Capital Gains Tax

Capital Gains Taxation on Sale of Shares and Mutual Funds [Updated]

Last updated: February 3, 2018

Any Profits / gains arising from sale of equity shares and mutual funds (being held as Capital Asset) is charged to tax under income from ‘Capital Gains’. Taxability depends upon the nature of capital asset, which can be either Long term or Short term.

Meaning of Short Term Capital Asset and Long Term Capital Asset

Capital Gains Tax

Gain arising from transfer of short-term capital asset is treated as short-term capital gains and gain arising from transfer of long-term capital asset is treated as long-term capital gains.

Short Term Capital Gains Tax (Section 111A)

Short-term capital gains tax on sale of equity shares or unit of equity oriented mutual fund is levied under section 111A of the Income Tax Act, 1961, at 15%, if-

  1. Transaction of sale of such equity shares or unit is entered into on or after 1.10.2004 and
  2. Securities Transaction Tax (STT) is paid on such transaction.

Tax rate will be 15% if the above conditions are satisfied.

Further, in case of individual and HUF, if the income other than the short term capital gain is less than the basic exemption limit i.e. ₹ 2,50,000, then the amount of short-term capital gain shall be reduced by the amount by which the other incomes fall short by ₹ 2,50,000. In simpler words, the taxpayer will get the full benefit of basic exemption limit regardless of section 111A.                

For example, total income of Mr. Jerry is ₹ 5,20,000/- including short-term capital gain of ₹ 3,50,000. In this case, other income is ₹ 1,70,000 (5,20,000 – 3,50,000) which is less than basic limit of ₹ 2,50,000 by ₹ 80,000. Therefore, short term capital gain will be reduced by ₹ 80,000 so as to fully utilize the exemption limit of ₹ 2,50,000. Hence, tax under section 111A @ of 15% will paid on ₹ 2,70,000 (3,50,000 – 80,000).

Long-term Capital Gains Tax [Section 10(38)]

Long-term capital gains on sale of equity shares or units of equity fund are exempt from tax under section 10(38) provided:

  1. Transaction of sale of such equity shares or unit is entered into on or after 1.10.2004,
  2. Securities Transaction Tax (STT) is paid on such transaction.

Further, this exemption will not be available for equity shares acquired after 1.10.2004 on which STT was not paid. (From A.Y. 2018-19)

Note: W.e.f. AY 2019-20, this exemption is limited to gains of ₹ 1,00,000. Gains in excess of ₹ 1,00,000 will be taxabe at the rate of 10%.

Budget 2018 Amendment (Exemption Withdrawn)

A new section 112A has been inserted w.e.f. Assessment Year 2019-20. As per new section, long-term capital gain arising out of sale of equity shares/units of equity oriented fund/unit of business trust shall be taxed at the rate of 10%. Capital gains shall be computed without giving the indexation benefit to the investor. However, not tax shall be levied if capital gain is less than ₹ 1,00,000.

Computation of Capital Gains

Income chargeable under the head ‘Capital Gains’ will be computed using following calculation:

Capital Gains TAx

Key Notes:

  1. Since, Long-term capital gains from sale of shares is exempt from tax, any long-term capital loss arising out of such sale has no tax treatment. However, these gains needs to be disclosed while filing Income Tax Return. W.e.f. AY 2019-20, long-term capital loss from shares exceeding ₹ 1,00,000 can be set off any other long term capital gains. [see section 70(3)]
  2. Short-term capital loss from sale of shares can be set-off against any other Long-term or Short-term capital gains.
  3. The exemption under section 10(38) is available only to equity shares and units of equity oriented mutual fund[w.e.f. AY 2019-20 exemption is limited to ₹ 1,00,000]. Gains from other types of securities such as preference shares, debentures, units of debt oriented fund, deep discount bonds etc. are not exempt.
  4. If shares are held as stock-in-trade, any income therefrom will be business income and not capital gains (refer Circular 4/2007, dated 15.06.2007).
  5. Cost of Acquisition of Bonus Shares will be NIL and period of holding will be considered from date of allotment of such bonus shares.

Pratik Gelda

I'm a qualified Chartered Accountant and I love to write about economics, finance, taxation and investments. My aim is to make my readers economically literate and financially independent