In addition to our normal business, many of us invest in share market to earn passive income in form of dividend or profit on its sale.
These investments are termed as “Capital Asset” for income tax purpose.
Depending on the period of holding, these assets are divided into 2 parts:
- Short-Term Capital Assets
- Long-Term Capital Assets
In the budget 2018, the government has withdrawn the exemption and imposed a tax of 10% on the long-term capital gain on sale of listed equity share. [Discussed later in this article]
On a sale of shares, you may either end up with a profit or loss. In this article, we will cover taxation of profit/loss on sale of equity share / Stock.
Short-Term Capital Assets
As per income tax law, a listed equity share will be considered as short-term capital assets if the period of holding is not more than 12 months.
Whereas an unlisted equity share (eg. Share of a private limited company) will be considered as short-term capital assets if the period of holding is not more than 24 months.
The table below is a repetition of the above 2 paragraphs.
|Short-Term Capital Assets|
|Type of Equity Share||Period of Holding
(up to the date Just before the sale)
|Listed (quoted)||up to 1 years|
|Unlisted (unquoted)||up to 2 years|
Calculation of Short Term Capital Gain (STCG) on Sale of Share
Capital Gain/Loss = Sales Price* – Purchase Price – Brokerage**
* Sale Price for an unquoted equity share shall be higher of sales proceed received or its fair market value.
**Any other expense incurred in connection with the sale of share
Current year loss on sales of equity shares can be set off with current STCG or LTCG only. If the loss is not wholly set off then it can be carried over to the following Eight (8) years. [Section 74]
For carrying over the losses a person must file his tax return within the due dates. [31st July 2018 for Individual]
Recommended to Read: How to Set off and Carry Forward STCG
Tax Rate of Short-term Capital Gain (STCG)
The tax rate on the sale of equity shares are:
- Slab Rate: For unlisted equity share
- 15%: For Listed Equity shares (STT paid)
However, a resident individual or HUF shall be exempted from capital gain tax on the sale of a listed share if the total income (including the capital gain) is not more than the maximum exempted income. (eg. Rs.2.5 Lakh for an Individual) Any STCG above the maximum exempted income shall be taxed at the rate of 15%.
Example of STCG on Sale of Listed or Quoted Shares:
Mrs. Sharma earned Rs.2,20,000/- as a short-term capital gain on sale of TATA share(Listed). She has also earned Rs.50,000/- as interest on saving.
Compute the tax liability for AY 2018-19.
|Calculation of Income Tax (AY 2018-19)|
|Short-Term Capital Gain
(under section 111A)
|Deduction under Chapter VI-A|
|Net Taxable Income||260000|
|Any income above 2.5 Lakh will
be first taxed as STCG u/s 111A i.e (2.6-2.5) x 15%
Long-Term Capital Assets
Listed equity shares are considered as long-term capital assets if it is held for more than 12 months.
In the case of an unlisted equity share, the period of holding should be more than 24 months for qualifying as a long-term capital asset.
In other words, every equity share which is not a short-term will be considered as long-term.
Calculation of Long Term Capital Gain (LTCG) on a Sale of Share
A long-term capital gain would be computed by using the given formula
|Calculation of Long-Term Capital Gain|
|Expenses incurred for Sale||(xx)|
|Indexed Cost of Acquisition||(xx)|
|Indexed Cost of Improvement||(xx)|
|Long-Term Capital Gain||xxx|
*Just like STCG, Sale Price for an unquoted equity share shall be higher of sales proceed received or its fair market value.
Tax Rate of Long-term Capital Gain (LTCG)
If the Share Sold on or before 31st March 2018 (AY 2018-19)
LTCG on an unlisted share shall be taxed at the rate of 20% with indexation. Similar to STCG, loss on LTCG of unlisted share can be set off with other Capital Gain income and in case of non-setoff, it can be carried up to a maximum 8 years.
However, long-term capital gain on sale of listed equity share up to 31st March 2018 is completely exempted. These incomes are not used for income computation and are only disclosed as exempted income. [Under section 10(38)]
If the Share Sold on or after 1st April 2018 (AY 2019-20)
Budget 2018 has not provided an amendment to the taxation of unlisted equity shares.
From the financial year 2018-19, long-term capital gain in excess of Rs. 1 lakh on the sale of listed equity share shall be chargeable to tax at the rate of 10% without indexation. [Under Section 112A]
A new cost of acquisition should be computed for every listed equity share purchased on or before 31st January 2018. It shall be higher of:
- The actual cost of acquisition of such equity share and
- Lower of (a) fair market value as of 31st January 2018 or (b) Full value consideration received as a result of the transfer of equity shares
- On 30th September 2017, purchased listed 10,000 equity shares for Rs. 10,00,000 [Rs.100 each]
- On 1st January 2018, fair market value (FMV) at of the share was Rs 120/share.
- On 1st November 2018, she sold the share for Rs.200/share.
Calculate the capital gain tax for Mrs. Sharma for FY 2018-19.
Period of Holding: 30th September 2017 to 1st Nov 2018 [13 months]
Status: Long Term Capital Gain [LTCG]
New Cost of Acquisition: Rs.120/share [Higher of the purchase price and FMV]
Capital Gain= Number of share x [Sales price less cost of acquisition]
= 10000 x [200-120]
=Rs.8 lakh [As the LTCG exceeds Rs.1 lakh, tax @ 10% shall be levied]
Tax on Capital Gain = 10% x [8 lakh less 1 lakh] = Rs.70,000/-