With the decreasing rates of Fixed Deposits, many young investors are looking for better investment options. Stock Market is rapidly becoming popular amongst youngsters as an option. As India is a booming market right now, it’s an excellent place to invest via stocks and shares.
But, when you invest in shares of any company, it becomes essential to mention all the detailed transactions in your ITR. We got numerous requests for creating a blog regarding the taxation on income earned from stocks trading. Today, I will explain to you about Capital Gain.
So let’s get started.
STCG (Short-Term Capital Gain)
If you buy equity shares of any stock market listed company and sell it within 12 months, you will incur profit or loss, depending on the stock movement.
If you make a profit, it’s treated as Short term Capital gain, and if you suffer losses, it is treated as Short-term capital loss.
The simple formulae can easily understand the Short term Capital Gain:
STCG= Sales price-any other expenses on shares-Buy Price (with the period of 12 months)
How is STCG taxed?
Irrespective of what Tax-slab you fall in, the 15% tax is applicable on all type of Short term Capital Gains. It is important to note that if your taxable income is below the threshold limit of 2.5 lakh without STCG, you can add this STCG to your taxable income.
So in the end, you will be paying 15% Tax and 4 % cess on the remaining STCG above your threshold value.
E.g. in any financial year, your taxable income without STCG is INR 2,00,000. Your STCG for the same year is INR 75,000. In this case, you can adjust INR 50,000 from your STSC in the threshold taxable income, making it 2,50,000.
You will have to pay 15% tax and 4 % cess on the remaining INR 25,000 of STCG.
LTCG (Long-Term Capital Gain)
If you buy equity shares of any stock market listed company and sell it after 12 months, either you will make profit or loss, depending on the stock movement.
If you make a profit, it will be treated as LTCG (Long-Term Capital Gain), and if you suffer loss, it will be treated as Lon-Term Capital Loss.
A simple formula can understand the LTCG:
LTCG = Sales Price-any other expenses-Buy Price (after 122 months)
How is LTCG taxed?
Before introducing the 2018 budget, LTCG made by selling equity shares or equity-oriented mutual funds was tax-free. But, after 2018, LTCG became taxable. As per the new budget, if your income from LTCG in a particular financial year is 1 lakh or above, it will be taxed at 10% in the form for LTCG tax.
Let me help you understand this with an example.
Let’s say you bought a share on 30th September 2017 at the rate of INR 2000 per share. You sold this share on 31st December 2018 at the Price of INR 2500. This means you held it for more than 12 months, making the gains taxable.
But what will be your taxable gain? This is where people get a bit confused!
Let’s say if the value of the share was INR 2200 on 31st January, and then your taxable gain will be 2500-2200, i.e. INR 200 and not INR 500.
Now let’s understand how the Long term and Short Term Losses will be treated.
Short-Term Capital Loss
Income Tax law allows any Short Term Capital Loss to be setoff against any LTCG or STCG generated from any capital asset. If you are unable to setoff the total losses, you can carry forward them to the next 8 years and set them off whenever required.
But there is a catch! You can carry forward these losses only if you have filed your ITR on time. So even if your income is below that tax slab, we recommend filing your ITR on time.
Long-Term Capital Loss
As mentioned earlier, LTCG made by selling equity shares or equity-oriented mutual funds was tax-free. Similarly, the losses from LTCG were also treated as dead-losses. This means you cannot set the off against any Capital Gain.
But with the introduction of 10 % tax on LTCG, the budget of 2018 also allowed to carry forward the Long-Term Capital Losses.
According to the Government’s FAQs on 4th February 2018, the Long-Term Capital Losses made from the transfers done on or after 1st April 2018 can be setoff against any Long Term Capital Gains. If the whole Long-Term Capital Loss is not setoff against any LTCG, it can be carried forward for the next five years.
But the criteria are the same here too. You can carry forward the losses only if you have filed returns on time!
I hope this explanation will help better understand how the Tax on Capital Gain is calculated. As observed in the above cases, if you fail to file your ITR on time, you won’t be able to avail the benefit of carrying forward your losses. Keeping an eye on stock trading mutual fund investment, calculating Capital gain and optimizing tax on the gains is a complicated task. If you do it yourself or hire some nitwit, there are chances that you might face legal issues in the future.
Moreover, you’ll need assistance from the expert to keep a track on all your transactions. Stay tuned if you want to know how to treat your income from share trading in an ITR. I will be soon uploading a blog related to that.
Meanwhile, if you need any further assistance, feel free to reach out.