Introduction:
The income obtained from the sale of shares and mutual funds falls under the category of ‘Income from Capital Gain’. This capital gain can be categorized into:
(i) Long-term capital gains
(ii) Short-term capital gains
This categorization is determined based on the duration for which the shares are held, known as the holding period. The holding period starts from the date of acquisition and continues until the date of sale or transfer.
It’s essential to understand that different classes of capital assets have varying holding periods for income tax assessment. The holding period for listed equity shares and equity mutual funds, for instance, differs from that of debt mutual funds, impacting their tax implications.
Taxation of Profits Derived from Equity Shares:
Short-Term Capital Gains (STCG): When equity shares listed on a stock exchange are sold within 12 months of acquisition, the seller may realize a short-term capital gain (STCG) or incur a short-term capital loss (STCL). STCG occurs when shares are sold at a price higher than the purchase price, and it is subject to a 15% tax rate.
The calculation of short-term capital gain is determined as follows:
Short-Term Capital Gain = Sale Price – Expenses on Sale – Purchase Price
Long-Term Capital Gains (LTCG): In case equity shares listed on a stock exchange are sold after holding for 12 months, the seller may either gain in long-term capital (LTCG) or incur a long-term capital loss (LTCL).
Prior to the 2018 Budget, long-term capital gains from selling equity shares or equity-oriented mutual funds were exempt from tax. However, this exemption was lifted in the 2018 Financial Budget. Presently, if a seller realizes a long-term capital gain exceeding Rs. 1 lakh from selling such instruments, a tax of 10% (plus applicable cess) is imposed. The seller does not have the benefit of indexation. These regulations are effective for transfers made on or after April 1, 2018.
Moreover, this provision was applied prospectively, taxing gains from February 1, 2018, onwards. This rule, termed the ‘grandfathering rule’, calculates any long-term gains from equity instruments purchased before January 31, 2018, based on its provisions.
The table below illustrates the taxation aspects of long-term capital gains on shares and various securities:
| Particulars | Tax Rate |
| STT-paid sales of listed shares on recognized stock exchanges and MFs | 10% on amounts over Rs 1 lakh |
| STT is paid on the sale of shares, bonds, debentures, and other listed securities. | 10% |
| Sale of debt-oriented MFs | With indexation – 20% Without indexation – 10% |
Negative Returns from Equity Shares:
Short-Term Capital Loss (STCL): Losses from selling equity shares can offset short-term or long-term gains from any asset. If not fully offset, they can be carried forward for eight years to offset future gains, provided the tax return was filed on time, even if income was below the taxable threshold.
Long-Term Capital Loss (LTCL): Pre-Budget 2018, LTCL from equity shares couldn’t be carried forward due to tax exemption on long-term gains. Post-Budget, losses can be carried forward and set off against long-term gains, not short-term ones. Unabsorbed LTCL can be carried forward for eight years, contingent on timely return filing.
Securities Transaction Tax (STT):
Securities Transaction Tax (STT) is levied on all transactions involving the buying or selling of equity shares on a stock exchange. The tax implications explained earlier are specifically relevant to shares that are listed on a stock exchange. Transactions involving listed shares on a stock exchange are subjected to STT. Consequently, the tax implications discussed earlier apply only to shares for which STT has been paid.
Grandfathering Clause:
A grandfathering clause preserves the application of an old rule for existing instances, exempting them from new regulations. Individuals unaffected by the new rule are said to have acquired grandfather rights.
In the context of taxation, long-term capital gains (LTCG) from the sale of listed equity shares and equity-oriented mutual funds were tax-free up to the 2017-18 fiscal year. However, the Finance Act of 2018 reintroduced LTCG tax on the sale of listed shares and equity-oriented mutual funds from April 1, 2018, i.e., fiscal year 2018-19, with a grandfathering clause.
This meant that although LTCG tax was reintroduced on 1st February 2018, gains accrued until 31st January 2018 were grandfathered, and no tax was imposed on them.
Grandfathering Clause Formula:
The calculation of acquisition cost involves the following steps:
Value I: The fair market value (FMV) as of January 31, 2018, or the actual selling price, whichever is lower.
Value II: The greater of Value I or the actual purchase price.
Long-Term Capital Gain (LTCG) = Sales Value – Acquisition Cost.
Tax Liability: LTCG up to Rs 1 lakh in a year is tax-exempt. Beyond this, a 10% tax (plus applicable surcharge and cess) is levied after subtracting Rs 1 lakh from the total LTCG.
Share Sale as Business Income:
Some taxpayers categorize gains/losses from share sales as ‘business income,’ while others consider it as ‘Capital gains.’ The classification has been a topic of debate.
For significant share trading activity, often seen in day traders or frequent Futures and Options trading, income is usually considered ‘business income.’ This necessitates filing ITR-3, with income shown under ‘income from business & profession.’
Income Computation Methods: Business Income vs. Capital Gains:
In the business income method, allowable expenses are subtracted to compute profits, which are then added to your overall annual income and taxed according to slab rates.
In the capital gains approach, expenses linked to the transfer can be deducted. Long-term equity gains exceeding Rs 1 lakh per year face taxation, and short-term gains are taxed at 15%.
New Clarification from CBDT:
CBDT now allows taxpayers to choose how they wish to treat this income, bringing clarity and reducing disputes. However, this choice is applicable only to listed shares or securities.
To simplify, the CBDT issued instructions that if a taxpayer opts for stock-in-trade treatment for listed shares, it will be considered business income. If they choose capital gains treatment, this will be accepted for shares held for over 12 months, and the same approach must continue in subsequent years.
Conclusion: In conclusion, understanding the taxation nuances related to income generated from selling shares is crucial for every investor. Whether it’s comprehending the implications of short-term and long-term capital gains, navigating the complexities of losses and gains, or acknowledging the impact of regulatory changes like the 2018 Budget, being informed is key. With the right knowledge and adherence to tax regulations, investors can optimize their tax liabilities and make informed decisions in the dynamic landscape of stock trading and investments.
