Taxes on Sale of Equity Shares

Updated: Apr 8

What exactly is Short-Term Capital Gains on Share Sale?


We are all aware that salary, rental, and business income are all subject to taxation. Similarly, income/loss from the sale of stock is classed as 'Capital Gains.'


So, what exactly is a capital gain?


A capital gain is any profit obtained from the sale of a capital asset. The profit made falls under the category of income. As a consequence, a tax must be paid on the earned income. The tax is known as capital gains tax and may be long-term or short-term.


This classification is based on how long the shares have been owned. The holding period is the amount of time that an investment is held from the moment it is purchased until it is sold or transferred.


Under the category 'Capital Gains,' income is further classified into two types:

  • Long-term capital Gain (LTCG)

  • Short term Capital Gain (STCG)

Important note: Under the Income Tax Act of India, capital gains tax is not payable if the shares are inherited and there is no sale.


Calculation of STCG Tax on Shares


If a stock exchange-traded equity share is sold within 12 months after purchase, the seller may realize a short-term capital gain (STCG) or incur a short-term capital loss (STCL) (STCL). When the selling price exceeds the buying price, the seller earns a profit, which is referred to as a short-term capital gain.


STCG = (Sale price) – negative (Purchase cost) – negative (expenses incurred on sale)


Important Reminders


  • You must pay taxes at the rate of 15%, regardless of your tax slab rate. Even if you are a senior citizen with a higher slab rate, you must pay 15% on your STCG.

  • If a stock exchange-traded equity share is sold within a year of acquisition, the seller may realize a long-term capital gain (LTCG) or suffer a long-term capital loss (LTCL) (LTCL).

  • Prior to the introduction of Budget 2018, long-term capital gains on the sale of equities shares or equity-oriented units of mutual funds were tax-free, which meant that no tax was due on profits on the sale of long-term equity investments.

  • This exemption was deleted from the Fiscal Budget for 2018. If the seller earns a profit on the sale of equity shares or mutual funds that exceeds Rs. 1 lakh, the seller would be liable to long-term capital gain taxes of 10%. (plus any cess if applicable). The seller will no longer profit from indexation as of April 1, 2018.


Applicable Taxes on Capital Gain on Sale of Shares


Note : Long Term capital gain more than Rs. 1 Lac are taxed at rate of 10% from Mar 2018


What about the taxes on shares sold at a loss?


Short Term Capital Loss


• Any short-term capital loss resulting from the sale of equity shares may be offset by any short-term or long-term capital gain resulting from the sale of any capital asset. If the loss is not set off, it may be carried forward for a further eight years and offset against any short or long-term capital gains achieved during that time.


• It is critical to note that a taxpayer may only carry forward losses if his income tax return is filed on or before the due date. As a consequence, even if your total income for the year is less than the statutory minimum, you must submit an income tax return in order to carry forward these losses.


Long term Capital loss


• Long-term capital loss on equity shares was considered a dead loss until Budget 2018 and could not be amended or carried forward. This is due to the exclusion of long-term capital gains from listed equity shares. They were also not able to set aside or carry forward their losses.


• Following the revision to the law in Budget 2018 to tax such earnings of more than Rs 1 lakh at 10%, the government has also said that any losses incurred from such listed stocks, shares, mutual funds, and so on would be carried forward.


Carry Forward Provisions related to Capital Loss on Shares Sold



What exactly is the Securities Transaction Tax (STT)?


All equity shares exchanged or acquired on a stock exchange are subject to STT. The above-mentioned tax effects only apply to shares traded on a stock exchange. STT applies to any stock market transaction or purchase. As a consequence, the above-mentioned tax concerns only apply to shares on which STT is paid.


Profit on the sale of non-STT Paid Shares:



Short-term capital gain tax exemptions and deductions for shares


1. Unlisted Shares Sale


The department has issued an opinion on the selling of shares that are not listed on any stock exchange and does not have any official trading data. To reduce disputes/litigation and preserve consistency, income derived from the transfer of unlisted shares would be taxed under the head 'Capital Gain,' regardless of holding time (as per CBDT circular Folio No.225/12/2016/ITA.1I dated May 2, 2016).


2. But what if you're in the business of selling stock?


If you have a lot of share trading activity (for example, if you are a day trader with a lot of activity or trade Futures and Options on a regular basis), your income is usually classified as business income. In this case, you must file an ITR-3, and your share trading revenue is recorded under 'income from business and profession.'


Earnings or losses from the sale of shares are classified as "income from a firm" by some taxpayers, while capital gains are classified as "capital gains" by others. It has long been argued whether your profits/losses from selling shares should be categorised as business income or capital gains.


3. What if selling stocks is part of my usual business?


When you report the sale of stock as company revenue, you may subtract the expenses of making that money. In such cases, your profits are added to your total income for the fiscal year and taxed at slab rates.


Why Taxpayers get letters from the tax department and spend considerable time and effort explaining why they choose a certain tax treatment for the sale of shares.


The CBDT has issued the following instructions (CBDT circular number 6/2016 dated February 29, 2016) to reduce litigation in similar cases: If the taxpayer elects to treat his listed shares as stock-in-trade, the income is treated as business income. A listed share has been held for any amount of time. The taxpayer's favoured viewpoint must be accepted by the AO.


• If the taxpayer elects to treat the income as capital gains, the AO will not object. This applies to listed shares that have been held for more than a year. This viewpoint, however, is applicable in subsequent assessment years once accepted by a taxpayer in a particular assessment year. And taxpayers will be unable to modify their minds in the coming years.


• Taxpayers now have the choice of how they want to handle such revenue. They must, however, apply the same process in subsequent years unless the circumstances of the case alter significantly. It should be noted that the option is only available for publicly traded shares or assets.


Tips for Reducing the STCG Burden on Shares


You may lower your short-term capital gain tax burden with smart tax preparation. Some fundamental pointers are as follows:


1. Use the Basic Exemption Limit: You may also create a Demat account in the name of your spouse and trade shares. If your spouse does not work, you may take advantage of the basic exemption limit. If your spouse is above the age of 65, you may lower your tax burden even more since elderly people have larger exemption limits. Refer to the most recent tax slab rates for the year.


2. Setting off losses may help you save money on your current year taxes: Short-term financing Short-term capital gains might be offset by losses suffered in the selling of shares. This contributes to a lower tax burden. As a result, it is critical that you keep accurate transaction records in order to account for losses.


3. Carry your losses forward to save on future taxes: Unused short-term capital Losses may also be carried forward and deducted from future short-term capital gains. To take advantage of this benefit in the next year, you must compute the losses and submit them in your current ITR filing. As a result, it's essential to submit your ITR with the assistance of a tax professional so that you don't lose out on carrying over these losses to the next year.


Some Examples of STCG Calculation


Eg 1:


Mr Janak is a salaried employee. He purchased 100 equity shares of X Ltd. from the Bombay Stock Exchange in December 2020 for Rs. 1,400 each share. In August 2021, these shares were auctioned on the BSE for Rs. 2,000 per share (a securities transaction tax of 2 percent was paid at the time of sale). What is the nature of the capital gain in this scenario?


Answers:


• The shares were purchased in December of 2020 and sold in August of 2021, meaning that they were sold after less than a year of ownership, and hence the gain will be a short-term capital gain.


• Section 111A applies to STCG derived through the transfer of equity shares, units of equity-oriented mutual funds, or units of business trusts via a recognised stock exchange on or after 1-10-2004 if the transaction is subject to the securities transaction tax.


• Section 111A applies to STCG derived through the transfer of equity shares, units of equity-oriented mutual funds, or units of business trusts via a recognised stock exchange on or after 1-10-2004 if the transaction is subject to the securities transaction tax.


• If the section 111A conditions are completed, the STCG is referred to as STCG covered by section 111A. This gain is taxed at a rate of 15%. (plus relevant surcharges and cess).


• In the case presented, shares were sold on a recognised stock exchange after being held for less than 12 months, and the transaction was subject to STT; hence, the STCG may be categorised as STCG covered by Section 111A. This STCG will be taxed at a rate of 15%. (plus surcharge and cess as applicable).


Eg 2:


Mr. Poddar is a paid employee. In December 2020, he purchased 100 equity shares in ABC Ltd. for USD 70 each share. These shares were sold in August 2021 for $85 per share. There was no STT on the transfer of shares since it was exchanged in an existing recognised international financial hub.


Answers:


• Section 111A applies to STCG arising from the transfer of equity shares through a recognised stock exchange where the transaction is subject to the securities transaction tax.


• STCG subject to Section 111A taxation is taxed at a rate of 15%. (plus relevant surcharges and cess).


• However, beginning with Assessment Year 2018-19, a 15 percent concessional tax rate will be available even if STT is not paid, if the transaction is conducted on a recognised stock exchange located in any International Financial Service Centre and the consideration is paid or payable in foreign currency.


• In the indicated case, Mr. Poddar sold shares of ABC Ltd. that were listed on a recognised stock exchange in an International Financial Services Centre (IFSC). In addition, payment is done in foreign currency.


• Shares were purchased in December 2020 and sold in August 2021, reflecting less than a year of ownership. As a consequence, the gain will be a capital gain in the near run.


• Because the shares were sold on a recognised stock market, the IFSC, and the payment was made in foreign currency, i.e., USD.


• As a consequence, even though the selling transaction was not subject to STT, the STCG may be referred to as STCG covered by section 111A.


• Such STCG will be taxed at a 15% rate (plus surcharge and cess as applicable).


FAQs


Q. Can I transfer shares to family members to avoid paying short-term capital gains tax?


Yes, you may give your current shares to your spouse or kid, which is also regarded prudent tax planning.


Q. Will it be considered a sale if I give my shares as a gift to my spouse?


No, Because the concept of capital asset transfer excludes gifts to family members, any transfer will not be deemed a sale of securities. If there is no transfer, it will not be regarded for capital gain, and hence no tax will be levied on the gift to your spouse.


Q. Will my spouse have to pay capital gains tax on the given shares when she sells them?


Yes, capital gain will occur when the given shares are sold in the market for a profit. The capital gain will be determined by collecting the actual purchase price of the shares from the person who purchased them. This will be useful if your spouse is not working and can take use of the basic exemption.


Q. Can I deduct my trade area's electricity and rental costs?


It is dependent on whether the trading revenue is treated as capital gain or business income. If you choose to view it as company revenue, you may deduct the expenditures that were spent to create that money, such as power or rental costs. However, you must pay taxes on your gain at slab rates, and the short-term capital gain rate will not apply.


Q. As an NRI, do I have to pay taxes on short-term capital gains on the sale of shares?


Yes, if an NRI person makes a profit or gain from the sale of shares, it will be taxed as a capital gain, just like any other resident. As a result, he must pay short-term capital gain.

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