Understanding Capital Gains on Sale of Shares
Profits or gains arising from the sale of shares are classified as capital gains under the Income Tax Act. These gains can be categorized as short-term or long-term, depending on the holding period of the shares. When equity shares listed on a recognized stock exchange are held for 12 months or less, any resulting profit is considered a short-term capital gain (STCG).
Classification of Short-Term Capital Gains
Short-term capital gains from shares are divided into two categories:
- Short-term capital gains under Section 111A
- Short-term capital gains other than those covered under Section 111A
Taxation of Short-Term Capital Gains Under Section 111A
STCG under Section 111A is taxed at a concessional rate of 15%, along with the applicable cess. The calculation of short-term capital gains is as follows:
STCG= Full Value of Consideration – Expenses Incurred Exclusively on Sale of Securities – Cost of Acquisition
Applicability of Section 111A
Section 111A is applicable for STCG arising from the purchase or sale of:
- Equity shares
- Units of equity-oriented mutual funds
- Units of business trust
To avail of the concessional rate under Section 111A, the transaction must be:
- Conducted through a recognized stock exchange
- Subject to Securities Transaction Tax (STT)
Transactions in an International Financial Service Center (IFSC) are taxed at the concessional rate of 15% even if STT is not applicable.
Adjustment Against Basic Exemption Limit
Indian residents whose total income after deductions is below the basic exemption limit can offset their STCG against this shortfall. Only the remaining amount will be taxed at 15%. Non-residents, however, cannot claim this exemption and must pay a 15% tax on STCG under Section 111A.
No Deductions from STCG Under Section 80C-80U
Deductions under Sections 80C to 80U cannot be claimed on STCG covered under Section 111A. However, deductions are allowed on short-term capital gains not covered by Section 111A.
Set Off & Carry Forward of Losses
Short-term capital losses (STCL) from the sale of listed equity shares or mutual funds held for up to 12 months can be set off against short-term and long-term capital gains from other assets within the same financial year. Additionally, taxpayers can carry forward any remaining STCL for up to 8 years to offset future STCG and LTCG.
Instances of STCG Covered Under Section 111A
- STCG on the sale of equity shares of a listed company through a recognized stock exchange, subject to STT
- STCG on the sale of units of equity-oriented mutual funds through a recognized stock exchange, subject to STT
- STCG on the sale of units of a business trust
- STCG on the sale of equity shares, units of business trust, or units of equity-oriented mutual funds through a recognized stock exchange in an IFSC, where the consideration is paid in foreign currency, even if STT is not applicable.
By understanding the intricacies of STCG on the sale of securities, investors can make informed decisions and effectively manage their tax liabilities.
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