Selling shares and realizing capital gains is a common activity among investors in India. Whether you're a seasoned trader or a beginner, it’s crucial to understand the tax implications of selling shares. Income from selling shares is subject to taxation, and the amount of tax you owe depends on various factors, including the holding period, the type of shares, and your income bracket.
In this blog, we will break down how income earned from selling shares is taxed in India and provide insights into Short-Term and Long-Term Capital Gains (STCG and LTCG), tax rates, exemptions, and more.
What is Capital Gains Tax?
Capital Gains Tax refers to the tax levied on the profit made from the sale of assets, including shares, mutual funds, real estate, and other investments. When you sell shares for more than you paid for them, the profit is considered capital gain, and the tax you owe is the capital gains tax.
Capital gains from the sale of shares are categorized as either short-term or long-term based on the holding period of the shares before the sale.
Types of Capital Gains: Short-Term vs Long-Term
Short-Term Capital Gains (STCG):
If you sell shares within one year from the date of purchase, the gains are classified as Short-Term Capital Gains (STCG).
Tax Rate: The tax rate for STCG on equity shares is 15%, irrespective of the amount of gain. This applies to shares listed on the recognized stock exchanges in India.
Long-Term Capital Gains (LTCG):
If you hold shares for more than one year before selling, the gains are classified as Long-Term Capital Gains (LTCG).
Tax Rate: LTCG on listed equity shares is exempt up to ₹1 lakh in a financial year. However, any LTCG exceeding ₹1 lakh in a year is taxed at a rate of 10% without the benefit of indexation.
Example:
If you purchased 100 shares of XYZ Ltd for ₹10,000 and sold them for ₹15,000 after holding them for 18 months, your profit would be ₹5,000. Since your total LTCG is below ₹1 lakh, it would be exempt from tax.
If your LTCG exceeded ₹1 lakh in a year, for instance, ₹1.2 lakh, only the excess amount of ₹20,000 would be taxed at 10%, i.e., ₹2,000 tax.
STCG vs LTCG: Key Differences
Factor | Short-Term Capital Gains (STCG) | Long-Term Capital Gains (LTCG) |
Holding Period | Less than 1 year | More than 1 year |
Tax Rate | 15% | 10% (on gains exceeding ₹1 lakh in a year) |
Exemption | No exemption | Exemption of ₹1 lakh per financial year |
Applicable Assets | Equity Shares, Mutual Funds, Derivatives, etc. | Equity Shares, Mutual Funds, etc. |
How is Tax Calculated on Selling Shares?
To calculate the capital gains tax on the sale of shares, follow these steps:
Determine the Sale Price: The sale price is the amount you received when you sold your shares.
Calculate the Purchase Price: This is the cost at which you acquired the shares, including any brokerage fees or other transaction costs.
Compute the Capital Gain: Subtract the purchase price from the sale price to determine your profit.
Determine Holding Period: Identify whether the gain is short-term or long-term based on the holding period.
Apply Tax Rate: Based on the holding period, apply the appropriate tax rate (15% for STCG, 10% for LTCG exceeding ₹1 lakh).
Tax Payment: Pay the applicable tax on the gains as per your income tax return filing.
Example of STCG Calculation:
Purchase Price of 100 Shares: ₹10,000
Sale Price of 100 Shares: ₹12,000
Profit (STCG): ₹12,000 - ₹10,000 = ₹2,000
STCG Tax: 15% of ₹2,000 = ₹300
Example of LTCG Calculation:
Purchase Price of 100 Shares: ₹10,000
Sale Price of 100 Shares: ₹15,000
Profit (LTCG): ₹15,000 - ₹10,000 = ₹5,000
LTCG Tax: Since LTCG is less than ₹1 lakh, no tax is payable.
Exemptions on Capital Gains Tax
Exemption on LTCG:As per the current provisions, LTCG on equity shares and equity mutual funds is exempt up to ₹1 lakh per financial year. If your LTCG exceeds ₹1 lakh, you will pay tax on the amount exceeding ₹1 lakh.
Tax Exemption on Investment in Residential Property:Under Section 54 of the Income Tax Act, if you sell a residential property and reinvest the gains in another residential property, you can claim an exemption on long-term capital gains. This exemption can be claimed for gains up to ₹2 crore.
Exemption on Capital Gains under Section 54EC:If you reinvest your capital gains from the sale of assets (including shares) in specified bonds like Rural Development Bonds (RDBs) or National Highway Authority of India (NHAI) bonds, you can claim an exemption under Section 54EC.
Tax Filing on Sale of Shares
All income earned from the sale of shares (STCG and LTCG) must be reported while filing your Income Tax Return (ITR). This income is reported under Capital Gains in the relevant ITR form. If your total income is subject to STCG tax or if LTCG exceeds ₹1 lakh, you need to pay tax accordingly and declare the same while filing your ITR.
Key Points to Remember
STCG Tax is 15% for equity shares sold within a year.
LTCG Tax is exempt up to ₹1 lakh in a financial year. Any amount exceeding ₹1 lakh is taxed at 10%.
Tax Filing: Report all gains and taxes paid on the sale of shares in your Income Tax Return.
Reinvestment Exemption: Use exemptions available under Sections 54 and 54EC to reduce your tax liability.
Conclusion
Taxation on income earned from selling shares depends on whether the gains are classified as short-term or long-term. Short-term capital gains are taxed at 15%, whereas long-term capital gains above ₹1 lakh are taxed at 10%. With proper planning, such as reinvesting gains or offsetting capital losses, you can effectively reduce your tax liability.
Understanding these tax rules is essential for maximizing your returns and avoiding surprises at the time of tax filing. Always keep track of your purchase and sale prices, and consult a tax expert or financial advisor to ensure compliance and optimize your tax outcomes.
Frequently Asked Questions (FAQs)
What is the tax rate for LTCG on equity shares? The LTCG tax rate on equity shares is 10% on gains exceeding ₹1 lakh in a financial year.
Is LTCG tax applicable on mutual funds? Yes, LTCG tax is applicable on mutual funds, but it is exempt up to ₹1 lakh per year.
Can I offset STCG with any capital losses? Yes, STCG can be offset by short-term or long-term capital losses.
Is there any exemption for LTCG from selling shares? Yes, you can claim an exemption for LTCG up to ₹1 lakh in a financial year. Beyond that, it is taxed at 10%.
How do I file tax for gains from the sale of shares? Income from selling shares must be reported under the Capital Gains section of your Income Tax Return.
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