Capital Gains Tax on sale of shares/mutual funds is levied based on the nature of the Capital Gain. There are 2 types of capital gains i.e. Short Term and Long Term.
|Particulars||Period of Holding in case of Shares & Mutual Funds||Period of Holding in case of other Assets|
|Short Term Capital Gains||Less than 12 months||Less than 36 months|
|Long Term Capital Gains||More than 12 months||More than 36 months
(Reduced to 24 Months from FY 17-18 onwards)
This article mainly focuses on the computation of Capital Gains Tax on the sale of Shares and Mutual Funds. For other assets, kindly refer this article – Computation of Capital Gains on the sale of an Asset.
The computation mentioned in this article is only for computation of tax on sale of shares and equity oriented mutual fund. For computation of tax on sale of Debt Mutual Fund, kindly refer this article – Tax on Debt Mutual Funds with examples. The period of holding for a Debt Mutual Fund to be classified as Long Term has been increased from 12 months to 36 months in Budget 2014.
Computation of Capital Gains
The Capital Gains would be computed using the following formula
|Full Value of Consideration/ Sale Price||xxx|
|(Less)||Expenditure incurred wholly and exclusively in connection with such Transfer/Sale||(xxx)|
|(Less)||Cost of Acquisition/ Purchase Price||(xxx)|
|(Less)||Cost of Improvement||(xxx)|
Capital Gains Tax Rate on Sale of Shares and Mutual Funds
Long Term Capital Gains arising on the sale of Shares and Mutual Funds are exempted under Section 10(38) and Short Term Capital Gains arising on the sale of Shares and Mutual Funds are taxed @ 15% under Section 111A provided that:-
- The transaction of sale is entered into on or after 1-10-2004 and
- Such transaction is chargeable to Securities Transaction Tax (STT) i.e. the sale transaction is through recognised stock exchange or sale of units of equity oriented fund is to a Mutual Fund.
Short Term Capital Gains on sale of Shares and Mutual Funds u/s 111A
Tax on short term capital gains is levied at a flat rate of 15% under Section 111A if the above mentioned 2 conditions are satisfied. However, where the income of the individual tax payer other than the short term capital gains is less than the minimum amount exempted from tax as per Slab Rates i.e. Rs. 250000, then the short term capital gains shall be reduced by an amount by which the other incomes fall short of Rs. 250000.
For example: In case of an individual, if the short term capital gains are Rs 300000 and other incomes are Rs. 80000 his total income becomes Rs. 3,80,000. In such a case, no tax would be levied upto Rs. 2,50,000 and the amount that is above 2,50,000 i.e. Rs. 1,30,000 would be taxed at a flat rate of 15%.
Short Term Capital Loss is arising from the sale of shares/mutual funds is allowed to be set-off against any other Long Term/Short Term Capital Gain.
Long Term Capital Gains on the sale of Shares and Mutual Funds u/s 10(38)
If the above mentioned conditions are satisfied, the Long Term Capital Gains are exempted in the hands of the taxpayer under Section 10(38). However, these gains would be required to be disclosed at the time of filing of Income Tax Returns.
It may be noted that since Long Term Capital Gains are exempted, Long Term Capital Loss shall have no tax treatment and such Long Term Capital Loss can neither be set-off against any income nor be carried forward.
- Recommended Read: Treatment of Capital Loss
Points to be noted
- The period of holding is the period from the date of purchase of the asset till the date of sale of the asset. For the seller, the date of sale of 1 day before the actual sale and for the buyer, the date of purchase is actual purchase date
- In case the shares/mutual funds are purchased on different dates at different prices, it would be assumed that the shares that were purchased first would also be sold first and the Cost of Acquisition would be ascertained on FIFO basis. (Circular No. 768 dated 24th June 1998)
- The Security Transaction Tax (STT) levied on the sale of shares and units of equity oriented mutual fund shall not be allowed as deduction in computing the income chargeable under the head “Capital Gains”. In other words, the STT paid shall neither form a part of the cost in case of purchase nor be allowed as deduction as expense of transfer in case of sale of such equity shares and units [Fifth Proviso to Section 48]
- Cost of Acquisition of Bonus Shares is deemed to be Nil and the period of holding would be considered from the date of allotment of such shares. (Recommended Read:-Tax on Sale of Bonus Shares)
- In case of split shares, the cost of acquisition would be considered proportionately to the cost of original shares. The period of holding of the split shares would be the same as the period of holding of the original shares.
- In case of multiple Demat Accounts, the FIFO method would be applied for each account separately.
- Tax on Sale of Futures and Options can either be taxed under head “Capital Gains” or under head “Profits from Business & Profession” depending on case to case basis.