Profit or gain arising on transfer of shares (considered as an investment not a business by assessee) is chargeable to tax under the head ‘Capital Gains’.
Types of Capital Gain
Capital gains on shares are divided into two types : –
- Short Term Capital Gains
- Long Term Capital Gains
| CAPITAL ASSETS | SHORT TERM CAPITAL ASSETS | LONG TERM CAPITAL ASSETS |
| Listed Shares (Equity or Preference Share), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero Coupon Bonds | Assessee held the shares or units etc for a period of not more than 12 months immediately preceding the date of transfer. | Assessee held the shares or units etc for a period of more than 12 months immediately preceding the date of transfer. |
| Unlisted shares of a company | Assessee held the shares for a period of not more than 24 months immediately preceding the date of transfer (with effect from Assessment Year 2017-18). | Assessee held the shares for a period of more than 24 months immediately preceding the date of transfer (with effect from Assessment Year 2017-18). |
Also Read – Equity Linked Saving Scheme (ELSS)
Taxability of Capital Gain
1) Long term capital gain on sale of equity shares listed in a recoginsed stock exchange (applicable up to Assessment year 2018-19)
As per Section 10(38), gain arising on transfer of long term capital asset, being an equity share or unit of an equity oriented fund or unit of a business trust, is not chargeable to tax in the hands of the person if the following conditions are satisfied: –
- such transactions are chargeable to securities transaction tax (STT)*
- the transfer should have taken place on or after October 1, 2004
The exemption under 10(38) shall be available from Assessment year 2017-18 even if the STT is not paid provided that: –
- the transaction is undertaken on a recognised stock exchange located in any International Financial Services Centre and
- where the consideration for such transaction is paid or payable in foreign currency
*Note: – With effect from Assessment year 2018-19, exemption u/s 10(38) shall not apply to any income arising from the transfer of a long-term capital asset, being an equity share in a company, if the transaction of acquisition, other than the acquisition notified by the Central Government in this behalf, of such equity share is entered into on or after the 1st day of October 2004 and such transaction is not chargeable to securities transaction tax. As per Notification 43/2017 issued by Government on 05th June 2017 which is applicable from Assessment year 2018-19, Central Government has defined the following transaction on which STT is not paid on acquisition but still, they are eligible for 10(38) exemption. This notification specifically covers genuine cases like Initial Public Offer (IPO), Further Public Offer (FPO), Employee Stock Option Scheme (ESOP), Bonus Issue, Right Issue etc.
| SPECIFIC EXCLUSION – STT IS NOT PAID ON ACQUISITION SO 10(38) EXEMPTION IS NOT AVAILABLE | SPECIFIC INCLUSION – STT IS NOT PAID ON ACQUISITION EVEN 10(38) EXEMPTION IS AVAILABLE |
| Where acquisition of existing listed equity share in a company whose equity shares are not frequently traded in a recognised stock exchange of India is made through a preferential issue: | Acquisition of listed equity shares in a company which has been approved by the Supreme Court, High Court, National Company Law Tribunal, Securities and Exchange Board of India or Reserve Bank of India in this behalf Acquisition of listed equity shares in a company by any non-resident in accordance with foreign direct investment guidelines issued by the Government of India Acquisition of listed equity shares in a company by an investment fund referred to in clause (a) of Explanation 1 to section 115UB of the Income tax Act or a venture capital fund referred to in clause (23FB) of section 10 of the Income-tax Act or a Qualified Institutional Buyer Acquisition of listed equity shares in a company through preferential issue to which the provisions of chapter VII of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 does not apply. |
| Where transaction for acquisition of existing listed equity share in a company is not entered through a recognised stock exchange of India | Following acquisition of listed equity shares in a company made in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956), if applicable, acquisition through an issue of share by a company other than the issue referred to in above point acquisition by scheduled banks, reconstruction or securitisation companies or public financial institutions during their ordinary course of business acquisition which has been approved by the Supreme Court, High Courts, National Company Law Tribunal, Securities and Exchange Board of India or Reserve Bank of India in this behalf acquisition under employee stock option scheme or employee stock purchase scheme framed under the Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines,1999 acquisition by any non-resident in accordance with foreign direct investment guidelines of the Government of India where acquisition of shares of company is made under Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulation, 2011 acquisition from the Government; acquisition by an investment fund referred to in clause (a) to Explanation 1 to section 115UB of the Income-tax Act or a venture capital fund referred to in clause (23FB) of section 10 of the income-tax Act or a Qualified Institutional Buyer acquisition by mode of transfer referred to in sections 47 or 50B of the Income-tax Act, if the previous owner of such shares has not acquired them by any mode referred to in clause (a) or clause (b) or clause (c) [other than the transactions referred to in the proviso to clause (a) or clause (b)]. |
| Acquisition of equity share of a company during the period beginning from the date on which the company is delisted from a recognised stock exchange and ending on the date immediately preceding the date on which the company is again listed on a recognised stock exchange in accordance with the Securities Contracts (Regulation) Act, 1956 read with Securities and Exchange Board of India Act,1992 (15 of 1992) and the rules made thereunder |
Note: – As the long-term capital gain is exempted from tax so long-term capital loss shall have no tax treatment and such long-term capital loss cannot be set-off against any income nor be carried forward to next year.
In other cases (which are not covered by Section 10(38) i.e. listed shares on which STT is not paid), the amount of long-term capital gain shall be taxed under Section 112. As per Section 112, the assessee has the following two options: –
- Avail of the benefit of indexation; the capital gains so computed will be charged to tax at a normal rate of 20%
- Do not avail of the benefit of indexation, the capital gain so computed is charged to tax at the rate of 10%
The selection of the option is to be done by computing the tax liability under both the options and the option with lower tax liability is to be selected.
Note: – No deduction under Chapter – VIA and Section 88 shall be available from the gains taxable under Section 112. However, in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income tax and the tax on the balance of such long-term capital gains shall be computed at the rate of 20%. The benefit of the basic exemption limit is available only when the capital gain is taxable with indexation benefit.
2) Long-term capital gain on sale of equity shares listed in recognised stock exchange (applicable from Assessment year 2019-20)
Exemption for long-term capital gain arising from the transfer of equity shares under Section 10(38) has been withdrawn by Finance Act 2018 with effect from Assessment year 2019-20 and a new Section 112A is introduced.
As per Section 112A, long-term capital gain arising from the transfer of long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust shall be taxed at the rate of 10% of such capital gain exceeding Rs 1,00,000. This concessional rate of 10% is applicable if: –
- in a case of an equity share in a company, securities transaction tax has been paid on both acquisition and transfer of such capital asset; and
- in a case a unit of an equity oriented fund or a unit of a business trust, STT has been paid on the transfer of such capital asset
Note: – Government has invited the comment on the Draft Notification for Section 112A to include the genuine transactions on which STT is not required to be paid on acquisition or transfer. The draft notification is more or less similar to the Notification 43/2017 related to Section 10(38).
Calculation of cost of acquisition in special cases
- The cost of acquisitions of a listed equity share acquired by the taxpayer before 01st February 2018 shall be deemed to be the higher of the following:
- The actual cost of acquisition of such asset; or
- Lower of the following:
- Fair market value of such shares as on January 31, 2018; or
- Actual sales consideration accruing on its transfer.
Note: – The Fair market value of listed equity share shall mean its highest price quoted on the stock exchange as on January 31, 2018. However, if there is no trading in such shares on January 31, 2018, the highest price of such share on a date immediately preceding January 31, 2018, on which trading happens in that share shall be deemed as its fair market value.
- In case of units which are not listed on a recognized stock exchange, the net asset value of
such units as on January 31, 2018, shall be deemed to be its FMV.
- In a case where the capital asset is an equity share in a company which is not listed on a recognised stock exchange as on 31-1-2018 but listed on the date of transfer, the cost of unlisted shares as increased by cost inflation index for the financial year 2017-18 shall be deemed to be its FMV.
Note: – No deduction under Chapter – VIA and Section 87A shall be available. However, in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, the long-term capital gains under section 112A shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax.
In other cases (which are not covered by Section 112A i.e. listed shares on which STT is not paid), the amount of long-term capital gain shall be taxed under Section 112. As per Section 112, the assessee has the following two options: –
- Avail of the benefit of indexation; the capital gains so computed will be charged to tax at the normal rate of 20%
- Do not avail of the benefit of indexation, the capital gain so computed is charged to tax at the rate of 10%
The selection of the option is to be done by computing the tax liability under both the options and the option with lower tax liability is to be selected.
Note: – No deduction under Chapter – VIA and Section 88 shall be available from the gains taxable under Section 112. However, in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income tax and the tax on the balance of such long-term capital gains shall be computed at the rate of twenty per cent. The benefit of basic exemption limit is available only when the capital gain is taxable with indexation benefit.
3) Long-term capital gain on unlisted equity shares
Long-term capital gain in unlisted equity shares shall be taxable under Section 112. It is mostly similar to the taxability of listed shares (on which STT is not paid) except the assessee does not have an option to pay tax at the rate of 10% without taking indexation benefit.
Note: – The period of holding should be 24 months to be considered as a long-term asset as the shares are unlisted.
4) Short term capital gain on sale of equity shares listed in a recognised stock exchange
As per Section 111(A), gain arising on transfer of a short-term capital asset, being an equity share or unit of an equity oriented fund or unit of a business trust, shall be chargeable to tax in the hands of the person at the rate of 15% if the following conditions are satisfied: –
- such transactions are chargeable to securities transaction tax (STT)*
- the transfer should have taken place on or after October 1, 2004
The benefit under Section 111(A) shall be available from Assessment year 2017-18 even if the STT is not paid provided that: –
- the transaction is undertaken on a recognised stock exchange located in any International Financial Services Centre and
- where the consideration for such transaction is paid or payable in foreign currency
Note: – No deduction under Chapter – VIA and Section 88 shall be available from the gains taxable under Section 111(A). However, in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such short-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such short-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income tax and the tax on the balance of such short-term capital gains shall be computed at the rate of 15%.
5) Short term capital gain on sale of unlisted equity shares
Short-term capital gain shall be taxable as per Section 48 of the Income Tax Act, at the applicable slab rate of the shareholder. If the individual is having 5% tax bracket then the gain would be taxed at the rate of 5% or if the tax bracket is 20% or 30% then the applicable tax rate would be 20% or 30%.
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