Many Taxpayers need to learn Tax on income earned from Equity or mutual funds, and Capital Gains Tax On Shares. This article is mainly focused on the computation of capital gain tax on the sale of Equity or mutual funds.
Income/Loss from sale of equity shares is covered under the head ‘Capital Gains’
Before dinning in first review the topics covered in this article.
The same phenomena of LTCG and STCG are applied in this calculation too.
If the date of the sales of the equity share is more then 12 months (1 Year) it is said to be long term capital gain tax on the sale of shares and if the date of sales of the equity share is less then 12 months (1 Year), it is said to be Short term capital gain tax on the sale of shares.
Tax Slab on Sales of Shares and Mutual Fund
As far as Shares and Mutual fund is concern Long term capital gain (LTCG) of Shares and mutual fund is exempted u/s 10(38) up to budget 2018, according to amendment from the finance ministry Profit more than Rs 1 Lakhs is taxable @ 10% and for short term capital gain (STCG) is taxable @ 15% u/s 111A.
| Type of Security | Type of Security | Particulars | Catagorized in | Tax rate @ |
| Equity | Listed | Holding Period More than 12 Months | LTCG | 10% |
| Equity | Listed | Holding Period Less than 12 Months | STCG | 15% |
| Equity | Unlisted | Holding Period More than 24 Months | LTCG | 20% (with indexation benefits) |
| Equity | Unlisted | Holding Period Less than 24 Months | STCG | As per Tax slab applicable |
| Derivative | Listed | Holding Period More than 12 Months | LTCG | 20% (with indexation benefits) |
| Derivative | Unlisted | Holding Period Less than 12 Months | STCG | Normal Rate of Individual |
If unlisted shares are held for over 24 months, gains qualify as LTCG and are taxable @ 20%.
Short-term gains (STCG) arising from the sale of unlisted shares shall be taxable at the normal Tax slab rates.
Taxation of Gains from Equity Shares
Long term capital gain tax on shares
LTCG u/s 10(38) is not taxable up to Rs 1 Lakhs if the sales of equity shares or equity-oriented units of the mutual fund after holding more then 12 months and beyond that if long term capital gain comes more then Rs 1 Lakhs, the capital gain tax calculated @ 10%.
Important Note: There is no indexing value benefit allowed to the taxpayer which is allowed to compensate for the inflation in the calculation in sale of house property.
Short term capital gain tax on shares
STCG is taxable @ 15%, If your total income is less then tax slab rates i.e. Rs 2,50,000, then the short term capital gain tax is adjusted in short full and the balance capital gain is taxable.
For Example: If the Income of Individual from other sources is Rs 1,00,000 and the ST capital Gain is Rs 2,50,000, The Total income computed is Rs 3,50,000, In such case you are liable to tax on Rs 1,00,000 only and the tax would be 15% + Cess.
Loss from Equity Shares
Short-term capital loss on shares
Short-term capital loss on shares allows the user to set off losses against gains in the category. If the loss is not set off entirely, it can be carried forward for a period of 8 years and adjusted against any short term or long term capital gains made during these 8 years.
In easy language, if you occurred with some portion of the loss in the short term, you can adjust your loss from the profit and your tax liability will reduce.
For Example: If the investor, pertain profit of Rs 10,000 in short term gain tax at 15 %. On the other hand, the investor faces a loss of Rs 4,000 due to reasons (not relevant at this stage). In that case, the investor’s has to pay tax on Rs. 6,000 (Rs. 10,000 – Rs. 4,000), not Rs. 10,000.
Long-term capital loss on shares
Until Budget 2018, long term capital gain from Listed Shares is exempted u/s 10(38), similarily the loss from equity part is also not considered and also set off also not allowed.
After the Budget 2018 amendment on long term capital gain profit more than Rs, 1 Lakhs is taxable @ 10%, Similarly, the loss pertains from equity shares also set off entirely, the long term capital loss can be set-off against any other long term capital gain and unabsorbed long term capital loss can be carried forward to subsequent eight years for set-off against long term gains.
Introduction of Grandfathering Clause
Grandfathered” persons enjoy the right to avail concession because they have made their decisions under the old law, any gains accumulated before that date (31st January 2018) won’t be taxed when the asset is sold.
what is Grandfather clause in LTCG
According to the clause if any investment made before 31 Jan 2018 is not taxable under certain scenarios.
Scenario 1
It is very clear that the shares or related segment sold before 31st March 2018 is not Taxable.
Scenario 2 (Case A):
According to these segments, it is very clear that the shares bought before 31st January 2018 and Sold after 31st March 2018, the Profit is Taxable @ 10%.
Although the Investor will get the benefit of the Highest Price of 31st of January 2018 and the Profit amount will be deducted from the difference of Higher price on 31st of January 2018 and Brought Price.
Scenario 2 (Case B):
In some of the cases If the Investor brought the shares and sold after 31st March 2018, it is taxable but if the price of the shares sold is less then the Price on 31st of January 2018, then in this scenario there is no tax levied, it is treated as lost.
Scenario 2 (Case C):
It’s a Clearcut case, in this segment, the Sales Price of the shares bought is less than the purchase price, the profit of the investor is Zero, so there is no tax liability levied on the Investor.
Scenario 2 (Case D):
This case is as similar as Scenario 2 (Case C), the only difference is the price on 31 January 2018 is higher than the price of sales, in this segment it is also treated as Zero because the brought price of the share is higher than the sales and grandfather price.
Scenario 3
It will clearly symbolics that if you bought the shares after 31st January 2018, you will not get any benefit of the grandfathered concept, you have to pay 10 % on Profit made as Long Term Capital Gain.
Also Read: Capital gain tax on property sale
Capital Gain Tax on Debt Mutual Fund
Long term capital gains tax on debt-based mutual fund
If debt investments are sold after three years, the returns are treated as long-term capital gains and taxed at 20 percent with indexation benefit. Indexation helps to bring down the tax as it inflates the purchase cost.
Short term capital gains tax on debt-based mutual fund
If debt investments are sold before three years, the returns are taxed as short-term capital gains. The gains are added to the income and taxed as per the income tax slab applicable to the investor.
Which ITR form to fill for capital gains from Equity?
ITR 2 and ITR 4 are designed to fill Income tax returns from capital gain tax from Equity and mutual fund.
The tax department has introduced two more schedules in the ITR forms namely, 112A and 115AD(1)(iii) where taxpayers were required to provide the capital gains for every share/scrip sold during FY.
Schedule 112A can be used by a resident individual who has earned capital gains from equity shares and/or equity mutual funds.
Schedule 115AD(1)(iii) can be used by non-resident individuals (NRI).
Punching of scrip wise details is beneficial for both taxpayer and income tax department. The clarity in ITR form saves the taxpayer from income tax notice and also helpful to calculate the correct amount from capital gain.
Income tax on derivatives trading in India
The income from derivative for the individual falls under capital gain, treatment of taxes from derivation gain or loss is as similar as equity.
If the derivatives are listed on a recognized stock exchange in India, the income from derivative transactions will be classified as income from Short Term Capital Gains/Loss (STCG/STCL) considering the holding period, not more than 12 months. If they are held for more than 12 months, then they are classified as income from Long Term Capital Gains/loss (LTCG/LTCL).
The calculation formula and rate of tax are also similar to equity.
Also Read: Home loan EMI calculator India
Computation of Capital Gain (Formula)
The simple and understandable formula to calculate capital gain:
| Cost of Sale of Equity or Derivation | Rs -------- | |
| Expenditure Incurred (like Brokerage) during transfer/Sale of securities | Less (-) | Rs -------- |
| Cost of acquisition of Equity or Derivative | Less (-) | Rs -------- |
| Capital Gain/Loss | Rs -------- |
Note it down: If the Loss in the capital gain calculation is more than the profit, The profit is set off and the balance loss is carry forwarded to the next financial year.
How to calculate Short-Term Capital Gains Tax?
For Instance: Sunil Mahajan Purchase equity shares (Reliance Industries) worth Rs. 1 lakh in January 2011 and sold it in September 2011 after 9 months at Rs. 1.65 lakh. What would be the short-term capital gains tax?
Capital gain: Full sales value – (Brokerage at 0.5% (assumed)+ purchase price) = 1,65,000 – (825 + 1,00,000) = Rs. 64,175
Short-term capital gains tax: Short-term capital gain multiplied by Tax rate divided by 100 = 64175 * 15 / 100 = Rs. 9,626
How to calculate Long-Term Capital Gains Tax?
With the same scenario above: Sunil Mahajan Purchase equity shares (Reliance Industries) worth Rs. 1 lakh in January 2011 and sold it in September 2014 after 44 months at Rs. 1.65 lakh. What would be the Long term-term capital gains tax?
Capital gain: Full sales value – (Brokerage at 0.5% (assumed)+ purchase price) = 1,65,000 – (825 + 1,00,000) = Rs. 64,175
Short-term capital gains tax: Short-term capital gain multiplied by Tax rate divided by 100 = 64175 * 10 / 100 = Rs. 6,417
For the calculation of Debt-oriented mutual funds and preference shares for long term capital gain (LTCG), you have to pay a 20% tax considering inflation indexation and 10% tax without indexation.