1. Gains from Equity Shares
a. Short-term capital gains and losses
Seller may make short term capital gain or incur a short-term capital loss if equity shares listed on a stock exchange are sold withing 12 months of purchase.
The seller can make a short term capital gain if shares are sold at a price higher than the purchase price.
Calculation of Short-term capital gain = Sale price(less) Expenses on Sale (less) Purchase price
b. Long-term capital gains and losses
The seller may make a long-term capital gain or incur a long-term capital loss if equity shares listed on a stock exchange are sold after 12 months of purchase,
Before the introduction of budget 2018, the long-term capital gain made on the sale of equity shares or equity-oriented units of mutual fund was exempt from tax under Section 10(38)
Under the Financial Budget 2018 provisions if a seller makes a long-term capital gain of more than Rs. 1 lakh on the selling of a mutual fund’s equity shares or equity-oriented units, the gain made would attract a capital gains tax of 10 percent long-term capital gains tax. Additionally, the seller will not get the value of indexing. Such provisions shall apply to transactions made after or on 1 April 2018.
2. Taxation of Gains from Equity Shares
a. Tax on short-term capital gains
Short-term capital gains are 15 percent taxable. What if the tax rate is 10 or 20 or 30 percent? A special 15 percent tax rate applies to short-term capital gains, irrespective of your tax level. Also, if your overall taxable income minus short-term gains are below taxable income i.e. Rs 2.5 lakh – this deficit can be balanced against your short-term gain. Remaining short-term gains will then be levied on it at 15 percent + 4 percent.
b. Tax on long-term capital gains
Long-term capital gains on equity shares listed on a stock exchange are non-taxable to the Rs 1 lakh mark.
According to the Budget 2018 amendments, the long-term capital gain of more than Rs 1 lakh on the selling of the mutual fund’s equity shares or stock-oriented units will incur a capital gains tax of 10 percent and the indexing profit will not be applicable to the seller. These provisions refer to transactions made on or after 1 April 2018.
3. Loss from Equity Shares
a. Short-term capital loss
Any short-term capital loss arising from the selling of equity shares can be compensated against short-term or long-term capital gain from any asset. If the loss is not completely balanced, it may be carried forward for an 8-year period and calculated against any short-term or long-term capital gains made over those 8 years.
It is worth noting that only if a taxpayer has completed his income tax return within the due date will be allowed to carry forward losses. Therefore, even if the total income received in a year is smaller than the required taxable income, filing an Income Tax Return is a must to bring such losses forward.
b. Long-term capital loss
Long-term capital loss from equity investments was considered dead loss before Budget 2018 – it can not be changed or carried forward. This is because profits from listed equity investments in Long Term Capital were excluded. Likewise, losses from them were not allowed to be set off nor carried forward.
4. Securities Transaction Tax (STT)
STT is applicable to all equity shares which are sold or bought on a stock exchange. The above-mentioned tax implications refer only to shares listed on a stock exchange. Any sale/purchase that occurs at a stock exchange is subject to STT. Such tax implications discussed above are therefore only for shares on which STT is paid.
5. Guidance for treating share sale as business income
Some taxpayers view shares gains or losses as ‘ business income, ‘ while others view them as ‘ capital gains. ‘It has been a matter of much discussion whether the gains/losses from the selling of shares should be viewed as business income, or be taxed under capital gains.
Typically your income is categorized as business income in the case of significant share trading activity (e.g. if you are a day trader with a lot of activity or if you trade frequently in Futures and Options).In such a scenario, you will be required to file an ITR-3 and your share trading profits will be shown under ‘ business & occupation income. ‘
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