Tax on Selling Shares | H&R Block India | Blog
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Income Tax on Share Trading

‘Whether it’s a long-term or short-term goal, invest in your future’, they say. And like-wise individuals in today’s day and age have been investing their wealth in different plans or assets more than ever. It has become the need of the hour to hoard your savings in various options and let it grow.

Out of the total number of investors in India, most of them are skewed towards the equity market. A large number of investors are comfortable playing in the stock market as there are more chances of making quick money here, but also chances of losing that money. While making money is like eating all the comfort food in the world, paying taxes on that money is like working out to release those extra calories, tiring but necessary.

Thus, people often question themselves whether they are liable to pay taxes on the income earned from selling the stocks and shares that they own.

Shares are a form of the capital asset which means that when you invest in shares you will experience either capital gains i.e. make a profit on selling these shares, or capital loss if the shares are sold at lower price than the cost price. So, profit or loss from the sale of equity shares falls under the head capital gains which is then taxed under income from capital gains.

Buying and selling of shares depend on a lot of factors and is often a spontaneous decision. Hence, the period of holding shares is never fixed. One may keep them for a couple of years if he isn’t satisfied with the current market selling price and also may sell it off within a few months if the share price shoots up. Making a difference in the holding period of shares is necessary so as to tax it at a fair rate.

The Long and Short of Capital Gains

Bifurcation based on the Period of Holding

Gains from the selling of shares are classified as Long-Term Capital Gains and Short-term Capital Gains hereafter referred to as LTCG and STCG respectively.

  • If the shares are held for more than 12 months, they are classified as Long-Term Capital Assets and hence resulting in LTCG
  • If shares are held for less than 12 months period, they are called Short-Term Capital Assets and result in STCG

These shares must be listed on a recognised stock exchange. However, if the transfer has taken place on or before July 10, 2014, listing of shares is not mandatory.

Note: Period of holding to be considered is 24 months in case of unlisted shares of a company.

How to Calculate the Gain

Now that we are clear on the classification for purpose of taxing income from selling shares, let’s understand how are they actually taxed.

The first step towards understanding capitals gains tax is knowing how to calculate the gains from shares.

  • The STCG is arrived at by deducting from the selling price, the cost of acquisition, cost of improvement and cost of transfer.
  • For the purpose of calculating LTCG, expenditure incurred in respect of such sale and indexed cost of acquisition and improvement must be deducted from the full value of consideration.

How to Tax Capital Gains?

There is a 15% tax on short-term capital gains that fall under the section 111A of Income Tax Act i.e. equity shares which are listed on the stock exchange. STCG other than that covered under section 111A is charged to tax according to the slab rates which is determined based on total taxable income. Shares which are not listed on a recognised stock exchange and preference shares are some examples of STCG listed under section 111A.

Earlier the LTCG falling under the exemption of section 10(38) were not taxable. Union budget 2018 -19 brought in major changes by amending this section. Now LTCG from equity shares if exceeding Rs 1 lakh (without indexing) will be subject to a tax at 10%. This rule will be applicable to transfer taken place after 1st April 2018.


Short-Term Capital Gains

Mr Vilas is a salaried employee. In the month of December 2015, he purchased 100 preference shares of ABC Ltd. at Rs 100 per share. These shares were sold in August 2016 at Rs 125 per share. Can the capital gain be termed as STCG covered under section 111A?

Solution: 111A is applicable in case of STCG arising on transfer of equity shares which were transferred on or before 1/10/2004 through a recognised stock exchange and such transaction is liable to STT.

In the given case the shares are preference shares and hence, the provisions of section 111A are not applicable and such gain will be treated as normal STCG taxed according to slab rates.

Long-Term Capital Gains

Mr Vilas is a salaried employee. In the month of February 2016, he purchased 150 shares of XYZ Ltd. at Rs 100 per share. Shares of XYZ Ltd have been listed on Bombay stock exchange. These shares were sold in April 2018 at Rs 130 per share. How will the gains be charged to tax?

Solution: The shares were held for a period not less than 12 months. Therefore, they will be exempt as the 10% charge is levied only if gains from selling shares are exceeding Rs 1 lakh.

The government wants to encourage long-term investment and hence has charged tax on the incomes from the sale of short and long-term capital assets along with reliefs and exemptions. Thus, one has to pay tax on any income from selling shares which are of short-term holding, and only on the amount exceeding Rs 1 lakh when gains are from long-term stock holdings.

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CA Madhuri Marne
CA Madhuri Marne
Madhuri is a tax expert at H&R Block (India) with over a decade of professional experience. Having co-authored a book on economics for the ICAI exam, she now enjoys writing about tax-related topics in a simple and easy manner. Outside of work, Madhuri is passionate about teaching students who are appearing for professional exams.