Last Updated on December 19, 2023 by BFSLTeam BFSLTeam
You must pay tax on any capital gains you make from equity funds you invest in. Depending on how long you hold onto your investment before realising a profit, you may have either short-term or long-term capital gains. For example, the capital gains you make from stock funds for a holding period of up to one year are considered short-term capital gains, abbreviated as STCG.
The tax applied to the STCG is calculated based on the tax bracket you fall into.
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Every sale of a taxpayer’s unit of shares creates a long-term capital gain on shares. When shares are sold, a tax burden is created for the company. Every transfer or transaction is qualified for long-term capital gains treatment, regardless of whether the underlying share was sold on or off the market.
Nevertheless, the income tax rate for listed and unlisted shares differs.
In addition, a long-term capital loss occurs when the price at which shares are sold is lower than the price at which they were originally purchased. A loss of this kind may be “carried forward” for use in any of the subsequent eight fiscal years. In addition, you can compensate for your short-term capital loss with your long-term capital loss.
The following equations may be used to determine how much of a gain in long-term capital you will get from the selling of shares:
LTCG = Net Sale Consideration – Indexed Cost of Acquisition
The indexed cost of acquisition is a price that has been modified to account for increases in the general rate of inflation.
With the assistance of an illustration, let’s get a handle on how to compute profits on investments held for a lengthy period. In January 2015, Atul purchased 500 Shree Cements shares at ₹1000 per share. In May 2018, he liquidated all his interests at ₹1500 per share. In this scenario, the indexed cost of purchase and the long-term capital gains resulting from the selling of shares will be computed according to the following formula:
The cost of purchasing shares, when adjusted for inflation, comes to ₹5,83,333 (5,000,000 times 280/240).
These numbers, 280 and 240, respectively, represent the inflation indexation for the fiscal years 2014-2015 and 2018-2019, respectively. Read this post if you want more information about the inflation index.
The formula for determining profits on investments held for a long period is detailed in the following table.
| The full value of the consideration received from the sale of shares (500 shares @1500 per share): | ₹ 7,50,000 |
| Expenditure incurred in connection with the such sale (brokerage): | Nil |
| Net sale consideration (A): | ₹ 7,50,000 |
| Indexed cost of acquisition (B) [calculated above]: | ₹ 5,83,333 |
| Long-term capital gain (C=A-B): | ₹ 1,66,667 |
Historically, the long-term capital gain (LTCG) on equity shares was exempt from taxes under Section 10 (38), which is part of the Income Tax Act of 1961. However, in the Annual Budget 2018, it was recommended that Section 10 (38) be removed, and in its place, Section 112A should be used to determine the tax impact of LTCG on the sale of equity shares. This change was made.
According to this section, the long-term capital gain (LTCG) on shares is subject to taxation at a concessional rate of 10% for profits over ₹1 Lakh. This particular sum does not consider the advantages of indexation or the advantages of computing a capital gain in a foreign currency for non-residents.
Long-term capital gains are taxed at a lower rate of 10%, while profits on short-term capital assets are taxed at 15%, making long-term capital gains a much more attractive investment choice.
