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Capital gains arise from the sale of equity shares at a price different from their acquisition cost and are subject to specific tax provisions under Indian income tax law. In the stock market context, capital gains are classified based on holding period and taxed according to prescribed rates. This article provides an overview of capital gains arising from listed equity shares, including their classification, calculation, and applicable tax treatment.
Capital gains refer to the difference between the sale value and the acquisition cost of a capital asset. In the context of the equity market, stock capital gains arise when equity shares or other listed securities are sold at a price higher than their purchase price. These gains are recognised only at the time of sale or transfer and are recorded for tax purposes in accordance with applicable income tax provisions.
In the share market, gains are classified based on the period for which the shares are held before sale. This holding period determines whether the resulting share market gains are treated as short-term or long-term under Indian tax regulations. The classification affects the applicable tax rate and reporting treatment, but does not alter the method used to compute the gain itself.
From a regulatory and accounting perspective, capital gains represent realised appreciation in asset value rather than periodic income, and they form a distinct category of taxable income separate from dividends or interest.
Understanding how capital gains are defined and classified provides a foundational reference for analysing equity transactions and their tax treatment within the stock market framework.
The types of capital gains are determined by the duration for which a capital asset is held before it is transferred. This classification forms the basis for how gains arising from equity-related instruments are treated under the Income-tax Act, 1961.
Short-term capital gains arise when specified capital assets are transferred within the holding period prescribed under the Income-tax Act, 1961. For certain equity-linked and listed securities, a holding period of twelve months or less results in the gain being classified as short term.
In the case of listed equity shares and equity-oriented mutual fund units where Securities Transaction Tax (STT) has been paid, short-term capital gains tax is levied under Section 111A at the rate applicable under prevailing tax provisions.
Assets that are treated as short-term capital assets when transferred within twelve months include:
Equity shares listed on a recognised Indian stock exchange
Listed securities (other than equity shares), such as listed bonds and debentures
Units of equity-oriented mutual funds, whether quoted or unquoted
Units of business trusts, including REITs and InvITs, subject to applicable conditions
Zero-coupon bonds
Long-term capital gains arise when eligible capital assets are transferred after exceeding the specified holding period. In the case of listed equity shares, equity-oriented mutual funds, and units of business trusts, a holding period of more than 12 months qualifies as long-term.
Under prevailing tax rules:
Long-term capital gains on these assets are exempt up to ₹1 Lakh in a financial year.
Gains exceeding this threshold are taxed at 10% without indexation, subject to the conditions specified under Section 112A of the Income-tax Act.
The long-term capital gain tax rate applicable to listed equity shares is determined in accordance with these provisions and the applicable exemption threshold.
The amount of capital gain recognised on the transfer of equity shares is influenced by defined transactional and regulatory factors. These factors determine how gains are measured and classified for tax purposes.
The duration for which equity shares are held determines whether the resulting gain is classified as short-term or long-term under applicable tax provisions.
Capital gains are computed based on the difference between the acquisition cost and the sale consideration received on transfer, subject to permitted adjustments under tax rules.
Dividend income is treated separately from capital gains and does not form part of capital gain computation.
Expenses incurred wholly and exclusively in connection with the transfer of shares, such as brokerage fees, exchange charges, and other transaction-related costs, may be deducted while computing capital gains, where permitted under applicable income tax provisions.
Capital gains are computed as the difference between the sale consideration and the cost of acquisition of the asset. Where permitted under tax provisions, expenses incurred wholly and exclusively in connection with the transfer may be deducted.
Capital Gain = Sale Consideration − Cost of Acquisition − Eligible Expenses
The classification of the gain as short-term or long-term depends on the holding period applicable to the asset.
The taxation of capital gains on equity shares is governed by thresholds, classification rules, and set-off provisions specified under Indian income tax law. These provisions define how gains are assessed, adjusted, and carried forward for tax purposes in accordance with statutory requirements.
Under current tax provisions, long-term capital gains arising from the sale of listed equity shares are exempt up to an aggregate threshold of ₹1 lakh in a financial year. Gains exceeding this limit are subject to tax at the prescribed rate. The exemption applies cumulatively across eligible transactions executed during the year.
Tax-loss harvesting refers to the recognition of capital losses arising from the sale of equity shares at a price lower than the cost of acquisition. Such recognised losses may be adjusted against taxable capital gains in accordance with income tax provisions. Where losses cannot be fully adjusted in the same financial year, they may be carried forward for up to eight assessment years, subject to prescribed conditions.
The Income Tax Act permits the set-off of capital losses against capital gains, based on the classification of the gain or loss as short-term or long-term. Short-term capital losses may be adjusted against both short-term and long-term capital gains, while long-term capital losses may be adjusted only against long-term capital gains. Unadjusted losses may be carried forward within the allowable time frame.
Capital gains arising from equity shares are subject to defined classification, calculation, and tax treatment under Indian income tax provisions. The applicable tax rates, exemption thresholds, and loss adjustment rules are determined by the holding period and nature of the asset. These elements together form the regulatory framework governing capital gains in the Indian stock market.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
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.
Capital gains tax exemptions are available under specific provisions of the Income Tax Act, subject to defined conditions, holding periods, and limits, depending on the nature of the asset and the type of capital gain.
Capital gains from stocks may be adjusted against eligible capital losses in the same financial year, with unadjusted losses allowed to be carried forward for up to eight assessment years, as per applicable tax rules.
Capital gain is calculated as the difference between the sale consideration and the cost of acquisition, after deducting any expenses directly related to the transfer, where permitted under tax law.
Exemptions from capital gains tax are provided under specific sections of the Income Tax Act, such as those relating to reinvestment in notified assets or eligible securities, subject to prescribed conditions and limits.
Capital gains are taxed based on the classification of the asset and the holding period, with separate tax rates applicable to short-term and long-term capital gains under prevailing tax provisions.
Capital gain calculations vary by asset type due to differences in holding period thresholds, tax rates, and eligibility for exemptions or indexation, as defined under income tax regulations.
The amount of capital gain is influenced by factors such as the purchase price, sale price, holding period, transaction-related expenses, and the applicable tax treatment for the specific asset.
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