Income Tax on selling of Shares and Securities
An investment in knowledge always pays the best interest. With that knowledge, we all invest in many things for a period of time. These all things are not left from the taxes. Share and securities are part of them. But what about the taxation of income from sale or purchase of shares?
Gain earned at the time of transfer of capital asset is taxable to Income Tax under the head “Capital Gains”.
Income from capital gains is classified as “Short Term Capital Gains” and “Long Term Capital Gains”. In this article, we will gain knowledge about the provisions relating to tax on Short Term Capital Gains.
Meaning of capital asset
In Income tax, capital assets are defined separately. Some of the examples of Capital assets are Land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewelry. The Rights of or in relation to an Indian company and the Rights of management or control or any other legal right are also included in this.
These are some of the following items which are excluded from the category of capital asset:
- Any stock, consumables or raw material, held for the purpose of business or profession,
- Personal goods such as clothes and furniture held for personal use,
- Agricultural land in rural India,
- .6½% gold bonds (1977) or 7% gold bonds (1980) or national defense gold bonds (1980) issued by the central government,
- Special bearer bonds (1991),
- Gold deposit bond issued under the gold deposit scheme (1999) or deposit certificates issued under the Gold Monetization Scheme, 2015.
What are the Types of Capital Assets?
- Short-term capital asset– Any capital asset which are being held for a period of 24 months or less is a short-term capital asset. Earlier The criteria were of 36 months which have been now reduced to 24 months for immovable properties such as land, building and house property from Financial Year 2017-18.
For instance, if you sell house property after holding it for a period of 24 months and that property is sold after 31st March 2017 then any income arising will be treated as long-term capital gain.
- Long-term capital asset –Any capital asset that is held for more than 36 months is a long-term capital asset. In case of movable property such as jewelry, debt-oriented mutual funds and many more the reduced period of the 24 months is not applicable. They will be classified as a long-term capital asset only if held for more than 36 months like old days.
Even now also some assets are considered short-term capital assets, when these are held for 12 months or less. This rule is applicable only if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase is).
These assets are:
- Equity or preference shares in a company listed on a recognized stock exchange in India.
- Securities (like debentures, bonds, government securities.) listed on a recognized stock exchange in India.
- Units of UTI, whether quoted or not
- Units of equity oriented mutual fund, whether quoted or not
- Zero coupon bonds, whether quoted or not
When the above-listed assets are held for a period of more than 12 months, they are considered as long-term capital asset.
In some cases these assets are acquired by gift, will, succession or inheritance. In Such cases, period for which the asset was held by the previous owner is also included when determining whether it is a short term or a long-term capital asset. Similarly In case of bonus shares or rights shares, the period of holding is counted from the date of allotment of bonus shares or rights shares respectively.
Now that we have learned what is capital gain and capital asset. Let us study about Taxation on shares in specific.
Short term and Long term capital gains and losses.
As studied earlier, we know when short term and long term capital gain arises. So let’s learn how to calculate the amount.
Short term capital gain= Sale price-Expense on sale-Purchase price.
Short term capital gains are taxable at 15%. Even, if your total taxable income excluding short term gains is below taxable income i.e Rs 2.5 lakh – you can adjust this shortfall against your short term gains. Remaining short term gains shall be then taxed at 15% + 4% cess on it.
Long term capital gain= Sale price-Purchase price- Transfer Cost
Before 2018, long term capital gain the income earned was exempt u/s 10(38), now the limit is Rs 1 lakh on sale of equity shares or equity-oriented units of mutual fund. The gain made will attract a capital gain tax of 10% without indexation long-term capital gains tax. Also, the benefit of indexation will not be available to the seller. These provisions apply to transfers made on or after 1 April 2018.
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The author of above article is Sneha Bhalotia.