Capital gains are the profits that are earned on the sale of capital assets. Stocks, Bonds, Mutual funds, etc are examples of capital assets. The tenure of the holding period of the capital asset determines the tax treatment.
A lot of people are confused regarding this, so this article will help you. In this article, we are going to discuss the long-term capital gains tax on shares.
What is the Long-Term Capital Gains Tax on Shares?
We categorize income earned by selling shares as a capital gain. We divide this capital gain into two categories. They are:
- Long-term capital gain
- Short-term capital gain
This classification is based on the holding period of shares. The holding period refers to the tenure for which the shareholder holds the investment. If the shareholder sells the shares within 12 months from the date of purchase, then the shares are considered a short-term capital gain.
Whereas if the shareholder holds the shares for 12 months and sells them after a period of 12 months, then they are defined as long-term capital gain.
Treatment of Sale on Unlisted Shares
There is no official market for the trading of unlisted shares. Hence, the tax authorities will categorize the entire income that arises from the transfer or sale of unlisted shares under the head of Capital gain. Here, no duration of the holding period is taken into consideration.
What is the Taxation Treatment of Long-Term Capital Gain on Shares?
Investors define shares held and sold after holding them for 12 months as long-term capital gain. Before the budget 2018 announcement, the government exempted long-term capital gains tax on shares. This means that you don’t need to pay any tax on gains earned from sales of equity shares.
But then came a new announcement in the financial budget for 2018. This budget revoked section 10 (38) which exempted tax on long-term capital gain from equity shares.
In this budget, the government declared that if an individual earns long-term capital gains from the sale of equity shares exceeding ₹1 lakh, the gains will be taxed at 10% (plus applicable cess).
The benefit of indexation will also not be available. This provision came into effect on 1st April 2018. This provision was brought through the implementation of section 112A.
Is There Any Tax Exemption on Long-Term Capital Gain on Shares?
Yes, you can get an exception of up to Rs. 1 lakh for LTCG on shares. If the amount goes above this, you can use the below methods.
Use Section 54F
As per section 54F, there are certain exemptions to the long-term capital gain on shares. To be eligible for long-term capital gains tax exemption, individuals need to follow the below parameters:
- An individual shall reinvest the net consideration amount received from the sale of shares into a maximum of two real estate properties.
- This reinvestment shall occur 2 years after the sale or 1 year before the sale of shares.
- An individual may also invest this consideration in a construction project.
- The condition is that the individual must complete the construction of such a project within 3 years after the date of the sale or transfer of shares.
Use the Grandfathering Clause
The government introduced the new section 112A to tax long-term capital gains from the sale of shares. However, certain individuals received exemptions from this. This was based on the concept of the Grandfathering Rule.
The provision of the grandfathering rule provides relief from taxation for any long-term gain arising from the sale of equity instruments purchased before 31st January 2018.
What is the Provision to Disclose LTCG in ITR Filing?
The Central Board of Direct Tax brought changes to the ITR-2 and ITR-3 forms. The following are the new provisions:
Individuals and Hindu Undivided Families (HUF) must disclose the declaration of LTCG from the sale or transfer of shares under Section B7 of the ITR-2 form. (These gains will not be considered under the heading “Income from Business or Profession”).
If Non-residents have long-term capital gains by selling or transferring shares, then they can declare the same in Sections B7 and B8 of the ITR-2 and ITR-3 forms respectively.
If an individual considers the equity shares or equity-oriented shares as stock-in-trade, then the individual will consider the gains from the sale or transfer of shares as “Income from business and profession”.
In this scenario, a 10% tax won’t be levied on LTCG on shares even if the amount is more than 1 lakh.
Conclusion
Long-term capital gain tax on shares is an important aspect that investors need to understand. Income tax on share trading profit in India is not less. So, the investors who prefer stocks should understand the LTCG taxation in detail.
A proper planning and tax-efficient investment strategy is important to reduce tax liability and maximize gains.
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Happy Investing 💰
