The share market presents an opportunity for investors to earn higher returns. This has attracted a huge number of people to earn by investing in stocks of the listed companies. An investor makes profits in the share market by selling shares at a price greater than the purchase price. The profits earned by selling or transferring shares are known as capital gains. These gains are taxed as per the laid provisions under the Income Tax Act of India. Moreover, capital gains made from selling equities are broadly classified into two categories- Short Term Capital Gains or STCG and Long Term Capital Gains or LTCG.
The taxation on different types of capital gains is also different. We will discuss how such gains are taxed and what is its significance in detail.
- 1. Types of Capital Gains on Equity Shares
- 2. Taxation on Short Term Capital Gains (STCG)
- 3. Taxation on Long Term Capital Gains (LTCG)
- 4. Loss From Selling Equity Shares
- 5. Securities Transaction Tax (STT)
- 6. Significance of Taxation on Equity Shares
As said, capital gains on equity shares meaning are of two types, i.e; STCG and LTCG. Let us first understand these in brief.
- In equity shares meaning, short term capital gains are realized when the equities are sold or transferred within 12 months of purchase.
- On the other hand, an investor makes long term capital gains when he/she sells equities after 12 months of purchase.
Taxation of equity shares meaning is different for STCG and LTCG.
Different capital gains are taxed differently
Taxation on Short Term Capital Gains (STCG)
Short term capital gains made by selling equities are taxed at 15 percent irrespective of the income tax slab of the investor’s annual income. This means that if you have made profits by selling equities within 12 months of their purchase, you have to pay 15% tax on the gains, no matter how much your total annual income is and under which tax slab it falls.
For example, even if your net annual income is less than 2.5 lakhs (no taxation), you will still have to pay 15% tax for the gains made from selling equity shares.
Taxation on Long Term Capital Gains (LTCG)
In equity shares meaning, long term capital gains of up to Rs 1 lakh are exempted from taxation. However, a long term capital gain of above Rs 1 lakh attracts a 10% tax along with the applicable cess and surcharge. Also, you cannot claim the benefits of indexation on LTCG made from equity shares.
When you will learn equity shares meaning and the related tax provision, you will also come to know that the current tax provision for LTCG was introduced in the 2018 Budget presented by the Indian government. Earlier, long term capital gains of even above Rs 1 lakh made from selling equity shares were exempted from taxation.
Another important thing to note on LTCG on equity shares is that the current provisions apply only to the sale/transfer of shares made on or after April 1, 2018. For example, if you would have sold equity shares before April 1, 2018, the gains made would have been exempted from taxation even if the ITR was filed after April 1, 2018.
The 2018 Budget also introduced a new tax provision known as the ‘grandfathering rule’. According to this newly introduced rule, any long term capital gain made from selling equity shares before January 31, 2018, will be taxed according to the grandfather rule.
Let us understand this new tax part of equity shares meaning with an example. Suppose you purchased shares of Rs 1,000 on on September 30, 2017, and sell the same at Rs 1,200 on December 31, 2018. Now, the price of the shares as of January 31, 2018 was Rs 1,100. So, out of the total capital gain of Rs 200 (Rs 1,200 – Rs 1,000), Rs 100 was eanred on January 31, 2018, and will be tax-free. The remaining gain of Rs 100 which was earned after January 31, 2018, will be taxed at 10% along with cess and surcharge and without indexation benefits.
It is not that an investor will always earn profit from his/her sale of equity shares. So what are the provisions in case the an investor incurs losses from equity shares?
You can set-off your capital losses against capital gains
Similar to the capital gains, capital losses are also classified as Short Term Capital Loss and Long Term Capital Loss.
Short Term Capital Loss
If an investor makes a short term capital loss, he/she can offset the incurred loss against short term or long term capital gains made from selling any type of capital asset. If the losses are greater than total profits made, the same can be carried forward for up to 8 years. The investor/taxpayer can keep on offsetting the losses against capital gains made every subsequent years until there is no loss to offset, or the 8 year period is over.
Long Term Capital Loss
Until 2018 Budget, long term capital losses were neither eligible to adjusted against any type of capital gain nor could be carried forward. However, the tax provisions introduced with the 2018 Budget, the long term capital losses were made eligible to be set-off against long term capital gains. They can also be carried forward for up to 8 years. The only difference between short term capital losses and long term capital losses is that the long term term capital losses can only be set off against long term capital gains and not short term capital gains.
Securities Transaction Tax (STT)
STT is a type of direct tax charged from the investors for buying and selling of equity shares. In terms of equity shares meaning, STT is a concept similar to TCS (Tax Collected at Source). It was introduced by the government to control tax evasions. The STT levied on purchase and sale of equity shares is 0.1% of the buying/selling price.
Learning equity shares meaning and taxes relevant to it is extremely important primarily for two reasons:
- By knowing different tax provisions made for different types of capital gains, you can make tax saving decisions. For example, you can hold equities for long to exempt taxes if your annual capital gains are up to 1 lakh. You can also set-off your losses made in equity shares against gains made from selling other capital assets.
- Knowing taxation on equity shares is also important to file proper tax returns. A proper knowledge of these tax matters allows you to file ITR easily and saves you from unnecessary troubles.
Along with understanding equity shares meaning, it is also necessary to learn about the tax provisions related to gains made from selling the same. This allows you to enjoy taxation benefits on capital gains and also save some taxes by setting-off the capital losses against capital gains.