What are long-term capital gains on shares?

Investing in equity shares offers higher rates of return on investment than other conventional investment options of comparable size. However, it comes with its concomitant set of risks too. Yet, the possible quantum of rewards from this activity in the stock market keeps millions of investors hooked.  

Once the investment goes in your favour and you make a profit, the next step is to pay taxes.  

Taxes on profits made on transactions in shares depend on the length of time you hold the investment (shares in this case). The capital gains made on the sale of shares may either be short-term capital gains or long-term capital gains. And on these gains, the investor pays the short-term capital gains tax or the long-term capital gains tax. Let us look at these taxes a little in detail.   

What are Long-Term Capital Gains Tax on the Sale of Shares? 

According to the Income Tax Act, of 1961, when a taxpayer makes a profit or loss on the sale of a capital asset, it gives rise to capital gains/losses. By definition, equity is an asset. So, when an investor sells listed equity shares that are held for more than one year, for a profit, the gains made are termed long-term capital gains (LTCG).  

The provision states that any long-term capital gains made from the sale of equity shares held for over a year shall be subject to tax if such gains exceed Rs. 1 lakh per annum. Thus, long-term capital gains of up to Rs 1 lakh made on the sale of equity shares are exempt from taxes. Beyond this threshold, LTCG from equity shares is subject to a 10% tax. On these long-term capital gains, the benefit of indexation will not be available.  

Exemptions On LTCG 

Limit of Annual Income Exemption 

A person is exempt from paying long-term capital gains tax on shares sold if his/her yearly income is less than the exemption threshold, which works out to the following:  

First, Indian citizens who are 80 years or older and have annual income under Rs 5 lakhs are excluded. 

Indian residents between the ages of 60 and 80 are excused from paying taxes if their yearly income is Rs 3 lakh. 

Moreover, Indian residents are free from paying taxes if their annual income is less than Rs 2.5 lakh. 

Regardless of age, the exemption ceiling for non-resident Indians (NRIs) is Rs 2.5 lakh. 

Exemption under Section 54EC 

Under Section 54EC, if LTCG made on sale of shares held for over a year is reinvested in certain specified bonds, the investor need not pay taxes. These bonds include 

Bonds issued by the Rural Electrification Corporation (REC) or the National Highway Authority of India (NHAI). Up to Rs 50 lakh per annum is permitted per an investor, and he/she would be eligible for tax exemption. 

The taxpayer can redeem the bonds only after three years. Beginning FY 2018-19, this time frame has been increased to five years . 

To qualify for the exemption, an investor must purchase these bonds before the deadline for paying the taxes. 

How are Long-Term Capital Gains Calculated? 

The following are taken into account to calculate LTCG: 

Sale consideration: The money that is received when an asset is sold is the sale consideration. When selling shares, the selling price minus the securities transaction tax (STT) and brokerage fees forms the sale consideration. 

Cost of acquisition:

The actual cost of buying the shares is used to calculate the cost of acquisition of long-term capital assets purchased on or before January 31, 2018. However, the fair market value is the purchase cost, if the actual cost is less than the fair market value of the asset.  

Cost of improvement:

The brokerage fees and other costs associated with the sale of assets are covered here. The STT fee is not taken into account when figuring out the cost of the improvement. 

Indexation:

The indexed cost of acquisition of the property, not the actual purchase cost is used to determine LTCG. This is because money's value varies over time. Over time, the country's inflation diminishes the purchasing value of your money. For instance, ten years ago, Rs. 50 could be used to purchase a movie ticket. These days, a multiplex won't even sell a soft-serve ice cream cone for that amount. Determining the exact price you would have paid for the property if you had bought it today is necessary. 

Long-term capital gains is calculated using the LTCG calculator:  

Long-term capital gains = Sale consideration - Purchase cost 

Conclusion 

Investments in equity shares were fully tax exempt before Section 112A of the IT Act became law. Once Section 112A came into vogue, this exemption was slashed to Rs. 1 lakh per investor per annum. Many investors now buy and sell shares more cautiously and with consideration of the tax ramifications.  

FAQs 

Q. Which ITR is submitted by those with income from sale of equity shares? 

Stock market traders must submit Form ITR 2 when the proceeds from sale of equity shares are considered capital gains. Traders must file ITR 3 and the required financial documents if they get revenue from the sale of equity shares in a non-speculative business. 

Q. How should unlisted equity share sale proceeds be handled? 

Income from the sale of unlisted shares is taxable under the head Capital Gains. Following the CBDT circular, investors and dealers are not permitted to treat it as a business income.