Shares are treated as capital assets under the Income Tax Act. Gains from their sale are classified as capital gains. The tax effects depend on whether the shares are listed or unlisted.
Listed equity shares are considered long-term capital assets if held for more than 12 months. Long-term capital gains are taxed at 12.5% without indexation, after an exemption of Rs. 1.25 lakhs. Short-term capital gains are taxed at 20%.
For unlisted shares and others, long-term capital assets are those held for more than 24 months. Long-term capital gains are taxed at 12.5% without indexation. Short-term capital gains are taxed at the applicable slab rates.
Types of Capital Gains on Shares
Under the category ‘Capital Gains’, income is divided into:
Long-term capital gains
Short-term capital gains
This division depends on how long the shares are held. The holding period measures the time from when the investment is acquired to when it is sold or transferred.
For income tax purposes, the holding periods for listed equity shares and equity mutual funds differ from those for debt mutual funds. Their tax treatment is also different.
The following table shows how to determine the nature of the investment based on the holding period:
| Asset | Short-term Capital Asset | Long-term Capital Asset |
| Listed Equity shares | ≤ 12 months | > 12 months |
| Other shares | ≤ 24 months | > 24 months |
Taxation of Gains from Equity Shares
Listed Equity Shares – Short-Term Capital Gains (STCG)
- The seller makes short-term capital gains when shares are sold at a price higher than the purchase price.
- Short-term capital gains are taxable at 15% if the sale happened before 23rd July, 2024.
- This has been increased to 20% with effect from 23rd July, 2024.
- No indexation is available for short term capital gains on sale of listed equity shares.
Other Equity Shares – Short-Term Capital Gains (STCG)
- Sale of shares other than listed equity shares are taxed at applicable slab rates, irrespective of date of sale.
- No indexation benefits are available for short term capital gains on sale of other shares as well.
The manner of calculation of short term capital gains for listed and other equity shares are similar. The following table explains how to calculate short term capital gains.
| Particulars | Amount (Rs.) |
| Sale Consideration | XXX |
| Less: Expenses related to transfer | (XXX) |
| Net Sale Consideration | XXX |
| Less: Cost of Acquisition | (XXX) |
| Less: Cost of Improvement | (XXX) |
| Capital Gains | XXX |
Illustration
In October 2024, Kuldeep Singh paid Rs. 38,750 for 250 shares of a publicly traded company at a price of Rs. 155 per share. He sold them for Rs. 192 per share after 5 months for a total of Rs. 48,000. Let’s see how much money he makes in the short run.
- Full sales value: Rs. 48,000
- Brokerage at 0.5%: Rs. 240
- Purchase price: Rs. 38,750
So, the short-term capital gain Kuldeep made will be calculated as follows:
| Particulars | Amount (Rs.) |
| Sale Consideration | 48,000 |
| Less: Expenses related to transfer | (240) |
| Net Sale Consideration | 47,760 |
| Less: Cost of Acquisition | (38,750) |
| Capital Gains | 9,010 |
Listed Equity Shares – Long-Term Capital Gains (LTCG)
- If equity shares listed on a stock exchange are sold after 12 months of purchase, the seller may make a long-term capital gain (LTCG) or a long-term capital loss (LTCL).
- If listed equity shares are sold before 23rd July, 2024, long-term capital gain of more than Rs.1.25 lakh will be taxed at 10% (plus applicable cess). Also, the benefit of indexation will not be available to the seller.
- If the shares are sold on or after 23rd July 2024, the gains are taxed at 12.5 % without indexation, after an exemption of Rs. 1.25 lakhs.
- Grandfathering clause is applicable for sale of long term listed equity shares.
Grandfathering Clause
- A grandfathering clause is a provision that states that an old rule will continue to apply to some existing instances while a new rule will apply to all future cases.
- While the LTCG was reintroduced on 1st February 2018, the CBDT (Central Board of Direct Taxes) grandfathered gains up to 31st January 2018, i.e. no tax would be paid on gains accrued until 31st January 2018.
- If the shares were purchased before 31st January, 2018, the fair market value of shares on 31st January 2018 can be considered as the purchase price, if it is beneficial to the assessee.
- But the cost of acquisition considered should not exceed the sale consideration.
The acquisition cost is calculated as follows:
- Value I – Fair market value as on 31st January 2018 or the sales consideration, whichever is lower.
- Value II – Value I or the purchase price, whichever is higher.
Long-Term Capital Gain = Sales Value – Acquisition Cost (as calculated above)
Example:
Original Purchase price of equity shares = Rs.100 (1st January 2017)
FMV on 31st January 2018 = Rs.200
Sale value = Rs.50 (1st of April 2024).
As per the grandfathering clause,
Value 1 – lower of the sale value(0) and FMV as on 31st January 2018(200) ; 0
Value 2 – Higher of the Value 1(0) or the actual purchase price (100); Rs. 100
Therefore, the actual cost of Rs.100 will be taken as the cost of acquisition in this case. Hence, the long term capital loss will be Rs. 50(Rs.50-Rs.100) in this case.
Other Equity Shares – Long Term Capital Gains(LTCG)
- For other equity shares, the long term capital gains are taxed at 12.5% without indexation, if it is sold on or after 23rd July, 2024.
- If sold before 23rd July, 2024, the long term capital gains are taxed at 20%, with indexation benefit.
- Exemption of Rs.1.25 lakhs do not apply in any cases.
Exemption on Long Term Capital Gains – Section 54F
- Irrespective of whether it is capital gains on listed equity shares or not, exemption under section 54F can be claimed on a proportionate basis.
- This exemption can be claimed if the sale proceeds from the capital assets are invested in a residential property, subject to other conditions.
- If the entire sale consideration is invested in a residential property, the entire capital gains can be claimed as an exemption.
Loss From Equity Shares
Short-Term Capital Loss (STCL)
Any short-term capital loss from the sale of equity shares can be offset against short-term or long-term capital gain from any capital asset. If the loss is not set off entirely, it can be carried forward for eight years and adjusted against any short term or long-term capital gains made during these eight years.
It is worth noting that a taxpayer will only be allowed to carry forward losses if he has filed his income tax return within the due date. Therefore, even if the total income earned in a year is less than the minimum taxable income, filing an income tax return is a must for carry forward of these losses.
Long-Term Capital Loss (LTCL)
Long-term capital loss from equity shares until Budget 2018 was considered a dead loss – It could neither be adjusted nor carried forward. This is because long-term capital gains from listed equity shares were exempt. Similarly, their losses were neither allowed to be set off nor carried forward.
After the Budget 2018 has amended the law to tax such gains made more than Rs 1 lakh at 10%, the government has also notified that any losses arising from such listed equity shares, mutual funds, etc., would be carried forward.
Long-term capital loss from a transfer made on or after 1 April 2018 will be allowed to be set off and carried forward in accordance with existing provisions of the Act. Therefore, the long-term capital loss can be set off against any other long-term capital gain. Please note that you cannot set off long-term capital loss against short-term capital gains.
Also, any unabsorbed long-term capital loss can be carried forward to the subsequent eight years for set-off against long-term gains. To set off and carry forward these losses, a person has to file the return within the due date.
Securities Transaction Tax (STT)
STT is applicable on all equity shares sold or bought on a stock exchange. The above tax implications are only applicable to shares listed on a stock exchange. Any sale/purchase on a stock exchange is subject to STT. Therefore, these tax implications discussed above are only for shares on which STT is paid.
Expenses incurred during the sale of shares:
Registration charges, brokerage charges & various other charges are deducted from the sale of shares to arrive at the net gain or loss arising from transfer of such shares.