Simplifying Tax for C.A's and Taxpayers
Capital Gain Tax on Shares

Capital Gain Tax on Shares

Have you rightly calculated your capital gain on shares and understand the cumulative impact of section 10,111A and 112 of income tax act,1961.

Clarifying the most asked question about taxation impact on the sale of shares and indexation option available in shares.

In this context, first of all, we have to understand that any profit or gain arising from the sale or transfer of a capital asset is taxable as “Capital gains”. Shares are considered as capital assets and, therefore, gain or profit on sale or redemption in respect of shares is chargeable under the head “Capital gains” in the income tax.

Capital gain is classified into two categories:
1. Short term capital gain and
2. Long term capital gain.

Short term capital gain is the gain originating on the sale or transfer of the short-term capital asset, and Long-term capital gain is the gain arising on the sale or transfer of the long-term capital asset.
A capital asset is regarded as short term capital asset when it is held by assessee for not longer than 36 months immediately prior to its date of transfer, otherwise the asset will be regarded as long-term capital asset.

However in case of equity or preference shares in a Company listed in recognised stock exchange in India , if such shares or units are held for less than or equal to 12 months, they will be treated as short term capital assets and accordingly gain arising on sale as such will be chargeable as short term capital gain. If such shares are held for more than 12 months, they will be treated as long term capital assets and accordingly gain arising on sale as such will be chargeable as long term capital gain.

Equity or preferences shares in a Company which is not listed in recognised stock exchange in India (like private or public limited companies) or foreign equity, which is held for less than or equal to 36 months will be regarded as short term capital assets and accordingly gain arising on sale as such will be chargeable as short term capital gain. If such shares or equity are held for more than 36 months, they will be treated as long term capital assets and accordingly gain arising on sale as such will be chargeable as long term capital gain.

Now after having the brief insight about nature of capital gain, we shall proceed to answer the most discussed or asked question that is “What about tax on short term capital gain and long term capital gain in case of shares?”, “When benefit of indexation is available in shares?”

Following chart answer the question in a quick and understandable manner for both equity and preference shares:

Understanding Capital gain in respect of equity shares:

understanding the capital gain tax
Understanding Capital gain in respect of equity shares

Understanding Capital gain in respect of preference shares:

Understanding Capital gain in respect of preference shares part 1
Understanding Capital gain in respect of preference shares part 2

Above chart is very helpful, easily understandable and saves lot of time which is consumed in understanding the cumulative impact of section 10,111A and 112 under the income tax act, 1961.  In the next article we will deal with the capital gain calculation in respect of mutual funds.

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4 Responses to Capital Gain Tax on Shares

  1. What will be the position in case of buy back of shares as these are not through stock exchange and as such no STT is paid ?

    • Dear Anand Prakash Ji

      Buy back of shares do not involve Securities transaction tax and accordingly depending on period of holding and nature of shares tax will be calculated in the manner considering the same as shares on which no STT paid. Further gain will not be exempted u/s 10(38).
      Thanks

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