Taxation of Capital Gains on Sale of Securities under the Income Tax Act, 1961

Understanding capital gain taxation on sale of securities is crucial to ensure accurate tax compliance, avoid penalties, and plan investments efficiently. It helps investors differentiate between short-term and long-term gains, apply correct tax rates, claim eligible exemptions, and optimise returns while staying within the legal framework of the Income Tax Act, 1961.

Here is a comprehensive guide to the taxation of capital gains on sale of securities as per the Income Tax Act, 1961, updated till Assessment Year 2025-26:

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📊 Taxation of Capital Gains on Sale of Securities under the Income Tax Act, 1961

1. Definition of Securities

As per the Income Tax Act, securities include:

• Shares (equity or preference) of a company
• Debentures, bonds, or other marketable securities
• Derivatives (futures & options)
• Units of mutual funds
• Government securities
• Other tradable financial instruments

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2. Types of Capital Gains

Capital gains on securities are classified as:

• Short-Term Capital Gain (STCG)
• Long-Term Capital Gain (LTCG)

📅 Period of Holding for Classification

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3. Tax Rates on Sale of Securities

(i) Listed Equity Shares & Equity-Oriented Mutual Funds

(ii) Other Securities

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4. Securities Transaction Tax (STT) Impact

• STT is applicable on listed equity shares and equity-oriented mutual funds.
• Payment of STT is mandatory to avail concessional tax rates under Section 111A and 112A.

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5. Important Exemptions & Deductions

• Section 54F: Exemption on LTCG if proceeds are invested in a residential house (subject to conditions).
• Section 10(38): Earlier provided exemption for LTCG on equity shares—now withdrawn from 01.04.2018 and replaced by Section 112A.

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6. Set-off & Carry Forward of Capital Losses

• Short-Term Capital Loss (STCL): Can be set off against both STCG and LTCG.
• Long-Term Capital Loss (LTCL): Can only be set off against LTCG.
• Losses can be carried forward for 8 assessment years, subject to filing the return within the due date.

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7. TDS Provisions

• No TDS for resident investors on sale of securities through stock exchange.
• For Non-Residents:
  • LTCG under Section 112A: TDS @ 10%
  • STCG under Section 111A: TDS @ 15%
• TDS applies to unlisted securities as well, subject to thresholds.

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8. Other Points

✅ Indexation benefit is available for LTCG on non-equity securities.
✅ Rebate under Section 87A is not available against LTCG taxable under Section 112A.
✅ Gains on intraday share trading are treated as business income, not capital gains.

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9. Example Illustration

Sale of Listed Equity Shares:

• Purchase Price: ₹1,00,000 (January 2023)
• Sale Price: ₹2,50,000 (March 2025)
• Holding Period: > 12 months → LTCG
• LTCG: ₹1,50,000
• Exemption: ₹1,00,000
• Taxable LTCG: ₹50,000
• Tax Payable: 10% of ₹50,000 = ₹5,000 (plus surcharge & cess)

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10. Relevant Sections of the Income Tax Act

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✅ Conclusion

Taxation on sale of securities depends primarily on:
✔ Type of security
✔ Holding period
✔ Mode of sale (Stock Exchange/Off-market)
✔ Applicability of STT

Proper tax planning and record maintenance can help reduce tax liability and avoid penalties.