Taxation of Income Earned from Selling Shares

Shares are considered as capital assets under the Income Tax Act, and gains their sale are considered as capital gains. The tax implications differ based on whether the shares are listed or unlisted.

Listed equity shares are considered long term capital assets if they are held for more than 12 months. Long term capital gains are taxed at 12.5% without indexation, after an exemption of Rs. 1.25 lakhs. Whereas, Short term capital gains are taxed at 20%.

For unlisted and other shares, long term capital assets are those held for more than 24 months, and long term capital gains are taxed at 12.5%, without indexation. Short term capital gains are taxed at applicable slab rates.

Types of Capital Gains on Shares

• Under the head ‘Capital Gains’, income is further classified into:
  • Long-term capital gains
  • Short-term capital gains
• This classification is made according to the holding period of the shares. The holding period means the duration for which the investment is held, starting from the date of acquisition till the date of sale or transfer. 
•  For income tax purposes, holding periods of listed equity shares and equity mutual funds is different from the holding period of debt mutual funds. Their taxability is also different.
• The following table gives the basis for determining the nature of investment based on holding period:

Taxation of Gains from Equity Shares

Listed Equity Shares - Short-Term Capital Gains (STCG)

• The seller makes short-term capital gains when shares are sold at a price higher than the purchase price. 
• Short-term capital gains are taxable at 15% if the sale happened before 23rd July, 2024.
• This has been increased to 20% with effect from 23rd July, 2024.
• No indexation is available for short term capital gains on sale of listed equity shares. 

Other Equity Shares - Short-Term Capital Gains (STCG)

• Sale of shares other than listed equity shares are taxed at applicable slab rates, irrespective of date of sale. 
• No indexation benefits are available for short term capital gains on sale of other shares as well. 

The manner of calculation of short term capital gains for listed and other equity shares are similar. The following table explains how to calculate short term capital gains.

Illustration

In October 2024, Kuldeep Singh paid Rs.38,750 for 250 shares of a publicly traded firm at a price of Rs.155 a share. He sold them for Rs.192 a share after 5 months for Rs.48,000. Let's see how much money he makes in the short run.

• Full sales value - Rs.48,000
• Brokerage at 0.5% - Rs.240
• Purchase price - Rs.38,750 

Therefore short-term capital gain made by Kuldeep will be calculated as follows: 

Listed Equity Shares - Long-Term Capital Gains (LTCG)

• If equity shares listed on a stock exchange are sold after 12 months of purchase, the seller may make a long-term capital gain (LTCG) or a long-term capital loss (LTCL). 
• If listed equity shares are sold before 23rd July, 2024, long-term capital gain of more than Rs.1.25 lakh  will be taxed at 10% (plus applicable cess). Also, the benefit of indexation will not be available to the seller.
• If the shares are sold on or after 23rd July 2024, the gains are taxed at 12.5 % without indexation, after an exemption of Rs. 1.25 lakhs.
• Grandfathering clause is applicable for sale of long term listed equity shares.

Grandfathering Clause

• A grandfathering clause is a provision that states that an old rule will continue to apply to some existing instances while a new rule will apply to all future cases. 
• While the LTCG was reintroduced on 1st February 2018, the CBDT (Central Board of Direct Taxes) grandfathered gains up to 31st January 2018, i.e. no tax would be paid on gains accrued until 31st January 2018.
• If the shares were purchased before 31st January, 2018, the fair market value of shares on 31st January 2018 can be considered as the purchase price, if it is beneficial to the assessee. 
• But the cost of acquisition considered should not exceed the sale consideration. 

The acquisition cost is calculated as follows:

• Value I - Fair market value as on 31st January 2018 or the sales consideration, whichever is lower.
• Value II - Value I or the purchase price, whichever is higher. 

Long-Term Capital Gain = Sales Value - Acquisition Cost (as calculated above)

Example: 

Original Purchase price of equity shares = Rs.100 (1^st January 2017)

FMV on 31^st January 2018 = Rs.200  

Sale value = Rs.50 (1^st of April 2024).

As per the grandfathering clause, 

Value 1 - lower of the sale value(0) and FMV as on 31^st January 2018(200) ; 0
Value 2 - Higher of the Value 1(0) or the actual purchase price (100); Rs. 100
Therefore, the actual cost of Rs.100 will be taken as the cost of acquisition in this case. Hence, the long term capital loss will be Rs. 50(Rs.50-Rs.100) in this case.

Other Equity Shares - Long Term Capital Gains(LTCG)

• For other equity shares, the long term capital gains are taxed at 12.5% without indexation, if it is sold on or after 23rd July, 2024.
• If sold before 23rd July, 2024, the long term capital gains are taxed at 20%, with indexation benefit. 
• Exemption of Rs.1.25 lakhs do not apply in any cases.

Exemption on Long Term Capital Gains - Section 54F

• Irrespective of whether it is capital gains on listed equity shares or not, exemption under section 54F can be claimed on a proportionate basis.
• This exemption can be claimed if the sale proceeds from the capital assets are invested in a residential property, subject to other conditions.
• If the entire sale consideration is invested in a residential property, the entire capital gains can be claimed as an exemption.

Loss From Equity Shares

Short-Term Capital Loss (STCL)

Any short-term capital loss from the sale of equity shares can be offset against short-term or long-term capital gain from any capital asset. If the loss is not set off entirely, it can be carried forward for eight years and adjusted against any short term or long-term capital gains made during these eight years. 

It is worth noting that a taxpayer will only be allowed to carry forward losses if he has filed his income tax return within the due date. Therefore, even if the total income earned in a year is less than the minimum taxable income, filing an income tax return is a must for carry forward of these losses.    

Long-Term Capital Loss (LTCL)

Long-term capital loss from equity shares until Budget 2018 was considered a dead loss – It could neither be adjusted nor carried forward. This is because long-term capital gains from listed equity shares were exempt. Similarly, their losses were neither allowed to be set off nor carried forward.

After the Budget 2018 has amended the law to tax such gains made more than Rs 1 lakh at 10%, the government has also notified that any losses arising from such listed equity shares, mutual funds, etc., would be carried forward.

Long-term capital loss from a transfer made on or after 1 April 2018 will be allowed to be set off and carried forward in accordance with existing provisions of the Act. Therefore, the long-term capital loss can be set off against any other long-term capital gain. Please note that you cannot set off long-term capital loss against short-term capital gains. 

Also, any unabsorbed long-term capital loss can be carried forward to the subsequent eight years for set-off against long-term gains. To set off and carry forward these losses, a person has to file the return within the due date. 

Securities Transaction Tax (STT)

STT is applicable on all equity shares sold or bought on a stock exchange. The above tax implications are only applicable to shares listed on a stock exchange. Any sale/purchase on a stock exchange is subject to STT. Therefore, these tax implications discussed above are only for shares on which STT is paid.

Expenses incurred during the sale of shares:

Registration charges, brokerage charges & various other charges are deducted from the sale of shares to arrive at the net gain or loss arising from transfer of such shares.

Share Sale as Business Income or Capital Gain Income

Certain taxpayers treat gains or losses from the sale of shares as ‘income from a business, while others treat it as ‘Capital gains’. Whether your gains/losses from the sale of shares should be treated as business income or be taxed under capital gains has been a matter of much debate. 

In case of significant share trading activity (e.g. if you are a day trader with lots of activity or regularly trade in Futures and Options), your income is usually classified as income from the business. In such a case, you are required to file an ITR-3, and your income from share trading is shown under ‘income from business & profession’.

Calculation of Income From Business

When you treat the sale of shares as business income, you can reduce expenses incurred in earning such business income. In such cases, the profits would be added to your total income for the financial year and, consequently, charged at tax slab rates. 

Calculation of Income From Capital Gains

If you treat your income as capital gains, expenses incurred on such transfer are allowed for deduction. Also, long-term gains from equity above Rs 1 lakh annually are taxable at 10%, while short-term gains are taxed at 15%. 

Deciding whether a specific investment in shares or other securities qualifies as a capital asset or as stock-in-trade is a matter that hinges on specific facts. This determination has historically caused considerable uncertainty and has been a source of litigation. Therefore, it is advisable to taxpayers to carefully assess and classify the income under the appropriate head.

New Clarification from CBDT

Taxpayers have now been offered a choice of how they want to treat such income. Once they choose, they must, however, continue the same method in subsequent years, too, unless there is a major change in the circumstances of the case. Note that the choice has been made applicable only to listed shares or securities. 
To reduce litigation in such matters, CBDT has issued the following instructions (CBDT circular no 6/2016 dated 29th February 2016)– If the taxpayer himself opts to treat his listed shares as stock-in-trade, the income shall be treated as business income. Irrespective of the period of holding of listed shares. The AO shall accept this stand chosen by the taxpayer. 
If the taxpayer opts to treat the income as capital gains, the AO shall not put it to dispute. This is applicable for listed shares held for more than 12 months. However, this stand, once taken by a taxpayer in a particular assessment year, shall also be applicable in subsequent assessment years. And the taxpayer will not be allowed to take a different stand in subsequent years. 
In all other cases, the nature of the transaction (whether capital gains or business income) shall continue to be decided basis the concept of ‘significant trading activity’ and the intention of the taxpayer to hold shares as ‘stock’ or as ‘investment’. The above guidance would prevent unnecessary questioning from Assessing Officers regarding income classification.

How to Treat the Sale of Unlisted Shares in This Context ?

However, in the case of the sale of unlisted shares for which no formal market exists for trading, the department has given its view. Income arising from the transfer of unlisted shares would be taxed under the head ‘Capital Gain’, irrespective of the holding period, to avoid disputes/litigation and maintain a uniform approach (as per CBDT circular Folio No.225/12/2016/ITA.1I dated the 2nd of May, 2016).

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