Introduction
Capital Gain Tax on Sale of Securities: Capital gains tax is a crucial aspect of the investment world, one that demands careful attention and consideration from investors. As far as capital gain tax on sale of securities is concerned, it represents a levy imposed on the positive difference between the sale price of a security and its purchase price, effectively the profit earned from the investment. The rate at which this tax is levied depends on various factors, primarily the duration for which the investment has been held, distinguishing between short-term and long-term capital gains. Understanding these categories and their respective tax rates is essential in effective tax planning.
A clear grasp of the tax implications associated with capital gains empowers investors to make informed decisions and strategize their investments with the tax burden in mind. It allows them to plan the holding period of their assets strategically, aligning with the tax regulations to minimize their capital gains tax expenses. For instance, opting for long-term investments can lead to a lower tax rate, which is particularly advantageous.
Furthermore, investors should remain vigilant about exemptions, deductions, and benefits offered under the tax laws. These can significantly impact the final tax liability and, consequently, the net gains from an investment. Diligently exploring and utilizing these provisions can lead to substantial tax savings, promoting an efficient utilization of the investment resources. So, let us delve in to discussing the categories of Capital gains, their nature and tax implications.
Categories of Capital Gain
Capital gain refers to the profit earned from selling or transferring capital assets such as shares, bonds, debentures, real estate, and more. The tax treatment of capital gains depends on the holding period, distinguishing between short-term and long-term gains. Short-term capital gains (STCG) and long-term capital gains (LTCG) have different tax rates.
Short-term capital gain (STCG) is the profit from the sale of a capital asset held for a short duration. On the other hand, long-term capital gain (LTCG) is the profit from selling a capital asset held for an extended period. The tax rates for STCG and LTCG vary accordingly.
However, there are exceptions to this rule. For instance, gains from the transfer of depreciable assets are always treated as short-term capital gains. This article will delve into the Income Tax provisions regarding both short-term capital gains (STCG) and long-term capital gains (LTCG) arising from the sale or transfer of securities.
Taxability of Short-Term capital gain
In the following circumstances, any capital gain arising from sale/transfer of securities are treated as Short-term capital gain (STCG):
(i) For listed shares (equity or preference), units of equity-oriented mutual funds, listed securities like debentures and Government securities, units of UTI, and Zero-Coupon Bonds, the gain is categorized as STCG if the transfer occurs within a holding period of less than 12 months.
(ii) For unlisted shares, the gain is treated as STCG if the transfer occurs within a holding period of less than 24 months
In case of Short-Term capital Gains (STCGs) covered under section 111A, tax is charged at 15% (plus surcharge and cess as applicable).
In case of STCGs not covered under section 111A, Tax is charged at the normal rate as per the tax slab applicable to the taxpayer.
Short-term capital Gains (STCGs) covered under section 111A
(i) STCG arising on sale of listed equity shares which is chargeable to STT;
(ii) STCG arising on sale of units of equity oriented mutual fund sold through a recognized stock exchange which is chargeable to STT;
(iii) STCG arising on sale of units of a business trust;
(iv) STCG arising on sale of equity shares, units of equity oriented mutual fund or units of a business trust through recognized stock exchange located in any International Financial Services Centre and consideration is paid or payable in foreign currency even if transaction of sale is not chargeable to securities transaction tax (STT).
Short-term capital gains (STCGs) not covered under section 111A
(i) STCG arising on sale of equity shares other than through a recognized stock exchange;
(ii) STCG arising on sale of shares other than equity shares;
(iii) STCG arising on sale of units of non-equity oriented mutual fund (debt oriented mutual funds);
(iv) STCG on debentures, bonds and Government securities.
Taxability of Long-Term capital gain
Capital gain on sale of securities which are transferred after a holding period of 12 months/24 months as recommended for STCG under above point are treated as Long-Term capital gains. Taxability of Long-term Capital gains is different for two different Categories of Long-Term capital gains.
Equity Shares and Equity-Oriented Mutual Funds
Sale of equity shares, equity-oriented mutual funds, or units of business trusts held for more than one year on or after April 1, 2018, is taxable at 10% plus a cess of 4%.
Before the financial year 2018-19, all Securities Transaction Tax (STT) transactions, including equity shares and equity-oriented mutual funds held for more than one year, were exempt from tax.
No indexation benefit is applicable for such transactions.
Starting from the financial year 2018-19, capital gains up to Rs. 100,000 in a single financial year are exempt from tax for long-term capital assets.
Other Long-Term Capital Assets
Long-term capital assets other than the sale of STT-paid equity shares, mutual funds, property transactions, or business trust are taxable at a rate of 20%.
Deductions under Chapter-VIA cannot be availed against long-term capital gains taxable at 10% or 20% for both residents and non-residents.
Resident taxpayers can adjust the unexhausted basic exemption limit for long-term capital gains taxable at 10% or 20%, whereas non-residents cannot adjust the unexhausted basic exemption limit.
Rebate under section 87A is not available for long-term capital gains taxable at 10%.
Conclusion
In today’s financial landscape, a considerable number of taxpayers are finding themselves with surplus funds and are increasingly turning to the investment market, particularly in securities, with the hope of reaping profitable returns. This trend reflects a fundamental understanding among individuals that investing in securities can be a lucrative avenue for wealth growth. However, this enthusiasm and drive towards financial growth should be balanced with a thorough comprehension of the implications of capital gains tax on these potential profits.
In essence, while the allure of potential profits drives investors to engage in the securities market, a comprehensive understanding of the associated tax implications is equally paramount. A well-informed investor not only optimizes their gains but also minimizes their tax burden, ensuring a prudent and efficient approach to wealth accumulation through investments in securities.
For a detailed idea about Short-Term Capital Gain tax, please follow the link-https://incometaxindia.gov.in/tutorials/14-%20stcg.pdf
For a detailed idea about Long-term Capital gain tax, please follow the link-https://incometaxindia.gov.in/tutorials/15-%20ltcg.pdf
You may also Like to go through my article on “capital gain on Sale of Land” by following this Link-https://anptaxcorp.com/capital-gain-on-sale-of-land/
You may also like to go through my article on “Capital gain on sale of Residential Property” by following this Link-https://anptaxcorp.com/capital-gain-on-sale-of-residential-property/
For a more clarity on this topic, you can watch this video class of ICAI-https://www.youtube.com/watch?v=O-VYJ3PJEDg
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