Taxation on sale of Shares and Securities
Taxation on the sale of shares and securities is a key aspect of personal finance and investment strategy, particularly for individuals involved in the stock market or who hold mutual funds. In India, the Income Tax Act governs the taxation rules on capital gains.
Capital gains refer to the profit made from the sale of assets like shares, bonds, mutual funds, and other securities. Depending on how long the asset has been held, the tax treatment can differ significantly.
- Short-term capital gains (STCG) are profits made from the sale of assets that have been held for not more than 12 months (in case of all listed securities) or for 24 months (in case of all other assets).
Tax Rate on STCG:
Listed Equity Shares and Equity Mutual Funds:
- 20% (flat rate) on gains. This is applicable when the shares or mutual funds are sold within one year of purchase.
Other Securities:
- For debt mutual funds and non-equity-oriented mutual funds, short-term capital gains are taxed as per the income tax slab rates applicable to the individual.
- Long term capital gains (LTCG) are profits made from the sale of long term capital assets(LTCA).Any assets other than short term capital assets is called long term capital asset.
Tax Rate on LTCG:
Listed Equity Shares and Equity Mutual Funds:
- 5% tax on gains exceeding ₹1.25 lakh in a financial year, without the benefit of indexation.
Other Securities:
- For debt mutual funds or securities held for over 3 years, long-term capital gains are taxed at 20% with indexation benefits (i.e., the purchase price is adjusted for inflation).
- Securities Transaction Tax (STT) For shares and equity mutual funds, Securities Transaction Tax (STT) is levied on the transaction value, and this has an impact on both short-term and long-term capital gains tax.
- STT is applicable on the purchase and sale of listed equity shares, equity mutual funds, and derivatives.
- STT rates:
- 0.1% on the buying and selling of shares on the exchange.
- 0.1% on the sale of equity mutual funds.
- 0.025% on sale of derivatives (futures and options).
- Chargeability (Section 45):
Capital gains shall be chargeable to tax if following conditions are satisfied
- a) There should be a capital asset. In other words, the asset transferred should be a capital asset on the date of transfer;
- b) It should be transferred by the taxpayer during the previous year;
- c) There should be profits or gain as a result of transfer.
- Loss From Equity Shares:
Set-off and Carry Forward of Losses:
- Short-term capital losses can be set off against any other capital gains, either short-term or long-term.
- Long-term capital losses can only be set off against long-term capital gains.
- Both short-term and long-term capital losses can be carried forward for 8 years to set off against future
- Others –
Tax Filing:
- Capital gains must be reported in the Income Tax Return (ITR), typically under ITR-2 or ITR-3 for individuals, depending on other sources of income.
Exemptions: Sec 54 to Sec 54H
Conclusion
Understanding the taxation rules on the sale of shares and securities is essential for making informed investment decisions. By differentiating between short-term and long-term capital gains, knowing the applicable tax rates, and leveraging exemptions and deductions, investors can effectively manage their tax liabilities.