Capital Gain On Sale Of Equity Shares – LTCG & STCG: Any gain or profit arising from the transfer of shares (which is considered as an investment and not a business by the assessee) is liable to tax under the head of ‘Income from Capital Gains’.
Types Of Capital Gain
There are two categories of Capital gains on shares which are as follows:
- Short Term Capital Gains
- Long Term Capital Gains
| Capital Assets | Short-Term Capital Assets | Long-Term Capital Assets |
| Listed Equity or Preference share, listed securities like debenture and Government securities, Units of Equity oriented mutual funds, Units of UTI and Zero-Coupon Bonds. | When Assesse holds the shares or units or securities for a period of not more than 12 months immediately preceding the date of transfer. | When Assesse holds the shares or units or securities for a period of more than 12 months immediately preceding the date of transfer. |
| Shares of an unlisted company | When Assesse holds the shares for a period of 24 months or less immediately preceding the date of transfer. (Effective from AY 2017-18) | When Assesse holds the shares for a period of more than 24 months immediately preceding the date of transfer. (Effective from AY 2017-18) |
Taxability Of Capital Gain
Capital gain from the sale of long-term equity shares listed in a recognized stock exchange (Effective up to Assessment year 2018-19): As per Section 10(38), any gain or profit arising out of transfer of long term capital asset, being a unit of an equity-oriented fund or equity share or unit of a business trust, is not liable to be taxed in the hands of the person while the following conditions are satisfied:
- The transfer of such unit of equity oriented fund or equity share or unit of business trust should have taken place on or after October 1, 2004.
- Such transactions are taxed under Securities Transaction Tax (STT)*
The exemption shall be available under 10(38) from Assessment year 2017-18 even while the STT is not paid provided that:
- such transaction is undertaken on a Recognized Stock Exchange which is located in any International Financial Services Centre and;
- Where the consideration for such transaction is payable or paid in foreign currency.
*Note: – With effect from Assessment year 2018-19, the exemption under section 10(38) shall not apply to any income arising from the transfer of a long-term capital asset, being an equity share in a company, if the acquisition transaction, other than the acquisition notified by the Central Government in this behalf, of such equity share is entered into on or after the 1st day of October 2004 and such transaction is not to be charged to the securities transaction tax.
As per Notification No. 43/2017 issued by the Government on June 5, 2017, which is effective from Assessment year 2018-19, Central Government has defined such transactions on which Securities Transaction Tax is not paid on acquisition but still, they are eligible for exemption under section 10(38). The above notification specifically covers genuine cases like Initial Public Offer (IPO), Further Public Offer (FPO), Employee Stock Option Scheme (ESOP), Right Issue, Bonus Issue etc.
| Specific Exclusion – STT is not paid on Acquisition, so the exemption is not available under section 10(38) | Specific Inclusion – STT is not paid on Acquisition even when the exemption is available under section 10(38) |
| Where the acquisition of existing listed equity shares of a company whose equity shares are not often traded in a recognized stock exchange is made through a preferential issue: | Listed equity shares purchased in a company that has been approved by the Supreme Court, High Court, Securities and Exchange Board Of India, National Company Law Tribunal and Reserve Bank of India.
Listed equity shares purchased in a company by a venture capital fund as referred in clause 23FB of Section 10 of Income Tax Act or by an investment fund as referred in clause (a) of Explanation 1 to Section 115UB of the Income Tax Act or by a Qualified Institutional Buyer. Listed equity shares purchased in a company by any non-resident individuals in accordance with the foreign direct investment guidelines issued by the Government of India. Listed equity shares purchased in a company through a preferential issue where there is no applicability of provisions of Chapter VII of the Securities and Exchange Board of India Regulations, 2009. |
| Where acquisition transactions of existing listed equity shares in a company are not entered through a recognized stock exchange of India. | Such listed equity shares purchased in a company in accordance with the provisions of the Securities Contracts Act, 1956, if applicable;
Shares purchased by scheduled banks, public financial institutions, or securitization or reconstruction companies. Purchase through the issue of shares by a company other than the issue referred. Listed equity shares purchased in a company that has been approved by the Supreme Court, High Court, Securities and Exchange Board Of India, National Company Law Tribunal and Reserve Bank of India. Acquisition under Employee Stock Purchase Scheme or Employee Stock Option Scheme under the Securities and Exchange Board of India Guidelines, 1999. Listed equity shares purchased in a company by any non-resident individuals in accordance with the foreign direct investment guidelines issued by the Government of India. Purchase of shares of a company is made following Securities and Exchange Board of India Regulation, 2011. Listed equity shares purchased in a company by a venture capital fund as referred in clause 23FB of Section 10 of Income Tax Act or by an investment fund as referred in clause (a) of Explanation 1 to Section 115UB of the Income Tax Act or by a Qualified Institutional Buyer. Purchase of shares from the Government Acquisition of shares by mode of transfer as referred in sections 47 or 50B of the Income-tax Act, if the previous owner of such shares has not acquired them by any mode as referred in clause (a) or clause (b) or clause (c) [other than the transactions as referred in the provisions of clause (a) or clause (b)]. |
| Acquisition of equity shares of a company during the period beginning from the date on which the company has been delisted from a recognized stock exchange and the ending date immediately preceding the date on which the company has been listed again on a recognized stock exchange in accordance with the Securities contracts Act 1956, and following the rules in the Securities and Exchange Board of India Act, 1992. |
Note: The long-term capital gain is exempted from tax. As a result, the long-term capital loss does not have tax treatment, and such long-term capital loss cannot be carried forward to next year, nor can it be set off with any other income.
In other cases that are not covered under Section 10(38), i.e. STT is not paid on the listed shares, the amount of long-term capital gain is liable to tax under Section 112. As per Section 112, the assessee has the following two options: –
- Avail the benefit of indexation and the capital gains so calculated will be liable to tax at a standard tax rate of 20%.
- Do not avail the benefit of indexation and the capital gain so calculated is liable to tax at the tax rate of 10%.
The option is to be selected by calculating the tax liability following both the possibilities, and the option with the lowest tax liability is to be chosen.
Note: There will be no deduction available under Chapter – VIA, and Section 88 shall be available from the gains tax under Section 112. However, in the case of an Undivided Hindu family or an individual, being a resident, where the total amount of income is reduced by such long-term capital gains is below the maximum amount which is not liable for income tax, then, such long-term capital gains shall be reduced by the amount by which the total amount of income is reduced falls short of the maximum amount which is not liable for income tax and the tax on the balance of such long-term capital gains shall be calculated at the rate of 20%. If the capital gain is taxable with the indexation limit, then the primary exemption limit benefits are available.
Long-term capital gain from the sale of equity shares that are listed in a recognized stock exchange (Effective from Assessment year 2019-20): The exemption under section 10(38) for long-term capital gain that arises from the transfer of equity shares has been withdrawn by the Finance Act, 2018, with effect from Assessment year 2019-20 and a new Section 112A is introduced.
As Section 112A, it states that any long-term capital gain arising out of transfer of a unit of an equity-oriented fund, the long-term capital asset, which is an equity share in a company or a unit of a business trust, is liable for tax at the rate of 10% of such long-term capital gain exceeding ₹100,000. This concessional rate of 10% on long-term capital gain is applicable if:
- in such cases where an equity share in a company, securities transaction tax has been paid on both transfer and acquisition of such capital asset; and
- in the case of a unit of an equity oriented fund or a unit of a business trust, securities transaction tax has been paid on the transfer of such capital asset
Note: The Government has invited comments on the Draft Notification for Section 112A to include only the genuine transactions on which STT is not required to be paid on transfer or acquisition. As compiled, the draft notification is more or less similar to Notification no. 43/2017 related to Section 10(38).
Computation of Acquisition Cost in Exceptional Cases
- The acquisitions cost of a listed equity share acquired by the taxpayer before February 1, 2018, shall be considered to be the higher of the following:
- The actual acquisition cost of such asset; or
Lower of the following:
- The Fair market value of such listed equity shares as of January 31, 2018; or
- Actual sales consideration accruing on its transfer.
Note: The Fair market value of such listed equity share means the highest price quoted on a recognized stock exchange as of January 31, 2018. However, suppose there is no trading in such shares on January 31, 2018. In that case, the highest price of such equity share on a date immediately preceding January 31, 2018, on which trading has happened in that equity share shall be considered its fair market value.
- In the case of units that are not listed on a recognized stock exchange, the net asset value of such units as of January 31, 2018, shall be deemed to be its fair market value.
- In such cases where the capital asset is an equity share in a company that is not listed on a recognized stock exchange as of January 31, 2018, but listed on the date of transfer, the cost of unlisted shares has increased due to cost inflation index for the financial year 2017-18 shall be considered to be its fair market value.
Note: There shall be no deduction under Chapter – VIA, and Section 87A shall be available. However, in the case of an undivided Hindu family or an individual, being a resident, where the total amount of income is reduced by such long-term capital gains is below the maximum amount which is not liable for income tax, then, such long-term capital gains under section 112 shall be reduced by the amount by which the total amount of income is reduced falls short of the maximum amount which is not liable for income tax.
In other cases that are not covered under Section 10(38), i.e. STT is not paid on the listed shares, the amount of long-term capital gain is liable to tax under Section 112. As per Section 112, the assessee has the following two options: –
- Avail the benefit of indexation, and the capital gains so calculated will be liable to tax at a standard tax rate of 20%.
- Do not avail the benefit of indexation and the capital gain so calculated is liable to tax at the tax rate of 10%.
The option is to be selected by calculating the tax liability following both the possibilities, and the option with the lowest tax liability is to be chosen.
Note: There will be no deduction available under Chapter – VIA, and Section 88 shall be available from the gains tax under Section 112. However, in the case of an undivided Hindu family or an individual, being a resident, where the total amount of income is reduced by such long-term capital gains is below the maximum amount which is not liable for income tax, then, such long-term capital gains shall be reduced by the amount by which the total amount of income is reduced falls short of the maximum amount which is not liable for income tax and the tax on the balance of such long-term capital gains shall be calculated at the rate of 20%. If the capital gain is taxable with the indexation limit, then the primary exemption limit benefits are available.
Long-term capital gain on the sale of unlisted equity shares: Under Section 112, any long-term capital gain on unlisted equity shares is liable to tax. It is almost similar to the taxability of listed shares on which STT is not paid. Except, in this case, the assessee does not have an option to pay tax at the rate of 10% without taking the indexation benefit.
Note: The period of holding of unlisted shares should be 24 months to be considered as a long-term asset.
Short-term capital gain on the sale of listed equity shares in recognized stock exchange: As per Section 111(A), any gain arising on transfer of a short-term capital asset, being a unit of an equity-oriented fund or an equity share or unit of a business trust, shall be taxable in the hands of the person at the tax rate of 15% if the following conditions are satisfied:
- such transactions are chargeable to securities transaction tax (STT)*
- The transfer of such listed equity shares should have taken place on or after October 1, 2004.
The benefit under Section 111(A) shall be effective from Assessment year 2017-18 even if the STT is not paid provided that:
- the transaction took place on a recognized stock exchange located in any International Financial Services Centre and
- Where the consideration of such transaction is payable or paid in foreign currency.
Note: There shall be no deduction under Chapter – VIA and Section 88 shall be available from the short-term gains tax under Section 111(A). However, in the case of an undivided Hindu family or an individual, being a resident, where the total amount of income is reduced by such long-term capital gains is below the maximum amount which is not liable for income tax, then, such long-term capital gains shall be reduced by the amount by which the total amount of income is reduced falls short of the maximum amount which is not liable for income tax and the tax on the balance of such short-term capital gains shall be calculated at the rate of 15%.
Short-term capital gain on the sale of unlisted equity shares: As per Section 48 of the Income Tax Act, any short-term capital gain is liable to tax at the applicable slab of the shareholder’s tax rate. If the individual is falling in the 5% tax bracket, then the capital gain would be taxed at the rate of 5%, or if the tax bracket is 20% or 30%, then the applicable tax rate would be 20% or 30%.