Short Term Capital Gain Tax (STCG) and Long Term Capital Gain Tax on Shares

Introduction

People who often trade stocks or people who prefer to invest their money in stocks need to be aware that their profits and losses are taxed as capital gains or losses. In this article information such as Short Term Capital Gain tax on shares, Long Term Capital Gain tax on shares, information on loss from equity shares, and guidelines on tax treating of selling of shares as a business income is mentioned.

Useful Insights on Capital Gain Tax on Shares

• Any portion of the proceeds from the selling of your mutual fund shares that constitutes a return on your initial investment is not taxable because you already paid income taxes on the money when you earned it. It is also vital to figure out what proportion of your income can be attributed to gains rather than investments.
• To determine how much of your investment income is gain or loss, you must first know how much you paid for the shares that were liquidated. Calculating the price you paid for a specific share can be difficult because mutual fund equities typically arrive on different dates, in varying volumes, and at different prices.
• You are only required to pay taxes if your total income from all sources, after a number of deductions, is greater than the basic exemption level of INR 2.50 lakh.
• For profits made on listed shares that are sold on stock exchanges after a year, in addition to the appropriate basic exemption, each taxpayer is entitled to an extra basic exemption of INR 1 lakh. So it should be clear that as long as you don’t sell your stocks, you don’t have to worry about filing the ITR or paying taxes.

Short Term Capital Gain Tax on Shares 

Any profit or gains realized from the sale of a “capital asset” are referred to as capital gains. You must pay tax on this since it is considered “income” and is due in the year that the capital asset is transferred. The term “capital gains tax” refers to this and it can be either long-term or short-term in nature.

Formula to Calculate STCG (Short Term Capital Gain):

STCG = Sale Price – Sale on Expenses – Purchase Prices

• If the sale price is greater than the purchase price than it is a Short term capital gain.
• If the Purchase price is more than the Sale Price than it is Considered as Short term capital loss.

Taxability of a STCG (Short Term Capital Gain) on Shares

According to Section 111A of the Income Tax Act, when equity shares or equity-oriented funds are sold on the stock exchange and a securities transaction tax is due, the short-term capital gain that results from the sale is subject to tax at the rate of 15%.

Long Term Capital Gain Tax on Shares

After one year from the date of purchase, the seller of equity shares listed on a stock exchange may realize a long-term capital gain (LTCG) or suffer a long-term capital loss.

The long-term capital gain made on the sale of equities shares or equity-oriented units of mutual funds was free from tax before the introduction of Budget 2018, meaning no tax was due on gains from the sale of long-term equity investments.

Below are the Tax treatment for the Long Term Capital Gain on Shares:

• Stocks are exempt from long-term capital gains tax up to a value of one lakh rupees.
• A capital gains tax of 10% will be applied to long-term capital gains of more than 1 lakh rupees on the sale of equity shares or equity-oriented units of a mutual fund.

As per the adjustments made in the budget for 2018, the seller will lose the advantage of indexation. All transfers made on or after April 1,2018, are subject to these regulations.

Informative guide on loss from equity shares Selling

• Loss on Short Term Capital Assets  

Equity share sales that result in any short-term capital losses maybe offset by equity asset sales that result in either short-term or long-term capital gains. The loss maybe carried forward for eight years and offset against any short-term or long-term capital gains realised during these eight years if it is not totally set off.

It is important to keep in mind that a taxpayer can only carry losses forward if his income tax return was submitted by the deadline. In order to carry forward these losses, an income tax return must be filed, even if the total amount of income generated in a given year is less than the minimum taxable income.

• Loss on Long Term Capital Assets

Up until Budget 2018, long-term capital losses on equity shares were regarded as dead losses because they could neither be modified nor carried forward. This is due to the exemption of long-term capital gains from listed equity shares. They were also denied the ability to set their losses off or carry them forward.

The government said that any losses from such listed equities shares, mutual funds, etc. will be carried forward after the Budget 2018 modified the rules. According to the Act’s current provisions, long-term capital losses from transfers made on or after April 1, 2018, may be offset and carried forward. As a result, any other long-term capital gain maybe offset by the long-term capital loss. Please be aware that long-term capital losses cannot be offset by recent capital gains.

Additionally, any unabsorbed long-term capital loss maybe carried over for set-off against long-term earnings for the following eight years. One must file the return by the deadline in order to set off and carry forward these losses.

Guidelines on tax treating of selling of shares as a Business Income

Gains or losses from the selling of shares are treated differently by different taxpayers as “income from a company” or “capital gains.” There has been significant discussion regarding whether or not your gains or losses from the selling of shares should be considered business income or subject to capital gains tax.

If you engage in a large amount of share trading, such as if you frequently trade futures and options or are a day trader, your income is typically categorized as income from the firm. Your share trading revenue will be reported under “income from business & profession” on your ITR-3 if you are required to file one.

Conclusion

Equity shares that are sold within a year of acquisition generate profits that are considered short-term capital gains and are taxed at 15% of the net profit, regardless of one’s tax bracket. Only if the profit exceeds INR 1 lac, equity shares sold beyond a year from the date of acquisition may result in earnings that are classified as long-term capital gains and are taxed at 10% of the profit amount.