Capital Gain Tax on Shares

Section 14 of the Income Tax Act, 1961 defines five ‘Heads of Income’ which are –

●       Income from Salaries;

●       Income from house property;

●       Profits and gains of business or profession;

●       Income from Capital gains; and

●       Income from other sources.

In the present article, we would try to understand the capital gain taxation on the sale of shares.

Understanding the term ‘Short term capital assets’ and ‘Long term capital assets’ –

Before understanding the taxation of capital gain on sale of shares, it is important to understand the terms ‘capital asset’, ‘short term capital assets’ and ‘long term capital assets’ which are explained hereunder –

Provisions of section 45 of the Income Tax Act, 1961 states that any profit or gain arising from the transfer of a capital asset is a capital gain. ‘Capital asset’ is defined under section 2 (14) of the Income Tax Act, 1961 which means –

• Property of any kind held by the assessee (whether or not connected with the business or profession;
• Any securities held by the Foreign Institutional Investor which is invested in such securities as per SEBI regulations.

However, capital assets do not include the following –

• 6% Gold Bonds, 1977 or 7% Gold Bonds, 1980 or National Defence Gold Bonds, 1980.
• Gold Deposit Bonds (issued under the Gold Deposit Scheme, 1999), or Deposit Certificate (issued under the Gold Monetisation Scheme, 2015).
• Special Bearer Bonds, 1991.
•   Agricultural land in the rural India.

Any stock-in-trade, raw materials or consumable stores held for the purposes of the business or profession.

Personal goods like clothes, furniture etc. held for personal use but doesn’t include jewellery, drawings, paintings, archaeological collections, sculptures or any work of art.

Based on the period of holding, the capital assets are divided into two parts, namely, short term capital assets and long term capital assets. The meaning of the term ‘short term capital assets’ and ‘long term capital assets’ are explained hereunder –

Short term capital assets mean the capital asset held by the assessee for the period of not more than 36 months immediately preceding the date of its transfer. However, for the following listed assets, the same would be considered as short term capital assets if the holding period is less than 12 months –

1. Security listed in a recognized stock exchange in India.
2. Unit of Unit Trust of India.
3. Unit of equity oriented fund.
4. Zero coupon bond.
5. Equity / preference shares in the company listed in a recognized stock exchange in India.

 Even though not connected with shares, it is important to mention here that with effect from 1^st April 2018 the holding period of 36 months has been reduced to 24 months in case of an immovable property being land or building or both.

Long term capital assets simply means the capital assets, which is not short term capital assets.

Capital Gain Tax on sale of Shares –

It should be noted that until 1^st April 2018, the long-term capital gain on transfer of equity shares, units of equity oriented funds and units of business trust were exempted under section 10 (38) of the Income Tax Act, 1961, if the following conditions are satisfied –

• The transaction of transfer of equity shares / units of equity oriented mutual funds / units of business trust is liable to Securities Transaction Tax i.e. STT;

• The equity shares / units of equity oriented mutual funds / units of business trust are long term capital assets; and
• The transfer of equity shares / units of equity oriented mutual funds / units of business trust has taken place on or after 1^st October 2004.

However, from 1^st April 2018, new section 112A was inserted in the Income Tax Act, 1961 which dealt with the taxability of the same. As per section 112A, long term capital gain on transfer of equity shares / units of equity oriented mutual funds / units of business trust shall be taxable @ 10% (without indexation). However, the tax on long term capital gain on transfer of equity shares / units of equity oriented mutual funds / units of business trust shall be levied only in excess of INR 1 Lakhs.

Explaining the Income Tax Rates on transfer of shares –

The following table explains the short term capital gain tax rates and long term capital gain tax rates on the sale of shares –

Particulars	Short term capital gain	Long term capital gain
Sale of shares of listed on the recognized stock exchange and mutual funds on which Securities Transaction Tax (STT) is paid	15%	10% (on gains exceeding INR 1 Lakhs)
Sale of bonds / debentures / shares and other listed securities on which securities transaction tax is not paid	At the applicable income tax slab	10%
Debt funds	At the applicable income tax slab	20% with indexation [minimum holding period 3 years]