The very first step in determining the tax liability on profit on sale of shares would be to classify yourself as an investor or a trader.
How An Investor Is Taxed On Profit From Sale Of Shares?
If you are a long term investor, that is you typically have sold shares after holding them for a period of more than a year, no capital gains tax would apply. In short there is no tax on long term capital gains in India on sale of shares.
Say for example, you bought 1000 shares of Axis Bank at Rs 300 and sold the same at Rs 350, you would have made a profit of Rs 50,000. Now, this Rs 50,000 will not attract any tax provided you have sold the same after a period of one year.
How Does Short Term Capital Gains Apply On Sale of Shares?
Capital gains in the short term would apply, if you have sold the shares at a profit within one year from the period of purchase. Currently, short term capital gains on profit from shares is a flat 15 per cent.
So, in the above case of Axis Bank, you would end up paying Rs 7500 as taxes.
Profit On Sale of Shares To Be Treated As Business Income
If you are a professional trader, who trades in the stock market regularly, then the profit on sale of shares would be treated as business income.
So, let's say you earn a salary of Rs 5 lakhs every year and have also made a profit of Rs 1 lakh throughout the year on sale of shares. In such case your total income would be computed as Rs 5 lakhs + Rs 1 lakh = Rs 6 lakhs.
A few important points to note
If you have incurred a non speculative trading loss it can be offset against other income like salaries. For example, if you have incurred a loss of Rs 1 lakh and you have a total income of Rs 6 lakhs on salary, you can deduct the same, when filing your tax returns.
It's very important to understand what kind of investor you are before determining your tax liability on profit on sale of shares.