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Capital gains represent the profit earned upon the sale of a capital asset like stocks at a price higher than the purchase price. In the Indian stock market, understanding the mechanics of capital gains and how they are taxed is crucial for anyone aiming to build wealth strategically. This page explores the types of capital gains, tax implications, and practical ways to optimise profits from equity investments.
Capital gains arise when an investor sells shares at a higher price than their cost of acquisition. These are categorised by the duration of holding:
Understanding how gains are taxed helps investors make informed choices on holding periods and exit strategies:
These are gains from stocks sold within 12 months of purchase. In India, they are taxed at a flat rate of 15%, excluding applicable surcharge and cess. The shorter the holding, the higher the impact of this tax.
If shares are sold after 12 months of holding, the profit qualifies as long-term capital gains (LTCG). LTCG is exempt up to ₹1 lakh annually. Beyond that, a 10% tax (without indexation benefit) applies.
Several practical and strategic elements can enhance capital gains in the long run:
Staying invested for more than a year helps in shifting profits from short-term to long-term category, reducing tax impact and possibly allowing returns to compound over time.
By reinvesting dividends received from equity holdings, investors can accumulate more units over time. This process enhances overall wealth through the power of compounding.
Stocks of fundamentally strong companies operating in high-growth sectors have historically shown higher appreciation potential. Investors may consider assessing earnings potential, financial health, and industry outlook.
Lower brokerage fees and fewer transactions help save on costs that eat into capital gains. Timing sales to minimise tax incidence also aids in maximising net profits.
Capital gains are calculated by subtracting the purchase price (also called cost of acquisition) from the selling price of an asset.
Capital Gain=Selling Price–Purchase Price–Expenses (if any)\text{Capital Gain} = \text{Selling Price} – \text{Purchase Price} – \text{Expenses (if any)}Capital Gain=Selling Price–Purchase Price–Expenses (if any)
Gains are classified as:
Short-Term Capital Gains (STCG) if the asset is held for a short period (e.g., < 1 year for stocks).
Long-Term Capital Gains (LTCG) if held beyond the specified period (e.g., > 1 year for stocks).
Tax rates differ based on the type and duration of the gain.
Efficient planning can reduce the tax liability associated with gains, thereby increasing net returns:
Long-term gains up to ₹1 lakh per financial year are exempt. Spacing out sales across years can help avoid taxation within this limit.
Investors can strategically sell loss-making stocks to offset gains and reduce taxable income. These losses can be carried forward for up to eight assessment years and set off against future capital gains.
Tax laws allow short- or long-term capital losses to be set off against corresponding capital gains. Losses not fully set off in the current year can be carried forward for eight assessment years.
Capital gains from stock investments can be optimised through tax planning, disciplined investing, and careful selection of stocks. Key strategies include extending holding periods, reinvesting dividends, and using legal avenues to manage tax liability.
LTCG on stocks is tax-free up to ₹1 lakh per year. After this, a 10% tax applies without indexation.
STCG is calculated at a flat 15% rate on gains from stocks sold within 12 months, excluding surcharge and cess.
Tax can be deferred or reduced using provisions like Section 54EC or by remaining within the LTCG exemption limit of ₹1 lakh.
By setting off realised capital losses against gains in the same financial year or carrying them forward for up to eight years.
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