How to calculate tax on capital gains from stocks

Investment in shares listed on any recognized stock exchange in India is categorized either as long term or short term gains depending upon the period for which such shares are held.

The tax implication on investments in stocks depends upon various factors such as the category of such stocks (i.e. listed or unlisted) and the period of holding of such stocks. Investment in shares listed on any recognized stock exchange in India is categorized either as long term or short term gains depending upon the period for which such shares are held.

Suresh Surana, founder, RSM India says “The period of holding constitutes the date on which the shares are acquired by the investor to the date on which such shares are sold. If such holding period exceeds one year, the gains derived from them would be categorized as long term in nature otherwise, short term.”

Computation of tax on the transfer of listed shares

The short term capital gains on listed shares are subjected to tax at the rate of 15 per cent u/s 111A of the IT Act. On the other hand, the long term capital gains are taxed at 10 per cent u/s 112A of the IT Act on the amount of gains that exceed the threshold limit of Rs 1 lakh in that particular financial year. In other words, Long term capital gains on listed shares to an extent of Rs 1 Lakh would be exempt from tax in the hands of an investor.

Surana, says “Note that the special rates u/s 111A and 112A of the IT Act would be made applicable provided the transaction is subjected to Securities Transaction Tax (STT). Though listed shares are usually subjected to STT, transactions routed through otherwise than the recognized stock exchange may not have STT levied on them. Further, when an investor is subjected to tax u/s 112A of the IT Act, gains on such investments made before 31 January 2018 would be subjected to grandfathering i.e. the investor would not be liable to pay tax on the long term gains which are accrued till 31 January 2018.”

In a case where STT is not levied on the transaction, short term capital gains would be taxed in accordance with the marginal slab rates applicable to the investor whereas long term capital gains would be at the rate of u/s 112 of the IT Act. In accordance with section 112 of the IT Act, the investor has the option to tax such long term gains either at the rate of 20 per cent (with indexation benefit) or 10 per cent (without indexation benefit), whichever is more beneficial.

Computation of Tax on Transfer of Unlisted Shares

Similar to taxation of listed shares, even gains from unlisted shares are required to be categorized as long term or short term as per their period of holding. However, in the case of unlisted shares, the gain is categorized as long term in nature only if the period of holding of such shares is more than 2 years otherwise, such gains would be categorized as short term.

Such short term capital gains on unlisted shares would be taxed in accordance with the applicable marginal rate of the investor. On the other hand, the long term capital gains are taxed at 20 per cent u/s 112 of the IT Act and eligible to claim the benefit of indexation on such long term capital gains. Surana, adds “In case of non-residents, the long term capital gains transfer of unlisted shares would be subject to tax at 10 per cent, without the benefit of indexation and the short term capital gains would be subject to tax at 40 per cent.”