How to compute capital gains tax on shares?

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How to compute capital gains tax on shares?
Investment in capital assets such as equity, mutual funds, real estate or gold result in the accrual of capital gains or capital loss depending on whether the asset is sold at a lower or higher price in comparison to the purchase price. Thus, shares held for less than a year result in short term capital gain if sold at a price higher than the purchase price else result in capital loss. On the other hand, if the shares are held for over a year, long-term capital gain or loss accrue on sale of shares.

Like other investment avenues, tax is to be paid on the gains realized on the sale of capital assets. The rate of capital gains tax varies across asset class and for different holding periods. Generally, lower capital gains tax rate is levied on growth assets such as equity, real estate or gold. Also, long term capital gains (LTCG) tax is lower in comparison to short term capital gains (STCG) tax.

Calculation of Short term capital gain (STCG) tax on shares

Short term capital gains on equity on which security transaction tax (STT) is paid attract a tax liability @ 15.45% (including cess). The accruing short term capital gains are calculated by finding out the difference between the sale price and purchase price of the shares that is then taxed @ 15.45%.

For eg: If an investor purchases 100 shares of X company at a price of Rs.1000 on 1st July'2013 and sells at Rs.1250 on 1st October'2013, making a total gain of Rs. 25,000. The gain is deemed to be short term capital gain as the holding period of the investment is less than a year and investor would be liable to pay 15.45% STCG tax on it.

It is to be noted that tax-slab benefit is available to resident individuals for such short-term capital gains. However, NRIs not entitled to such tax slab benefit would need to pay short term capital gains tax @ 15.45%. Further, NRI individuals would need to file income tax return disclosing income from capital gain plus any other income that is taxable in India.

The gains realized on sale of shares held for over a year are presently exempt from long term capital gains tax, as long as the investor has paid STT. Thus, holding the equity for a year or more, provides an investor with an incentive in the form of tax exemption. Of course, he might want to look at his investment objective and returns and might sometimes be ready to bear the tax, if the profits are superlative.

Story first published: Friday, October 4, 2013, 11:27 [IST]
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