Taxation of listed shares held as the investment
This article briefly covers the provisions related to taxation of your investments in listed Indian shares
Period of holding
Period of holding refers to the time span for which an asset is held by you, immediately prior to its sale. It shall be computed from the date on which the asset was acquired until the date of its sale.
(In case the asset is acquired other than by means of acquisition, such as inheritance or gift, the period of holding shall be reckoned as per various provisions of the Income Tax Act, 1961)
A listed equity share is considered a long-term capital asset if it is held for more than 12 months immediately prior to the date of sale.
If held for 12 months or less, it will be considered a short-term capital asset.
Tax on long term capital gains
Tax on long term capital gains have undergone drastic changes from the financial year FY 2018-19. Long term capital gains on sale of listed shares were exempt prior to FY 18-19. In order to minimize economic distortions and curb erosion of tax base, Budget 2018 withdrew the exemption u/s. 10(38) and introduced a new section 112A.
As per section 112A,
- Gains in excess of ₹1,00,000 arising from sale of a capital asset
- Being a long-term (held for more than 12 months) equity share in a company or unit of an equity-oriented mutual fund or unit of a business trust
- Shall be charged to tax at a flat rate of 10% without giving effect to indexation.
Provided - STT has been paid on
- Acquisition and transfer of such equity share
- Transfer of unit of an equity-oriented mutual fund or unit of a business trust
Exemption from STT on transfer is available if such sale transaction takes place on a recognised stock exchange located in International Financial Services Centre (IFSC) provided the consideration is paid or payable in foreign currency.
However, all gains till 31st January 2018 will be grandfathered (i.e. Exemption u/s. 10 (38) would continue for all shares purchased before 31st January, 2018 and sold after holding them for more than a year).
The cost of acquisitions in respect of the long-term capital asset acquired by the assessee before the 01/01/2018 shall be deemed to be the higher of –
- the actual cost of acquisition of such asset; and
- the lower of –
- the fair market value of such asset; and
- the full value of consideration received or accruing as a result of the transfer of the capital asset.
What is Fair market value?
Fair market value has been defined to mean –
- in a case of listed capital asset- the highest price of the capital asset quoted on such exchange on the 31-01-2018.
However, where there is no trading in such asset on such exchange on the 31-01-2018 the highest price of such asset on such exchange on a date immediately preceding 31-01-2018 when such asset was traded on such exchange shall be the fair market value; and
- in a case where the capital asset is a unit and is not listed- the net asset value of such asset as on 31-01-2018.
Any long-term capital gains in excess of the cost of acquisition will be taxed at 10% without indexation.
Consider an example:
An equity share is purchased 6 months before 31st January, 2018 at ₹100 and the highest price quoted on 31st January is ₹140. The share is sold after 31st July, 2018 at ₹180 after holding it for more than a year.
Cost of acquisition will be higher of-
₹100 and ₹140 i.e. ₹140
The taxable gain will be ₹180 - ₹140 = ₹40.
Illustrations to understand taxation of Long-term gains exceeding ₹ 1,00,000
| Buy date | Sale date | Buy price (a) | Highest quoted price on 31/01/18 (b) | Sale price (c) | Lower of (b) & (c)- (d) | Cost of acquisition [Higher of (a) & (d)] | Sale price | Long-term Capital Gains (LTCG) |
|---|---|---|---|---|---|---|---|---|
| 16-Feb-17 | 21-Apr-18 | 100 | 200 | 250 | 200 | 200 | 250 | 50 |
| 09-Apr-17 | 30-Oct-18 | 100 | 200 | 150 | 150 | 150 | 150 | - |
| 19-May-17 | 30-Oct-18 | 100 | 50 | 150 | 50 | 100 | 150 | 50 |
| 06-Nov-17 | 13-Dec-18 | 100 | 200 | 50 | 50 | 100 | 50 | 50 |
Note: If the amount of LTCG exceeds ₹1,00,000 then the gains in excess of ₹1,00,000 will be at a flat rate of 10% without indexation.
Note that where the total income (say ₹4,50,000) as reduced by such LTCG (say ₹3,00,000) is below the basic exemption limit (say ₹2,50,000), then, such LTCG (₹4,50,000) shall be reduced by the amount by which the total income as so reduced falls short of the basic exemption limit [₹1,00,000 i.e. 2,50,000- (450,000-3,00,000)] and the balance LTCG (₹2,00,000 i.e. 3,00,000-1,00,000) shall be taxed at 20%.
Tax on short-term capital gains
Short-term gains (STCG) arising from sale of listed shares are taxed at a flat rate of 15% as per section 111A of Income Tax Act, 1961.
Note that where the total income (say ₹4,50,000) as reduced by such STCG (say ₹3,00,000) is below the basic exemption limit (say ₹2,50,000), then, such STCG (₹4,50,000) shall be reduced by the amount by which the total income as so reduced falls short of the basic exemption limit [₹1,00,000 i.e. 2,50,000- (450,000-3,00,000)] and the balance STCG (₹2,00,000 i.e. 3,00,000-1,00,000) shall be taxed at 15%.
References:
The Income Tax Act, 1961