Taxation on Sale of shares

Taxation of Income Earned from Selling Shares

Many individuals, including homemakers and retirees, engage in buying and selling shares, but often remain uncertain about how the income from these activities is taxed. Income or loss from the sale of shares falls under the category of Capital Gains.

Budget 2024 Updates

The Union Budget 2024 introduced several changes, effective from FY 24-25, that impact the taxation of capital gains on the sale of shares:

• Holding Periods: There will now only be two holding periods to classify assets as either long-term or short-term: 12 months and 24 months. The previous 36-month holding period has been removed.
• Short-Term Capital Gains (STCG): The tax rate on STCG for listed equity shares, units of equity-oriented mutual funds, and units of business trusts has increased from 15% to 20% starting from 23rd July 2024.
• Long-Term Capital Gains (LTCG): The exemption limit for LTCG on the transfer of equity shares, equity-oriented units, or units of business trusts has been increased from Rs. 1 lakh to Rs. 1.25 lakh per year. However, the tax rate on these gains has also increased from 10% to 12.5%.

Capital Gains Classification

Under the Capital Gains category, income is classified as either:

1. Long-Term Capital Gains (LTCG)
2. Short-Term Capital Gains (STCG)

The classification depends on the holding period of the shares, which is the duration between the date of acquisition and the date of sale or transfer.

It is important to note that the holding periods for different types of capital assets, such as listed equity shares, mutual funds, and debt funds, vary. The taxability of these assets also differs.

This article focuses on the tax implications related to listed securities, such as listed equity shares, bonds, debentures listed on Indian stock exchanges, as well as units of UTI and zero-coupon bonds.

Taxation of Gains from Equity Shares

• Short-Term Capital Gains (STCG): If equity shares listed on a stock exchange are sold within 12 months of purchase, any profit made is considered Short-Term Capital Gain (STCG). If shares are sold for more than their purchase price, the seller earns STCG, which is subject to tax. Currently, STCG is taxed at a rate of 15%. However, starting from 23rd July 2024, the tax rate will increase to 20%.

• Long-Term Capital Gains (LTCG)

If equity shares listed on a stock exchange are sold after holding them for more than 12 months, the seller may incur either a long-term capital gain (LTCG) or a long-term capital loss (LTCL), depending on whether the sale price is higher or lower than the purchase price.

Budget 2018 Changes

Before the introduction of the Budget 2018, long-term capital gains from the sale of equity shares or equity-oriented mutual fund units were exempt from tax. This meant that no tax was levied on profits from the sale of long-term equity investments.

However, the Budget 2018 removed this exemption. As a result, from 1st April 2018, any long-term capital gain (LTCG) exceeding Rs. 1 lakh on the sale of equity shares or equity-oriented mutual fund units is subject to tax at the rate of 10% (plus applicable cess). Importantly, indexation benefits are not available under this provision, meaning the cost of acquisition cannot be adjusted for inflation.

Grandfathering Clause

To provide some relief, the Budget 2018 introduced the grandfathering clause, which applies to gains arising from the sale of equity shares or equity-oriented units purchased before 31st January 2018. Under this provision, the capital gains on such investments will not be taxed on the gains accrued before 1st February 2018. Only the gains arising after this date are subject to the 10% LTCG tax.

Thus, any long-term gains from equity instruments purchased before 31st January 2018 will be calculated based on the price as of 31st January 2018, and only the gains over this “grandfathered” value will be taxed under the new rules.

Here’s an example for both Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) from the sale of shares in table format:

Explanation:

1. STCG (Short-Term Capital Gains):
   • The holding period is 11 months, which is less than 12 months, so it’s considered short-term.
   • The sale price of ₹1,50,000 and purchase price of ₹1,00,000 result in a capital gain of ₹50,000.
   • As per the new rule (effective from 23rd July 2024), STCG on listed shares will be taxed at 20%.
   • The tax payable on ₹50,000 gain is ₹10,000, and the resulting gain after tax is ₹40,000.
2. LTCG (Long-Term Capital Gains):
   • The holding period is 24 months, which is more than 12 months, so it qualifies as long-term.
   • The sale price of ₹2,50,000 and purchase price of ₹2,00,000 result in a capital gain of ₹50,000.
   • Since the capital gain exceeds ₹1 lakh, it is subject to 10% LTCG tax (as per Budget 2018 provisions).
   • The tax payable on ₹50,000 is ₹5,000, and the resulting gain after tax is ₹45,000.

This table provides a clear comparison of the tax treatment for both short-term and long-term capital gains from the sale of equity shares, with tax rates and the resulting after-tax gains.