We all know that Income from salary, rental income and business income is taxable. But what about income from sale or purchase of shares? Many home makers, retired people, spend their time gainfully buying and selling shares but are unsure of how this income is taxed.
Income/ Loss from sale of equity shares are covered under the head ‘Capital Gains’. Capital gains are classified as short term and long term and taxed accordingly. You may also have a short term or long term capital loss.
Short Term and Long Term Gain on Equity Shares
If you sell equity shares, listed on a stock exchange, within 12 months of buying them, you will earn a short term capital gain. Short term capital gain = Sale price less expenses on sale less purchase price. Alternatively you may incur a short term capital loss when you sell them at a price lower than what they were bought for.
Equity shares which are sold after 12 months of their purchase are long term. So any gain/loss on them is termed as long term capital gain or loss.
In the budget 2018, long term capital gains on sale of Equity shares / units of equity oriented fund if more than Rs 1 lakh will be taxed at @ 10% without the benefit of indexation.
Uptil 31st March 2018, investors had a relief to exempt amount of capital gains up to 31 Jan 2018. The amount of Gains made thereafter the cut-off date will be taxed.
For Example, Mr A purchased shares for Rs. 100 on 30th September 2017 and sold them on 31st December 2018 at Rs 120. The Value of the Stock was Rs. 110 as on 31st January 2018. Out of the capital gains of Rs. 20 (i.e 120-100), Rs. 10 (i.e 110-100) is not taxable. Rest Rs. 10 is taxable as Capital gains @ 10% without indexation.
Tax on Gains from Equity Shares
Short term capital gains are taxed at 15%. What if your tax slab rate is 10% or 20% or 30%? Special rate of tax of 15% is applicable to short term capital gains, irrespective of your tax slab. Also, if your total taxable income excluding short term gains is less than the minimum income which is chargeable to tax (Rs 2,50,000 for financial year 2016-17) – you can adjust this shortfall against your short term gains. Remaining short term gains shall be then taxed at 15% + 3% cess on it.Whereas long term capital gain on equity shares listed on a stock exchange are not taxable.
Loss from Equity Shares
Any short term capital loss from Equity Shares can be set off against short term capital gains or long term capital gains from any capital asset. If you have not been able set off this loss entirely, you are allowed to carry it forward for 8 years in your Income Tax Return and adjust it from your short term or long term capital gains in future in any of these 8 years. Do remember though – you will only be allowed to carry forward your losses if you have filed an Income Tax Return. So even if your income is less than the minimum taxable income, filing an Income Tax Return is a must for carrying forward these losses.
Long term capital loss from equity shares is a dead loss – it can neither be adjusted or carried forward. Just like long term capital gain on equity shares has no tax treatment.
STT or Securities Transaction Tax is applicable on all equity shares which are sold or bought on a stock exchange. The above tax implications are only applicable for shares which are listed on a stock exchange. Any sale/purchase which happens on a stock exchange is subject to STT and therefore these tax implications are for shares on which STT is paid.