Profits or losses from selling equity shares fall under the category of 'Capital Gains'.
All types of income are taxed in India. Starting from salary, rental income, business income, stocks, mutual funds income, everything is taxed as per the taxpayer's chosen tax regime and income tax slab. Homemakers and retirees often engage in buying and selling shares as a source of income. However, they may be uncertain about the taxation of this income. Profits or losses from selling equity shares fall under the category of 'Capital Gains'.
Last week, the Bombay High Court's ruling on gifting shares and capital gains tax implications in India could impact wealth transfer strategies. The judgment in Jai Trust vs. Union of India clarified tax treatment for capital gains from gifted financial assets.
Business Today spoke to Dr. Suresh Surana, Founder, RSM India, on taxation of shares. Here are the top points
Surana said the computation of capital gains is a complex subject in India considering that there are many factors that needs to be considered such as the period of holding, whether shares were acquired by way of purchase (primary market / secondary market), gift, inheritance, acquired through market purchase (by paying STT) or off market purchase without payment of Securities transaction tax (STT), for listed shares whether it was purchased before January 31, 2018, (i.e. the availability of grandfathering of cost), etc needs to be considered.
Taxation on transfer of listed shares
> Gains derived from the transfer of shares listed on any recognised stock exchange in India would be categorised either as long-term or short-term gains depending upon the period of holding of such shares i.e. period for which such shares are held by the taxpayer/investor. If such holding period exceeds 12 months, the gains derived from them would be categorized as long-term in nature otherwise, short term.
"The short-term capital gains on listed shares would be subjected to tax at the rate of 15% u/s 111A of the IT Act. On the other hand, the long term capital gains are subject to tax at 10% u/s 112A of the IT Act on the amount of gains exceeding the threshold limit of Rs 1 lakh in that particular financial year. As such, long term capital gains on listed shares up to Rs 1 Lakh for any particular financial year would be exempt from tax in the hands of taxpayer/ investor," Surana noted.
It is to be noted that special rates u/s 111A and 112A of the IT Act would be applicable provided such shares are held as capital asset (and not stock in trade) and the transaction is subjected to Securities Transaction Tax (STT). "Though listed shares are usually subjected to STT, transactions routed through otherwise than the recognized stock exchange may not have STT levied on them," Surana said.
> In a case where STT is not levied on the transaction, short term capital gains would be taxed in accordance with the marginal slab rates applicable to the investor whereas long term capital gains would be at the rate of u/s 112 of the IT Act. "In accordance with section 112 of the IT Act, the investor has the option to tax such long term gains either at the rate of 20% (with indexation benefit) or 10% (without indexation benefit), whichever is more beneficial to him," Surana said.
Taxation on transfer of unlisted shares
In the case of unlisted shares, the gain would be categorised as long-term wherein the period of holding of such shares is more than 24 months otherwise, such gains would be categorised as short-term.
"Such short-term capital gains on unlisted shares would be taxed in accordance with the applicable slab rate of the investor. On the other hand, the long-term capital gains in the hands of the resident investors are taxed at 20% u/s 112 of the IT Act and eligible to claim the benefit of indexation on such long-term capital gains," Surana said.
It is to be noted that shares held as stock-in trade and not capital assets would be subject to tax under “Profits & Gains under Business & Profession” and not under the head “Capital Gains”.
Type of Shares
Applicable Section
under the IT Act
Applicable Tax Rate
Long Term Capital Gain (LTCG) held for more than 12 months
(Shares are subject to STT)
10% above Rs. 1,00,000
(Without Indexation benefit)
Grandfathering Benefit can be claimed as aforementioned, if shares are acquired upto 31 January 2018
(Shares are not subject to STT)
10% (Without Indexation) or
20% (With Indexation), whichever is more beneficial
Short Term Capital Gain (STCG) held upto 12 months
(Shares are subject to STT)
Shares are not subject to STT
Marginal Slab Rates
LTCG held for more than 24 months
20% (With Indexation)
STCG held upto 24 months
