Capital gains tax is the tax levied on the profit made by an individual or an entity from the sale of an asset such as shares, property, or other capital assets.
In the case of sale of shares, the capital gains tax depends on the holding period of the shares. If the shares are held for more than one year, the gains are considered long-term capital gains (LTCG), and if the shares are held for less than or equal to one year, the gains are considered short-term capital gains (STCG).
LTCG on sale of equity shares
Long-term capital gains (LTCG) on the sale of equity shares are taxed at a concessional rate of 10% if the gains exceed INR 1 lakh in a financial year. LTCG on equity shares held for more than one year are considered long-term gains.
The calculation of LTCG on equity shares involves deducting the cost of acquisition, cost of improvement, and any other expenses incurred in transferring the shares from the sale value of the shares. The resultant amount is taxed at a flat rate of 10% without providing any indexation benefits.
However, to avail the concessional tax rate of 10%, the sale transaction must be chargeable to Securities Transaction Tax (STT). For shares sold off-market, the tax rate on LTCG is 20% with indexation benefit.
STCG on sale of Equity shares
Short-term capital gains (STCG) on the sale of equity shares are taxed at the normal income tax rate applicable to the taxpayer. STCG on equity shares is considered when the shares are held for less than or equal to one year.
The calculation of STCG on equity shares involves deducting the cost of acquisition, cost of improvement, and any other expenses incurred in transferring the shares from the sale value of the shares. The resultant amount is added to the taxpayer’s total income and taxed at the applicable income tax rate.
In addition to the income tax, Securities Transaction Tax (STT) is also levied on the purchase and sale of equity shares. The STT rate is different for equity delivery trades and intraday trades.
Taxpayers are required to disclose their STCG from equity shares in their income tax return and pay the applicable tax liability. It is essential to maintain accurate records of share transactions and consult a tax professional to ensure compliance with all tax laws and regulations related to the taxation of STCG on the sale of equity shares.
Long term Capital loss on sale of shares
Long-term capital losses on the sale of shares refer to losses incurred when an individual or entity sells shares that were held for more than one year at a lower price than the purchase price.
long-term capital losses can be set off against long-term capital gains from the sale of any capital asset, including shares, in the same financial year. If the long-term capital losses exceed the long-term capital gains in a financial year, the excess loss can be carried forward to the next eight financial years.
Long-term capital losses can only be set off against long-term capital gains, i.e., short-term capital gains cannot be set off against long-term capital losses.
Short-term capital losses on the sale of shares
Short-term capital losses on the sale of shares refer to losses incurred when an individual or entity sells shares that were held for less than or equal to one year at a lower price than the purchase price.
Short-term capital losses can be set off against both short-term and long-term capital gains from the sale of any capital asset, including shares, in the same financial year. If the short-term capital losses exceed the short-term and long-term capital gains in a financial year, the excess loss can be carried forward to the next eight financial years.
However, short-term capital losses can only be set off against capital gains, i.e., short-term capital losses cannot be set off against any other income such as salary or business income.
CAclubindia
