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Capital Gains Tax on Shares

What are Capital Gains?

A capital gain would mean any gain out of the sale of a capital asset. It is regarded as an income. Thus, it will be taxed in the same year in which the capital asset is transferred. Capital Gains refer to the gains that arise in the form of profits. This happens when an investor realizes that his capital assets are being sold at a price higher than the purchase price. These gains are taxable under a special head called the Capital Gains head.

Capital Gains Tax can be classified into two types:

  • Short term capital gains: These gains, also referred to as STCG, are profits that are realized from the sale or transfer of a capital asset which has been held for a year or lesser.

  • Long term capital gains: These gains, also referred to as LTCG, are profits that are attained when a capital asset has been held for over a year before being sold.

What is Capital Gains Tax?

To put it in simple terms, capital gains are actually gains or profits that arise when a capital asset is sold. This gain that arises as a result of the sale of the capital asset is considered as an income. The moment it becomes an income, it is liable to be charged as tax, that too in the same year of transfer of the capital asset. This tax resulting from the gains is called capital gains tax and can easily be classified into two types; namely – short term and long term capital gains tax.

Capital Gains Tax is the tax which is charged on the profits or gains made by an investor who sells his assets. Some of the most commonly known capital assets are shares, bonds, mutual funds, building, land, vehicle, trademarks, patents, machinery, leasehold rights, jewellery, etc. However, the following are not considered as capital assets: personal goods like furniture and clothes which are purely held for personal use; stocks, raw materials or consumables that are used for business or profession; agricultural land that lies in rural India; gold bonds of specific percentages., i.e. 6½% gold bonds, 7% gold bonds, or even national defence gold bonds that are issued by the Central Government.

The assets can broadly be classified into two types:

  • Short Term Capital Assets: Assets like securities and shares which have been held by the taxpayer for up to 3 years before the date of transferring the asset.

  • Long Term Capital Assets: Assets that are held for more than 3 years before their transfer.

Capital Gains Tax Calculation on Shares

Short Term Capital Gains: To calculate STCG, these items have to be subtracted from the total value of sales:

  • Brokerage or expenses associated with the selling of the asset

  • The asset’s purchase price

Long Term Capital Gains: To calculate LTCG, these items have to be subtracted from the total value of sales:

  • Brokerage or expenses upon selling the asset

  • The asset’s indexed purchase price

STCG = Full value consideration – (cost of acquisition + cost of improvement + cost of transfer)

LTCG = Full value of consideration received or accruing – (indexed cost of acquisition + indexed cost of improvement + cost of transfer)

Taxes Pertaining to Capital Gains

Taxes on capital gains:

On long term capital gains: The tax on long term capital gains is available at the rate of 20% plus surcharge and an education cess. On short term capital gains: The tax on short term capital gains depends on two different conditions.

  • When the securities transaction tax isn’t applicable, short term capital gains is added on to the income tax return. The taxpayer is then taxed as per his income tax slab.

  • When the securities transaction tax is applicable, on the other hand, short term capital gains is applicable at the rate of 15% plus surcharge plus education cess.

Indexed Cost

The indexed cost is determined based on the CII or Cost Inflation Index released by the Government of India.

The CII for the past 10 years has been listed below:

Financial YearCost Inflation Index
2007-2008129
2008-2009137
2009-2010148
2010-2011167
2011-2012184
2012-2013200
2013-2014220
2014-2015240
2015-2016254
2016-2017264
2017-2018272

Indexed Price of an Asset = Cost of Purchase X CII of the year of sale / CII of the Year of Purchase

Revision of Union Budget

As per the Union Budget of 2018, as declared by our Finance Minister, Arun Jaitley on 01 February, 2018, some changes to the capital gains tax were made. LTCG at 10% is levied on Income which is over INR 1 lakh without the benefit of Indexation. But, the gains that have been made either on or before the 31st of January, 2018 are exempted from the new rule. The reform has been initiated in order to create a balance in the equity market.

Exemption on Capital Gains

There are always some exemptions that follow. As per the Income Tax Act, 1961, the taxpayers can save taxes on capital gains under sections 54 as well as 54F. The specifications have been listed below. However, both these exemptions are applicable on long term capital gains:

  • The exemption under section 54 is valid on long term capital gains on the sale of a residential house property

  • The exemption under section 54F is valid on long term capital gains on the sale of any other asset but a residential house property

FAQs

What are capital gains?

Capital gains, as the name suggests, are the gains that arise in the form of profits when capital assets are sold. This typically happens when the capital asset is sold at a price that is higher than its purchase price.

How can capital gains be classified?

Capital gains can be classified into two types: short term and long term capital gains. While short term capital gains or STCG are the gains derived from the transfer or sale of capital assets held for a year or lesser, long term capital gains are the gains that are derived from the sale of capital assets that are held for over a year before being sold.

Are capital gains regarded as income?

Yes, capital gains and any profits arising out of them are considered as income, which is why they are chargeable to tax in the same year in which the transfer of capital asset is made.

What are the most important terms to know before getting into the details of capital gains?

You need to be familiar with the following, in order to understand capital gains better:

  • Cost of acquisition: This refers to the value in which the capital asset has been acquired by a seller.

  • Cost of improvement: This refers to the expenses that are incurred while making some improvements to a capital asset by a seller. However, there is an exception. Any improvements to the capital asset made before the sate – 01 April, 1981, is not taken into consideration.

  • Full value consideration: This refers to the consideration that is received or has to be received by a seller in exchange for his capital assets that he has transferred. Capital gains, are however, chargeable to tax in the same year of transfer of assets.

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