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:
📊 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
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
| Type of Security | Short-Term if held for | Long-Term if held for |
|---|---|---|
| Listed Equity Shares | ≤ 12 months | > 12 months |
| Units of Equity-Oriented Mutual Funds | ≤ 12 months | > 12 months |
| Unlisted Shares | ≤ 24 months | > 24 months |
| Debt Mutual Funds | ≤ 36 months | > 36 months |
| Listed Debentures/Bonds | ≤ 12 months | > 12 months |
3. Tax Rates on Sale of Securities
(i) Listed Equity Shares & Equity-Oriented Mutual Funds
| Type of Gain | Tax Rate | Notes |
|---|---|---|
| STCG (covered under Section 111A) | 15% + surcharge & cess | Sale through Recognized Stock Exchange; STT paid |
| LTCG (Section 112A) | 10% (exceeding ₹1 lakh) + surcharge & cess | STT applicable; No indexation benefit |
(ii) Other Securities
| Security Type | Short-Term Capital Gain | Long-Term Capital Gain |
|---|---|---|
| Debt Mutual Funds | As per slab rate | 20% with indexation |
| Unlisted Shares | As per slab rate | 20% with indexation |
| Listed Debentures/Bonds | As per slab rate | 10% without indexation or 20% with indexation |
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.
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.
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.
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.
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.
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)
10. Relevant Sections of the Income Tax Act
| Section | Description |
|---|---|
| 2(42A) | Definition of Short-Term Capital Asset |
| 111A | Tax on STCG on equity shares/mutual funds |
| 112 | Tax on LTCG for other securities |
| 112A | Tax on LTCG on equity shares/mutual funds |
| 54F | Exemption on LTCG for investment in residential house |
✅ 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.