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Capital Gains on Equity Shares: Types, Calculation, Tax Rates and More
A capital gain or appreciation arises when there is a growth in the price of a capital asset, which increases its value over its purchase price. The price of an asset fluctuates regularly depending on its performance in the market. In simple words, capital gains on shares refer to the profit made by investors who sell an asset (equity shares) at a higher price than what they originally paid for it.
The capital gain can be categorized into two types depending on how long investors hold their shares. Capital gains on shares can be termed long-term (if held for more than 12 months, 24 months, or 36 months, depending on the type of asset) or short-term (if held for less than 12 months).
Long-Term Capital Gain on Shares
Long-term capital gains on shares are profits generated from the sale of equity shares that an investor has owned for over 12 months at the time of sale. The gain is the net profit investors enjoy while selling this asset before any capital gains tax on shares is charged.
However, this time period of 12 months is only considered when talking about listed equity shares. These are the shares traded on exchanges like the NSE, BSE, etc. In the case of unlisted shares, long-term capital gains are referred to as the gains generated from assets held by an investor for 24 to 36 months or longer.
Short-Term Capital Gain on Shares
Gains generated from shares held for a period shorter than 12 months (for listed equity shares) or 36 months (for unlisted equity shares) are regarded as short-term capital gains on shares.
Calculation of Capital Gain on Equity Shares
Calculating capital gains on shares differs for both short and long-term equity shares. Let's understand how one can easily calculate the value of both short-term and long-term capital gain on equity shares by using an example for each.
Computation of Short-Term Capital Gains on Shares
Short-term capital gains can be calculated by deducting the following two items from the current total value of shares:
- Brokerage fees or other charges associated with the sale of the equity shares.
- Purchase price of the shares.
Example of Short-Term Capital Gains on Shares
Sudeep bought 300 shares of a listed company in February 2022 at Rs. 145 per share, paying a total of Rs. 43,500. He sold them for Rs. 200 per share in July 2022, after 5 months, at Rs. 60,000. Let us find out how much his short-term capital gains on shares will be.
Total sales value= Rs.60,000
Brokerage fee at 0.5%= Rs.300
Total purchase price= Rs.43,500
Therefore, the short-term capital gain made by Sudeep=Rs. 60,000 - (Rs. 43,500+ Rs.300) =Rs.16,200
Computation of Long-Term Capital Gains on Shares
The long-term capital gains on shares can be determined by subtracting the following two items from the current total value of sale:
- Brokerage fees or other expenses related to the sale of equity shares
- Indexed purchase price of the shares
Indexation is applicable only during the calculation of long-term capital gain. It is a process to arrive at the correct price by incorporating inflation into the calculation of capital gains. Indexed cost is determined by adjusting the price against the increase in the asset's value due to inflation.
Example of Long-Term Capital Gains on Shares
Let’s consider that Sudeep bought 200 shares of a listed company in November 2018 at the rate of Rs. 130 per share and paid a total amount of Rs. 26,000 for them. He then sold the acquired shares for Rs.155 per share on June 2020, after 1 year and 6 months, at Rs. 31,000.
In this case, the indexed purchase price of shares must be calculated to find the long-term capital gain on purchased shares.
Cost Inflation Index (CII) from the year 2015-16 to 2019-20:
|Financial year||Cost Inflation Index (CII)|
Thus, based on the table above, the indexed purchase price of the shares = Rs. (26,000x 289/280) = Rs.26,835 approximately.
Let’s find out Supdeep’s long-term capital gains on shares based on the following numbers
Sales Value= Rs.31,000
Brokerage value at 0.5%= Rs.155
Indexed price of purchase= Rs.26,835
Long-term gains on purchase of equity shares= Rs.31,000–(Rs.26,835+Rs.155) = Rs.4010.
Capital Gains Tax on Shares
After the calculation of long and short-term capital gains on shares, it is important to know about the current rate of taxation on both types of capital gain.
When shareholders earn capital gains from selling equity shares, the profit falls in the income category. Thus, when capital assets are transferred, investors must pay tax on the gains under the Income Tax Act, 1961. This is known as capital gains tax on shares and is imposed on both short-term and long-term gains.
However, the capital gains tax is payable only when selling the asset. An investor can avoid paying this tax by holding the asset with appreciating value rather than selling it.
Taxation of Long-Term Capital Gains
Earlier, long-term capital gains on shares included under Section 10(38) of the Income Tax Act,1961, were exempt from taxation. However, Section 10 (38) was replaced by another section, Section 112A, in the Union Budget (2018-19). The previously exempt capital gains are now subject to taxation under this reform without indexing if the quantum of gain is more than Rs.1 Lakh.
The current taxable rate for long-term capital gain on listed shares is 10%, while that on unlisted shares is 20%.
Taxation of Short-Term Capital Gains
The taxation rules for short-term capital gains differ slightly from long-term capital gains tax on shares. The short-term capital gain included in Section 111A is liable to a 15% tax. It includes assets sold on or after October 1, 2004, on a recognized stock exchange and falls under securities transaction tax (SST), such as equity shares, equity-oriented mutual funds, and units of business trust.
Upon considering all the facts, investors need to conduct thorough research on their investments to make sure that they understand the charges and tax liabilities on both their short-term and long-term assets.
How to avoid capital gains tax on shares?
Investors must make sure to hold equity shares for more than one financial year to avoid paying capital gains tax on shares. Long-term capital gains are taxed only when the profit from equity investment exceeds Rs. 1 Lakh in a financial year. Therefore, you can harvest your shares for the long term by purchasing the same stocks or mutual funds after holding them for more than a year and realizing a profit of less than Rs. 1 lakh each year.
What is capital loss on shares?
A capital loss is the inverse of capital gain. That is, suffering a loss in a transaction. Simply put, when you have to sell equity shares at a lower price than you paid for them, you receive a negative income or a loss.
What are capital gains tax on foreign shares?
Foreign investment capital gains may be taxed twice: first in India and again in the nation where the shares are held. The long-term capital gains from overseas shares will be subject to a 20% long-term and 30% short-term tax under this double taxation system. However, under Section 91 of the Income Tax Act of 1961, people can avoid double taxation liability.