Understanding Taxes On Share Market Earnings: A Comprehensive Guide

Almost everyone knows that business income, rental income, and salary income are taxed. However, what about the income from selling or buying shares? Many housewives and pensioners spend their time buying and selling shares for a profit, but do you know how this income is taxed?

What Is Capital Gains Tax?

Capital gains are taxable or in other words, capital gains fall under the tax net and an investor - an individual or a company - has to pay tax after selling an asset. However, the company only has to pay capital gains tax when the asset is sold. Capital gains are taxable; income/losses from the sale of shares fall under the heading “capital gains”.

Capital Gains income is further subdivided into:

• Long-term capital gains

• Short-term capital gains

This classification is based on the holding period of the shares. The holding period is the period during which the investment is held, from the date of acquisition to the date of sale or transfer.

It should be noted that the holding periods of shares and securities are different for different classes of capital assets. For income tax purposes, holding periods of listed equity shares and equity mutual funds are different from the holding period of debt mutual funds. Their taxability is also different.

Short-Term Capital Gain

If listed shares are sold within 12 months of purchase, the seller may realise a short-term capital gain (STCG) or suffer a short-term capital loss (STCL). 

The seller concedes short-term capital gains if the shares are sold at a higher price than the purchase price. Short-term capital gains are taxable at 15%.

For instance, the price per share of a publicly traded firm in October 2015 was Rs.155 a share, for which Kuldeep Singh paid Rs.38,750. After 5 months, he sold them for Rs.192 per share for Rs.48,000. 

Sale value - Rs.48,000

Brokerage fee at 0.5% - Rs.240

Purchase price - Rs.38,750

So Kuldeep’s short-term capital gain is: Rs.48,000 - (Rs.38,750+ Rs.240) = Rs.9,010.

Long-Term Capital Gains (LTCG)

• When equity shares are sold after 12 months of purchase, the seller may make a long-term capital gain (LTCG) or a long-term capital loss (LTCL). 

• Before the introduction of Budget 2018, long-term capital gains from the sale of shares or equity-oriented units of mutual funds were tax-free, i.e. no tax was payable on gains from the sale of long-term equity investments. 

• This tax exemption was abolished with the 2018 Finance Budget. If a seller realises a long-term capital gain of more than Rs. 1,000 on the sale of shares or equity-oriented units of a mutual fund, such gain will henceforth be subject to long-term capital gains tax at 10% (plus applicable tax). In addition, the seller cannot benefit from indexation. 

• These provisions apply to transfers made on or after April 1, 2018.

What Is Loss From Equity Shares?

Short-Term Capital Loss

An equity share sale loss can be offset by a long-term or short-term capital gain from any capital asset. In the event the loss is not completely set off, it can be carried forward for eight years and offset against any short-term or long-term capital gains.

Long-Term Capital Loss (LTCL)

Long-term capital losses from shares were considered a dead loss until the 2018 budget – they could neither be corrected nor carried forward. This is because long-term capital gains from listed shares were tax-free. Similarly, their losses could neither be offset nor carried forward

After Budget 2018 amended the law to tax such gains exceeding 1 lakh at 10%, the government has also notified that all losses from such listed shares, mutual funds, etc. can be carried forward.

Long-term capital losses arising from transfers made on or after April 1, 2018, can be set off and carried forward as per the existing provisions of the Act. Therefore, the long-term capital loss can be set off against other long term capital gains. 

What Is Securities Transaction Tax (STT)?

The STT applies to all shares sold or bought on a stock exchange. The above tax implications apply only to listed shares. Any sale/purchase on a stock exchange is subject to STT. Therefore, the above tax implications apply only to shares on which STT is paid.

Conclusion

Every individual must file their taxes in the prescribed IT return form. Taxpayers need to file ITR for capital gains by submitting ITR Form 2 to the Income Tax Department. However, if your total income for a financial year includes income from a business or profession, you need to file ITR-3 as an income tax return for capital gains.

If you want to raise a query about e-filing of Income Tax Return, you can call at 1800 103 0025 or 1800 419 0025 during business hours i.e., 8 am to 8 pm from Monday to Friday. Stay updated with Jaagruk Bharat for the latest income tax updates and news.