Selling shares can generate significant income for investors. But how is the income from share trading taxed in India? What are the different types of taxes and tax rates applicable?
This comprehensive guide will explain everything you need to know about taxation of income earned from selling shares in India.
Table of Contents
Introduction
Share trading has become extremely popular in India. With high returns possible, more and more individuals are investing in shares of publicly listed companies.
However, many shareholders have doubts about how the income earned from share trading is taxed. Based on the period of holding, shares are classified as short-term or long-term capital assets. The income is taxable under the head ‘Capital Gains’.
This article will provide a deep dive into taxation of short-term and long-term capital gains from sale of listed shares. It covers recent changes after Budget 2018, grandfathering clause, setting off capital losses, and more. Read on to gain clarity on share trading taxation in India.
What are Capital Gains?
Any profit or gain that arises from the sale of a ‘Capital Asset’ is taxable under the head ‘Capital Gains’. For taxation purpose, capital assets are classified into short-term and long-term based on the holding period of shares.
- Short-Term Capital Asset – Shares held for 12 months or less.
- Long-Term Capital Asset – Shares held for more than 12 months.
Accordingly, capital gains are categorized as:
- Short-Term Capital Gains (STCG) – Profit from shares held up to 12 months.
- Long-Term Capital Gains (LTCG) – Profit from shares held for more than 12 months.
The tax rates and rules for STCG and LTCG are quite different. Let’s understand them in detail:
Short-Term Capital Gains Tax
If you sell shares within 12 months of purchase, any profit is considered Short-Term Capital Gains (STCG). For example:
- Shares of ABC Ltd purchased on 12th Feb 2023
- Sold on 3rd Jan 2024
- Holding period = Less than 12 months
- Hence any profit is considered STCG
According to Income Tax laws, STCG arising from sale of listed equity shares is taxable at 15%. This rate is irrespective of your income tax slab.
For computing STCG, you can deduct expenses incurred wholly and exclusively for the transfer, such as brokerage fees or demat charges.
The calculation of STCG is:
STCG = Sale Value – Purchase Value – Expenses
Let’s take an example:
- Purchase Price: ₹120 per share
- Sale Price: ₹200 per share
- No. of Shares: 500
- Brokerage at 0.1% of Sale Value = ₹200
- STCG = (500 x 200) – (500 x 120) – 200 = ₹90,000
Here, the STCG will be ₹90,000 and tax payable will be 15% of this gain, which is ₹13,500.
This STCG will be added to your Total Income for the financial year and taxed as per your applicable tax slab rate.
Now that you understand taxation of STCG, let’s move on to LTCG taxation.
Long-Term Capital Gains Tax
When listed shares are sold after being held for more than 12 months, the resulting profit is called Long-Term Capital Gains (LTCG).
Taxation of LTCG has undergone a significant change after Budget 2018.
Up to 31st Jan 2018 – LTCG from equity shares were completely exempt from tax.
From 1st April 2018 – LTCG exceeding ₹1 Lakh in a financial year is taxable at 10%.
This means any LTCG made till 31st Jan 2018 is tax-free. For gains after this date, only the amount above ₹1 Lakh is taxed at 10%.
Let’s take an example to understand this better:
- Shares purchased on 1st Nov 2017
- Sold on 1st May 2019
- LTCG = ₹1,20,000
Tax Calculation:
- LTCG made till 31 Jan 2018 = Tax Free
- LTCG after 31 Jan 2018 = ₹1,20,000
- Less: Exemption of ₹1 Lakh
- Taxable LTCG = ₹20,000
- Tax on this at 10% = ₹2,000
Therefore, on your ₹1,20,000 LTCG, only ₹2,000 is payable as LTCG tax.
This change in LTCG tax has been made prospectively from 1st April 2018. The gains made up to 31st Jan 2018 are protected by the grandfathering clause, which we will cover next.
Grandfathering Clause for LTCG
The grandfathering clause is a transitional provision to ensure gains made up to 31st Jan 2018 are exempted from LTCG tax.
Under this clause, the cost of acquisition of shares acquired before Feb 1, 2018 is taken as the higher of:
- Actual purchase price OR
- Fair market value (FMV) as on 31st Jan 2018
Let’s understand this with an example:
- Shares purchased on 1st July 2017 at ₹150
- FMV on 31st Jan 2018 = ₹200
- Sold on 1st April 2019 for ₹250
As per grandfathering clause, the cost of acquisition is taken as the higher of:
- Actual purchase value = ₹150
- FMV as on 31st Jan 2018 = ₹200
Therefore, the cost of acquisition is ₹200.
LTCG will be – Sale value minus cost of acquisition = ₹250 – ₹200 = ₹50
So LTCG of ₹50 will be exempt from tax under grandfathering clause.
Set Off and Carry Forward of Losses from Shares
Many investors also incur losses from share trading. Here is how these capital losses can be set off against capital gains:
Short-Term Capital Loss (STCL)
- Can be set off against any capital gains – STCG or LTCG
- Remaining loss can be carried forward for 8 assessment years
- Allowed only if return is filed on time
Long-Term Capital Loss (LTCL)
- Can be set off only against LTCG
- Not allowed to be set off against STCG
- Remaining loss can be carried forward for 8 assessment years
- Allowed only if return is filed on time
Therefore, by filing your tax returns on time, you can reduce your tax liability through prudent set off of capital losses.
Securities Transaction Tax (STT)
Securities Transaction Tax (STT) is levied on purchase or sale of securities listed on Indian stock exchanges.
Current STT rates are:
- 0.1% on purchase or sale value of shares
- 0.001% on sale of futures
- 0.017% on sale of options
- 0.125% on sale of equity funds
The tax implications discussed in this article are applicable if STT is paid on the transaction.
Sale of Shares – Business Income vs Capital Gains
Gains from shares are typically taxed under the head ‘Capital Gains’.
However, in case of high volume trading like day trading, the income may be construed as ‘Business Income’.
- For day traders or high volume traders, gains are taxed as business income. These are added to total income and taxed as per slab.
- For general investors, gains are considered capital gains and eligible for beneficial rates.
In case of any dispute, CBDT has clarified that the taxpayer can decide the income head and pay taxes accordingly. This stand has to be maintained consistently.
Tax on Sale of Unlisted Shares
The taxation rules differ slightly for unlisted shares:
- Income from sale of unlisted shares is considered capital gains. This is irrespective of holding period.
- Unlisted shares do not attract securities transaction tax (STT).
- To provide uniformity, CBDT has specified that income from unlisted shares will be taxed as capital gains.
Frequently Asked Questions
Q: What is grandfathering clause in LTCG?
A: The grandfathering clause exempts LTCG made up to 31st Jan 2018 from tax. The cost of acquisition is taken as higher of actual purchase price or FMV as on 31 Jan 2018.
Q: Can I adjust capital loss against business income?
A: No, capital loss can be set off only against capital gains. It cannot be set off against normal business income.
Q: Is STT applicable on sale of shares?
A: Yes, Securities Transaction Tax (STT) is payable on purchase or sale of listed shares on stock exchanges.
Q: How is intraday trading taxed?
A: For day traders or active traders, gains are considered speculative business income. These are added to total income and taxed as per slab rates.
Q: Are dividends from shares taxable?
A: No, dividends received from domestic companies are exempt from tax in the hands of the investor.
Conclusion
Taxation of capital gains from shares depends on:
- Holding period – short-term vs long-term
- Time of sale – before or after 31st Jan 2018
- Applicability of STT
- Grandfathering clause
Day traders may have to pay tax on share trading as business income. By prudently adjusting capital losses, you can reduce your tax incidence.
I hope this comprehensive guide on taxation of share trading income helps you understand the applicable rules fully. The team at Filingwala can also help you file capital gains tax on stocks correctly.
Filingwala.com is an accounting services company that provides various legal and compliance services like company registration, trademark registration, tax filing, accounting and more. Their expert CAs and lawyers can assist you in correctly computing capital gains tax and filing returns.
