Capital Gains Tax on Shares in India: Short-Term vs Long-Term

What is Capital Gains Tax on Shares?

Capital Gains Tax is the tax on the profit which arises when a capital asset is sold or transferred. If an investor sells shares for more than they paid for them the difference may be treated as a capital gain.

For instance if an investor purchases listed shares for Rs 50,000 and then sells them for Rs 70,000 the profit is Rs 20,000 (prior to adjustment for eligible transaction costs).

The tax treatment of the gain will be very much dependent on the holding period and the relevant provisions of the Income-tax Act.

What is Short Term Capital Gains Tax?

Short term capital gains (STCG) are those which arise on the sale of shares in the period specified under the rules for short term assets.

For listed equity shares in India, shares held for 12 months or less prior to sale are normally treated as short term capital assets.

For qualifying listed equity shares sold through a recognised stock exchange where the STT conditions are satisfied, short term capital gains are generally taxed at 20% under section 111A for transfers on and after 23 July 2024. The applicable surcharge and health and education cess will also be applicable.

Example of Short-Term Capital Gains

Suppose an investor purchases listed shares for Rs.1,00,000 and sells them after 6 months for Rs.1,20,000.

The capital gain is:

₹1,20,000 − ₹1,00,000 = ₹20,000

If it qualifies under section 111A the gain is generally taxed at 20% (prior to the applicable surcharge and cess).

Short term gains can also be achieved via frequent buying and selling (although the tax treatment of intraday trading and a host of other transactions may be different). It's not true that every profit made in the stock market is capital gains.

What is Long Term Capital Gains Tax?

Long term capital gains (LTCG) are where shares are held for a period in excess of the relevant threshold prior to sale.

For listed equity shares the holding period will normally have to be in excess of 12 months for the gain to be a long term gain.

Qualifying long term capital gains under section 112A (e.g. gains from eligible listed equity shares where the STT conditions are met) are generally taxed at 12.5% on the aggregate gains in excess of ₹1.25 lakh in a financial year (before any surcharge or cess).

Example of Long-Term Capital Gains

Suppose an investor purchases listed shares for Rs.2,00,000 and sells them after 18 months for Rs.3,80,000.

The capital gain is:

₹3,80,000 − ₹2,00,000 = ₹1,80,000

If the gain is eligible under Section 112A then the first ₹1.25 lakh of the eligible aggregate LTCG is not taxable under that section. The balance of ₹55,000 is normally taxed at 12.5% (before surcharge and cess).

The ₹1.25 lakh is the threshold for eligible aggregate gains in the year (not on a per stock basis).

Short-Term vs Long-Term Capital Gains: Key Differences

Factor	Short-Term Capital Gains	Long-Term Capital Gains
Holding period for listed equity shares	12 months or less	More than 12 months
Relevant tax provision	Section 111A, if eligible	Section 112A, if eligible
General tax rate for qualifying listed equity	20%	12.5% above ₹1.25 lakh annual threshold
Applicable conditions	Includes STT conditions	Includes STT conditions

The rates and thresholds set out above apply to qualifying transactions under the relevant provisions. Other share transactions will have a different tax treatment.

How is Capital Gains Tax calculated?

Capital gains are generally calculated by taking the sale consideration and deducting from it the cost of acquisition and any eligible transfer costs.

Investors should keep their purchase and sale contract notes, their broker statements and the relevant transaction records. With respect to shares held in a Demat account you'll need to check the holding period and the cost of acquisition very carefully, especially where the shares were acquired in a number of transactions.

The tax calculation will also be subject to adjustment in certain circumstances (for example in the case of a corporate action or shares acquired prior to a particular change in the tax rules).

How can an investor report capital gains?

Capital gains from shares are reported in the income tax return via the appropriate ITR form and schedule. The form to be used will be determined by the taxpayer's other sources of income and the nature of the transactions.

Investors should cross check their broker's capital gains statement against their own records and make sure the details are correct before they file. If they are also deriving income from intraday trading or from futures and options then the tax treatment will be different to that of the capital gains on delivery shares.

Conclusion

Capital gains tax on shares in India is dependent on the holding period, the nature of the transaction and the relevant tax provisions. It is absolutely essential to know whether the gain is short term or long term in order to work out how it will be taxed and what records you will need to maintain.

Investors can use platforms such as Ashika Dhanush 2.0 to get the market information. Of course they'll have to be aware that for tax reporting purposes you do need the actual transaction records and you do need to be aware of the tax rules that apply.