 

Short-term capital gains (STCG) for the shares or stocks which are not covered under section 111A are typically taxed at the applicable income tax slab rates. The gain is added to the total income of the taxpayer, and deductions under Chapter VI of the Income Tax Act are allowed to reduce the taxable income. Here are some examples which are not covered under section 111A.

• STCG arises on the sale of equity shares other than through a recognized stock exchange.
• STCG arises on the sale of shares other than equity shares.
• STCG arises on the sale of units of non-equity-oriented mutual funds (debt-oriented mutual funds).
• STCG on debentures, bonds, and Government securities.
• STCG on sale of assets other than shares/units like STCG on sale of immovable property, gold, silver, etc

Examples:

1. Example 1: Ms. Sharma sold gold jewelry after holding it for 9 months. The tax rate applicable on the STCG from the sale of gold would depend on her income tax slab rates.
2. Example 2: Mr. Patel sold a residential property after holding it for 11 months. The tax rate applicable on the STCG from the sale of the property would also depend on his income tax slab rates.
3. Example 3: Mr. Gupta sold government securities after holding them for 8 months. The tax rate applicable on the STCG from the sale of government securities would again depend on his income tax slab rates.

Adjustment of STCG Covered under Section 111A against Exemption Limit

The adjustment of the exemption limit against short-term capital gains (STCG) covered under section 111A is subject to certain conditions. Here are the key points regarding the adjustment:

1. Eligibility: Only resident individuals and resident Hindu Undivided Families (HUF) are allowed to adjust the exemption limit against STCG covered under section 111A. Non-resident individuals are not eligible for this adjustment.

2. Adjusting Other Income: For resident individuals and HUFs, the adjustment of STCG covered under section 111A against the basic exemption limit can only be done after making adjustments for other sources of income. This means that first, any income other than STCG covered under section 111A is to be adjusted against the exemption limit.

3. Remaining Limit Adjustment: Once the adjustment for other income has been made, any remaining portion of the basic exemption limit can be adjusted against STCG covered under section 111A. This means that if the other income does not fully utilize the exemption limit, the remaining limit can be used to offset STCG covered under section 111A.

4. Deduction u/s 80C to 80U: Deductions under sections 80C to 80U are not permitted for short-term capital gains as specified in section 111A. However, these deductions can be claimed for short-term capital gains that are not covered under section 111A.

It’s important to note that the adjustment against the exemption limit helps in reducing the taxable income and lowering the overall tax liability.

Example 1: Mr. Ram, aged 45, purchased equity shares of XYZ Ltd. in April 2022 for Rs. 4,00,000. He sold the shares in December 2022 for Rs. 5,70,000. Securities Transaction Tax (STT) was levied on the transaction, and the gain is covered under Section 111A of the Income Tax Act. Mr. Ram does not have any other income apart from the gain on the sale of shares. Calculate his tax liability for the financial year 2022-2023.

Solution:

1. Calculate the Short-term Capital Gain (STCG): STCG = Sale Proceeds – Purchase Cost STCG = Rs. 5,70,000 – Rs. 4,00,000 STCG = Rs. 1,70,000
2. Adjust against the basic exemption limit: For individuals below 60 years of age, the basic exemption limit for the financial year 2022-2023/A.Y.2023-24 is Rs. 2,50,000.
3. As the STCG of Rs. 1,70,000 is less than the basic exemption limit, no tax will be applicable to the STCG. Mr. Ram can adjust the entire STCG amount against the basic exemption limit, and he will not have any tax liability for the financial year.

Therefore, considering the STCG on the sale of equity shares, STT, and Section 111A, Mr. Ram will not have any tax liability for the financial year 2022-2023/A.Y.2023-24, as the entire gain can be adjusted against the basic exemption limit.

Example 2: Mr. Ram, a 45-year-old individual, purchased equity shares in April 2022 for a total of Rs. 4,00,000. He subsequently sold the shares in December 2022 for Rs. 5,70,000, with securities transaction tax (STT) levied on the transaction. In addition to his gains from the sale of shares, Mr. Ram also has other sources of income. He receives a commission income of Rs. 1,20,000 Yearly.

Solution:

Let’s calculate the tax liability for Mr. Ram based on the given information.

1. Basic Exemption Limit: The basic exemption limit for an individual is Rs. 2,50,000.

2. Adjustment of Other Income: First, we need to adjust Mr. Ram’s annual income of Rs. 1,20,000 against the basic exemption limit.

• Basic Exemption Limit: Rs. 2,50,000
• Annual Commission Income: Rs. 1,20,000
• Adjusted Exemption Limit: Rs. 2,50,000 – Rs. 1,20,000 = Rs. 1,30,000

3. Calculation of Short-Term Capital Gain (STCG): The STCG on the sale of equity shares is the difference between the selling price and the buying price.

Buying Price: Rs. 4,00,000
Selling Price: Rs. 5,70,000
STCG: Rs. 5,70,000 – Rs. 4,00,000 = Rs. 1,70,000

4. Adjustment of STCG against the Exemption Limit: Next, we need to adjust the STCG against the remaining exemption limit.

Adjusted Exemption Limit: Rs. 1,30,000
STCG: Rs. 1,70,000

Considering the remaining exemption limit of Rs. 1,30,000 and the STCG of Rs. 1,70,000, the taxable STCG would indeed be Rs. 40,000 (Rs. 1,70,000 – Rs. 1,30,000). The tax on STCG at a rate of 15% would amount to Rs. 6,000. Additionally, the education cess at 4% of Rs. 6,000 would be Rs. 240. Therefore, Mr. Ram’s total tax liability for the year would be Rs. 6,000. However, Mr. Ram, with a total income of up to Rs. 5,00,000, is eligible for the rebate provided under section 87A. The rebate amount will be limited to the lesser of the tax payable or Rs. 12,500. So, the tax liability of Mr Ram is Nil.

Exemption Limit of Income Tax Slab

The table provides information on the basic exemption limits applicable to individuals for the financial year 2022-23/assessment year 2023-24. The basic exemption limit refers to the level of income up to which a person is not required to pay any tax.

Long-term Capital Gain on Shares

Long-term capital gains (LTCG) on equity shares refer to the profits made from the sale of equity shares held for more than 12 months. The tax treatment of LTCG on equity shares differs from short-term capital gains (STCG) on equity shares. LTCG on equity shares is taxed at a flat rate of 10% if the total gains exceed Rs. 1 lakh in a financial year. The calculation of LTCG involves deducting the cost of acquisition and any expenses incurred in relation to the sale from the selling price.

How to Calculate Long-term Capital Gains Tax on Equity Shares

You can calculate the Long-Term Capital Gains (LTCG) on shares as per the procedure given below.

1. Sale Value: This is the amount receivable or received from the sale of the shares. It is the gross selling price excluding Securities Transaction Tax (STT) and brokerage charges.

2. Indexed Cost of Acquisition:  For equity shares purchased before 1st February 2018, the cost of acquisition is determined using the following steps:

4. Indexation: Indexation is a method that adjusts the cost of acquisition and improvement of an asset for inflation using the Cost Inflation Index (CII). It helps reflect the current value of money and the impact of inflation on the gains. However, it’s important to note that the indexed cost of asset improvement applies to other assets such as property or real estate and not specifically to shares.

For shares, the indexed cost of acquisition is determined by considering the cost of acquisition adjusted for inflation using the CII. The CII is calculated with 1.4.2001 as the base year. By applying the CII to the cost of acquisition, you can determine the indexed cost of acquisition.

Format for Calculation of Long-term Capital Gains on Shares

Long-Term Capital Gain Tax on Shares

In the Financial Budget of 2018, significant changes were made to the taxation of long-term capital gains on equity-oriented shares. The key points to consider are:

Exemption Limit and Applicable Tax Rate:

1. Previous Exemption: Prior to the budget, long-term capital gains on equity-oriented shares were completely exempt from tax.
2. New Exemption Limit: Now, long-term capital gains exceeding Rs. 1 lakh are subject to tax.
3. Tax Rate: The tax rate for long-term capital gains exceeding the exemption limit is 10%. In other words, any gains above Rs. 1 lakh will be taxed at a rate of 10%.

Effective Date:

1. The changes took effect from the financial year following the budget announcement, which was from 1st April 2018 onward.

Tax Calculation:

1. Exemption Limit: Gains up to Rs. 1 lakh are still exempt from tax.
2. Taxable Gains: Only the gains exceeding the exemption limit of Rs. 1 lakh are subject to the 10% tax rate.
3. Tax Payable: Multiply the taxable long-term capital gains by the applicable tax rate of 10% to determine the tax payable.
4. Education Cess: Additionally, consider the education cess (currently at 4%) on the LTCG tax amount.

It’s important to note that the above information is specific to the changes made in the Financial Budget of 2018 regarding long-term capital gains on equity-oriented shares.

Adjustment of LTCG against Exemption Limit

Adjustment of LTCG against the Basic Exemption Limit

Eligibility for Adjustment:
– Only resident individuals and HUFs can adjust the exemption limit against LTCG.
– Non-resident individuals and non-resident HUFs cannot adjust the exemption limit against LTCG.

Important Points Related to Long-Term Capital Gains on Equity Shares

1. No Deduction under Chapter VI-A can be claimed against such capital gain (Sec LTCG u/s 112A, LTCG u/s 112, and STCG u/s 111A)
2. No Indexation benefit is available
3. An enhanced surcharge of 25%/37% is not applicable on LTCT on equity shares. Max Surcharge is leviable on LTCG is 15%
4. Only a resident individual/HUF can adjust the basic exemption limit against LTCG.

Examples: 

Solution Scenario 1: 

Solution Scenario 2:

Rebate u/s 87 is not allowed as the total income of the assessee is Rs. 6 Lakhs.

Solution Scenario 3:

The LTCG is 184000 which is lower than the basic exemption limit of Rs. 2,50,000. So there is no taxable income as per the income tax slab.