Introduction
Capital appreciation refers to the increase in the value of an asset over its purchase price. When investors sell shares at a higher price than their purchase price, the profit generated is termed as capital gains on equity shares.
Types of Capital Gains on Shares
These gains are categorised into two types based on the holding period:
Long-Term Capital Gain (LTCG) on Shares:
- LTCG on shares is applicable when the shares are held for more than 12 months (for listed equity shares).
- The calculation involves deducting the sale price from the cost of acquisition (purchase price) of the shares.
- For listed equity shares, the holding period is considered from the date of acquisition to the date immediately preceding the date of sale.
Short-Term Capital Gain (STCG) on Shares:
- STCG on shares applies when the shares are held for less than or equal to 12 months (for listed equity shares).
- The calculation is similar to LTCG but involves shares held for a shorter duration.
- STCG is added to the investor’s other income for the year and taxed according to the applicable income tax slab.
Calculation of Capital Gain on Equity Shares:
The calculation of capital gains on equity shares involves several factors, including the sale value of the shares, cost of acquisition, expenses incurred during the sale, and the holding period. Here’s a breakdown of the key components:
- Sale Value of Assets: This is the value received upon selling the shares, after deducting brokerage charges and Securities Transaction Tax (STT) for listed shares.
- Cost of Asset Acquisition: It includes the purchase price of the shares, including brokerage charges. The actual cost of acquisition is compared with the fair market value, and the lesser amount is considered.
- Expenses Incurred Due to Transfer or Sale: These expenses include brokerage charges and any other charges related to the sale of shares.
- Indexation: Indexation is applicable only for LTCG and involves adjusting the purchase price for inflation using the Cost Inflation Index (CII) as a reference.
- Holding Period: The holding period is the duration for which the investor held the shares, measured in days or months for STCG and in years for LTCG.
Tax Implications of Capital Gains on Shares:
Once the capital gains on shares are calculated, investors need to consider the tax implications. Here’s an overview of the tax treatment for LTCG and STCG on shares:
Long-Term Capital Gains Tax (LTCG):
- LTCG exceeding ₹1 lakh in a financial year are taxable at a rate of 10% (plus surcharge and cess).
- Previously exempt LTCG under Section 10(38) are now taxable without indexation if the gains exceed ₹1 lakh.
- The tax reform introduced in the 2018-19 Union Budget abolished the exemption for LTCG exceeding ₹1 lakh.
Short-Term Capital Gains Tax (STCG):
- STCG on shares held for less than 12 months are taxed as per the investor’s income tax slab rate.
- STCG from listed shares and equity-oriented mutual funds sold on recognized stock exchanges are taxed at 15% under Section 111A of the Income Tax Act.
Conclusion
Understanding capital gains on shares is essential for investors to make informed investment decisions and optimise their tax liabilities. By comprehending the calculation methods and tax implications for both LTCG and STCG, investors can plan their investment strategies effectively. Consulting a tax advisor or financial expert can provide personalised guidance based on individual financial circumstances and goals. With the right knowledge and planning, investors can navigate the complexities of capital gains taxation on shares and maximize their investment returns.
Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.