Capital Gains Tax on Sale of Shares

Shares represent ownership in a company, and investing in them allows individuals to participate in the company’s growth and profits. The allure of potentially high returns has made share investments increasingly popular in India, with many people jumping into the stock market to make money. However, the volatile nature of the market also means that investors can face significant losses.

Regardless of the outcome, it is crucial for investors to be aware of the tax implications associated with share transactions. With the introduction of the Annual Information Statement (AIS) by the Income Tax Department, all share transactions are now meticulously reported, making it essential for investors to understand the relevant tax rules. This guide provides a detailed overview of capital gains tax on the sale of shares, focusing on both long-term and short-term gains, as well as the treatment of losses.

Capital gains tax is a crucial consideration for investors in the stock market. This guide provides a detailed overview of capital gains tax on the sale of shares, focusing on both long-term and short-term gains, as well as the treatment of losses. We will cover the relevant sections of the Income Tax Act, 1961, tax rates, exemptions, carry forward rules, and other important details.

Also Read: Capital Gain Taxation (Detailed Explanation) with Tax rates and examples

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Understanding Capital Gains Tax

Capital gains tax is imposed on the profit made from the sale of shares. The tax treatment varies based on the holding period of the shares:

• Short-Term Capital Gains (STCG): Gains from shares held for 12 months or less.
• Long-Term Capital Gains (LTCG): Gains from shares held for more than 12 months.

Tax Rates and Sections

The tax rates and applicable sections of the Income Tax Act, 1961, are different for STCG and LTCG, and also depend on whether Securities Transaction Tax (STT) has been paid.

Let’s Understand in Detail:

Long-Term Capital Gains (LTCG)-

Section 112A (Cases Where STT Paid):

• Tax Rate: 10% on gains exceeding ₹100,000.
• Exempt Income: Gains up to ₹100,000 are exempt.
• Deductions: Chapter VIA deductions are not available.
• Rebate: Rebate u/s 87A is not available.
• Unexhausted Basic Exemption Limit: Available

Read the Act: Tax on long-term capital gains in certain cases – Section 112A

112A. (1) Notwithstanding anything contained in section 112, the tax payable by an assessee on his total income shall be determined in accordance with the provisions of sub-section (2), if—

  (i) the total income includes any income chargeable under the head “Capital gains”;

 (ii) the capital gains arise from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust;

(iii) securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004 (23 of 2004) has,—

(a) in a case where the long-term capital asset is in the nature of an equity share in a company, been paid on acquisition and transfer of such capital asset; or

(b) in a case where the long-term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust, been paid on transfer of such capital asset.

(2) The tax payable by the assessee on the total income referred to in sub-section (1) shall be the aggregate of—

 (i) the amount of income-tax calculated on such long-term capital gains exceeding one lakh rupees at the rate of ten per cent; and

(ii) the amount of income-tax payable on the total income as reduced by the amount of long-term capital gains referred to in sub-section (1) as if the total income so reduced were the total income of the assessee:

Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, the long-term capital gains, for the purposes of clause (i), shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax.

(3) The condition specified in clause (iii) of sub-section (1) shall not apply to a transfer undertaken on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transfer is received or receivable in foreign currency.

(4) The Central Government may, by notification in the Official Gazette, specify the nature of acquisition in respect of which the provisions of sub-clause (a) of clause (iii) of sub-section (1) shall not apply.

(5) Where the gross total income of an assessee includes any long-term capital gains referred to in sub-section (1), the deduction under Chapter VI-A shall be allowed from the gross total income as reduced by such capital gains.

(6) Where the total income of an assessee includes any long-term capital gains referred to in sub-section (1), the rebate under section 87A shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains.

Explanation.—For the purposes of this section,—

(a) “equity oriented fund” means a fund set up under a scheme of a mutual fund specified under clause (23D) of section 10 ⁵⁸[or under a scheme of an insurance company comprising unit linked insurance policies to which exemption under clause (10D) of the said section does not apply on account of the applicability of the fourth and fifth provisos thereof] and,—

 (i) in a case where the fund invests in the units of another fund which is traded on a recognised stock exchange,—

(A) a minimum of ninety per cent of the total proceeds of such fund is invested in the units of such other fund; and

(B) such other fund also invests a minimum of ninety per cent of its total proceeds in the equity shares of domestic companies listed on a recognised stock exchange; and

 (ii) in any other case, a minimum of sixty-five per cent of the total proceeds of such fund is invested in the equity shares of domestic companies listed on a recognised stock exchange:

Provided that the percentage of equity shareholding or unit held in respect of the fund, as the case may be, shall be computed with reference to the annual average of the monthly averages of the opening and closing figures:

⁵⁸[Provided further that in case of a scheme of an insurance company comprising unit linked insurance policies to which exemption under clause (10D) of section 10 does not apply on account of the applicability of the fourth and fifth provisos thereof, the minimum requirement of ninety per cent or sixty-five per cent, as the case may be, is required to be satisfied throughout the term of such insurance policy;]

(b) “International Financial Services Centre” shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic

Section 112 (Cases where STT Not Paid)

• Tax Rate: 20% with indexation benefits.
• Special Rate: For listed securities (other than units) or zero-coupon bonds, 10% without indexation and 20% with indexation.
• Deductions: Chapter VIA deductions are not available.
• Rebate: Rebate u/s 87A is available.
• Unexhausted Basic Exemption Limit: Available

Read the Act: Tax on long-term capital gains – Section 112

112. (1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head “Capital gains”, the tax payable by the assessee on the total income shall be the aggregate of,—

(a) in the case of an individual or a Hindu undivided family, being a resident,—

 (i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been his total income ; and

(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent :

Provided that where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate of twenty per cent ;

(b) in the case of a domestic company,—

 (i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income ; and

(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent;

(c) in the case of a non-resident (not being a company) or a foreign company,—

  (i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income ; and

 (ii) the amount of income-tax calculated on long-term capital gains [except where such gain arises from transfer of capital asset referred to in sub-clause (iii)] at the rate of twenty per cent; and

(iii) the amount of income-tax on long-term capital gains arising from the transfer of a capital asset, being unlisted securities or shares of a company not being a company in which the public are substantially interested, calculated at the rate of ten per cent on the capital gains in respect of such asset as computed without giving effect to the first and second proviso to section 48;

(d) in any other case of a resident,—

 (i) the amount of income-tax payable on the total income as reduced by the amount of long-term capital gains, had the total income as so reduced been its total income ; and

(ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent.

Explanation.—[***]

Provided that where the tax payable in respect of any income arising from the transfer of a long-term capital asset, being listed securities (other than a unit) or zero coupon bond, exceeds ten per cent of the amount of capital gains before giving effect to the provisions of the second proviso to section 48, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee :

Provided further that where the tax payable in respect of any income arising from the transfer of a long-term capital asset, being a unit of a Mutual Fund specified under clause (23D) of section 10, during the period beginning on the 1st day of April, 2014 and ending on the 10th day of July, 2014, exceeds ten per cent of the amount of capital gains, before giving effect to the provisions of the second proviso to section 48, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee.

Explanation.—For the purposes of this sub-section,—

  (a) the expression “securities” shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (32 of 1956);

(aa) “listed securities” means the securities which are listed on any recognised stock exchange in India;

(ab) “unlisted securities” means securities other than listed securities.

(b) [***]

(2) Where the gross total income of an assessee includes any income arising from the transfer of a long-term capital asset, the gross total income shall be reduced by the amount of such income and the deduction under Chapter VI-A shall be allowed as if the gross total income as so reduced were the gross total income of the assessee.

(3) ⁵⁷[***]

Short-Term Capital Gains (STCG)

Section 111A (Cases Where STT Paid)

• Tax Rate: 15%.
• Exempt Income: No exemption.
• Deductions: Chapter VIA deductions are not available.
• Rebate: Rebate u/s 87A is available.
• Unexhausted Basic Exemption Limit: Available

Read the Act: Section 111A Tax on short-term capital gains in certain cases.

111A. (1) Where the total income of an assessee includes any income chargeable under the head “Capital gains”, arising from the transfer of a short-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust and—

(a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and

(b) such transaction is chargeable to securities transaction tax under that Chapter,

the tax payable by the assessee on the total income shall be the aggregate of—

 (i) the amount of income-tax calculated on such short-term capital gains at the rate of fifteen per cent; and

(ii) the amount of income-tax payable on the balance amount of the total income as if such balance amount were the total income of the assessee:

Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such short-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such short-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such short-term capital gains shall be computed at the rate of fifteen per cent :

Provided further that nothing contained in clause (b) shall apply to a transaction undertaken on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in foreign currency.

(2) Where the gross total income of an assessee includes any short-term capital gains referred to in sub-section (1), the deduction under Chapter VI-A shall be allowed from the gross total income as reduced by such capital gains.

(3) ⁵⁶[***]

Explanation.—For the purposes of this section,—

(a) “equity oriented fund” shall have the meaning assigned to it in clause (a) of the Explanation to section 112A;

(b) “International Financial Services Centre” shall have the same meaning as assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005);

(c) “recognised stock exchange” shall have the meaning assigned to it in clause (ii) of the Explanation 1 to sub-section (5) of section 43.

Example: STT Paid on Sale of Listed Shares

• Purchase Details: 100 shares bought at ₹100 each in January 2021.
• Sale Details: 100 shares sold at ₹150 each in June 2021.
• Holding Period: Less than 12 months (Short-Term).

Calculation:

1. Purchase Price: 100 shares x ₹100 = ₹10,000
2. Sale Price: 100 shares x ₹150 = ₹15,000
3. STCG: ₹15,000 – ₹10,000 = ₹5,000

Tax Calculation:

1. Taxable STCG: ₹5,000
2. Tax Rate: 15%
3. Tax Payable: ₹5,000 x 15% = ₹750

Non-Specified Sections (Where STT Not Paid)

• Tax Rate: Taxed at applicable slab rates.
• Exempt Income: No exemption.
• Deductions: Chapter VIA deductions are available.
• Rebate: Rebate u/s 87A is available.
• Basic Exemption Limit: Available

Treatment of Losses

Losses incurred from the sale of shares can be set off and carried forward according to specific rules:

1. Short-Term Capital Loss (STCL)
   • Can be set off against both STCG and LTCG.
   • If not fully set off in the same year, it can be carried forward for 8 assessment years.
   • To carry forward losses, the taxpayer must file the income tax return before the due date.
2. Long-Term Capital Loss (LTCL)
   • Can be set off only against LTCG.
   • If not fully set off in the same year, it can be carried forward for 8 assessment years.
   • Similar to STCL, LTCL must be reported in the income tax return filed before the due date.

Watch this video to save your Tax on Share market Income:

ITR Filing Requirements

Investors need to report capital gains and losses in their Income Tax Return (ITR):

• ITR-2: For individuals and HUFs not having income from business or profession.
• ITR-3: For individuals and HUFs having income from a business or profession.

You can contact team of Tax Experts at 9150010300 or visit www.legalsahayak.com to get Paid services on ITR filing

You Can file ITR yourself with the help of below videos:

Understanding the nuances of capital gains tax on the sale of shares, including the treatment of losses and the ability to carry forward unutilized losses, is essential for investors. The Income Tax Act, 1961 provides clear guidelines on tax rates, calculation methods, exemptions, and set-off and carry forward rules. Staying informed and adhering to these regulations allows investors to manage their investments efficiently while meeting tax obligations.

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