Capital Gains On Stocks: How To Accurately Calculate Tax Liability

• Short-term capital gains (STCG) apply when shares are sold within 12 months and are taxed at 15% (increasing to 20% from July 23, 2024).

• Long-term capital gains (LTCG) apply for shares held for more than 12 months, taxed at 12.5% (previously 10%) on gains exceeding ₹1.25 lakh.

• Under Section 54F, LTCG tax can be exempted if the gains are reinvested in up to two residential properties within a specified period.

Investing in the stock market is one of the most popular ways of wealth creation in India. However, like salary, rental income and business income, any earnings made by investing in shares attract income tax. 

Income or loss from the sale of equity shares falls under the category of Capital Gains. Capital gains are profits from the sale or transfer of properties, whether movable or immovable, known as capital assets. Let’s look into the capital gains tax on stocks.

Capital gains are classified into long-term capital gains (LTCG) and short-term capital gains (STCG) based on the holding period of the shares. The holding period is the duration for which the investment is held, starting from the date of acquisition till the date of sale or transfer. 

In the case of shares, any capital gain after holding the shares for less than 12 months is considered as a short-term capital gain. On the other hand, holding them for more than 12 months is considered as a long-term capital gain.

When the time comes to sell, the tax implications on the transfer of stocks include the following:

Short-term capital gains tax on stocks are applicable when shares are sold at a price higher than the purchase price and are taxable at 15%, which has been increased to 20% from July 23, 2024. 

Short-term capital gains are taxed at 20% if the asset has been subject to Securities Transaction Tax (STT) during purchase and sale. If STT is not incurred, the tax rate depends on the individual's income slab, including a 4% cess and applicable surcharge.

Before Budget 2018, LTCG from the sale of equity shares or equity-oriented mutual funds was exempt from tax. However, post-Budget 2018, LTCG exceeding ₹1 lakh is taxed at 10% without the benefit of indexation.

The Budget 2024 increased the exemption limit for LTCG from ₹1 lakh to ₹1.25 lakh per year but also raised the tax on stock profits from 10% to 12.5%, effective from July 23, 2024.

Under Section 54F, you can avail exemption on long-term capital gains tax on stocks by reinvesting the net consideration amount in up to two real estate properties (increased from one property as per the Budget 2019). 

Reinvestment should be done within 1 year before or 2 years after the sale, or within 3 years if investing in a construction project. The exemption is revoked if the new property is sold within 3 years of purchase.

Loss from equity shares occurs when the selling price of a stock falls below the purchase price, leading to capital loss. You can offset these losses from the previous assessment years against the capital gains:

Any short-term capital loss from the sale of equity shares can be offset against short-term or long-term capital gains from any capital asset. If not fully set off, it can be carried forward for eight years and adjusted against any short-term or long-term capital gains made during these years. To carry forward losses, you must file your income tax return within the due date.

Long-term capital loss occurs when the cost of acquisition exceeds the sale price. This loss can be set off against LTCG in the same assessment year. If LTCG falls below ₹1.25 lakh due to the set-off, the tax on LTCG is exempted. 

Before Budget 2018, long-term capital loss from equity shares was considered a dead loss as LTCG from listed equity shares were exempt. Post-Budget 2018, long-term capital loss can be set off against any other long-term capital gain and carried forward for eight years. To set off and carry forward these losses, you must file the return within the due date.

A grandfathering clause allows an old rule to apply to some existing instances while a new rule applies to future cases. LTCG on the transfer of listed equity shares and equity-oriented mutual fund schemes were tax-free until the fiscal year 2017-18. 

The Finance Act, 2018 reinstated the LTCG tax on the sale of listed shares and equity-oriented mutual fund schemes with a grandfathering clause, effective from April 1, 2018. Gains up to January 31, 2018, are not taxed.

When you sell shares, understanding the tax implications is crucial for making informed financial decisions. Some important aspects to know include:

STT is applicable on all equity shares sold or bought on a stock exchange. The tax implications discussed above apply only to shares on which STT is paid. Expenses like registration charges, brokerage charges and other charges are deducted from the sale of shares to arrive at the net gain or loss.

Capital gains tax on shares also depends on its treatment as 'Income from Business' or 'Capital Gains.' Significant share trading activity, like day trading or trading in Futures and Options, is usually classified as business income. 

In such cases, you must file an ITR-3 and your income from share trading is shown under 'income from business & profession.' When treating the sale of shares as business income, you can reduce expenses incurred in earning such income. 

Profits are added to your total income for the financial year and taxed at slab rates. If treated as capital gains, expenses incurred on the transfer are deductible. Long-term gains from equity above ₹1 lakh annually are taxed at 10%, while short-term gains are taxed at 15%.

Income from the transfer of unlisted shares is taxed under 'Capital Gain,' irrespective of the holding period, to avoid disputes and maintain a uniform approach.

The ITR-2 and ITR-3 forms have been updated to reflect changes by the Central Board of Direct Taxes (CBDT). Individuals and Hindu Undivided Families (HUFs) with LTCG from the sale or transfer of shares must disclose their LTCG in Section B7 of the ITR-2 form, provided they do not consider those gains under income from business or profession. 

Non-residents must disclose LTCG in Sections B7 and B8 of ITR-2 and ITR-3, respectively. If equity shares and equity-oriented shares are treated as stock-in-trade, profits from their sale or transfer should be posted under income from business or profession.

On June 14th, 2019, the CBDT relaxed the rules for posting capital gains while filing tax. Individuals now need to file income tax with the net consolidated amount from capital gains. However, profits and losses from different equity shares and units of equity-oriented funds must be calculated separately during income tax computation.

To compute capital gains, subtract the cost of acquisition and the associated sale expenditures from the sale price. However, if capital gains surpass ₹1.25 lakh in a fiscal year, a 12.5% tax rate (plus surcharge and cess) will be levied on the excess profits.

Short-term capital gains are realised when you hold an asset for one year or less, while long-term capital gains are realised when you hold an asset for longer than one year.

If you retain your asset for a year or less, it will incur short-term capital gains benefits. However, if you maintain your asset for a more extended period, you will be able to obtain the benefits of long-term capital gains. For shares and stocks, short-term capital gains incur 15% taxation, but for long-term capital gains, there are tax exemption options.

There is an annual exemption from capital gains tax for equity gains up to ₹1.25 lakh.

In India, Long-Term Capital Gains (LTCG) on shares and equity-oriented mutual funds are subject to a tax rate of 12.5%, plus applicable surcharge and cess, if the total gains within a financial year reach or exceed ₹1.25 lakh.

As per Section 1411 of the Internal Revenue Code, the Net Investment Income Tax (NIIT) levies a 3.8% tax on certain net investment income for the following:

• Individuals

• Estates

• Trusts

The asset should surpass the statutory income thresholds. This tax impacts capital gains, dividends, interest and rental income.

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