Capital gains taxation is one aspect of individual taxation which needed some reform. While some rectification have been carried out over the years, the structure is still pretty complex and difficult to comply with for a layperson. For all types of financial assets such as listed and unlisted equity / preference shares, equity oriented mutual funds and instruments like REIT/Invit units and other financial assets like debt oriented mutual funds, the long-term capital gains tax rate can be aligned at 10% and short-term capital gains tax at 15 percent
Furthermore, all forms of income are subject to taxation In India. This includes salary, rental income, business income, income from stocks, and income from mutual funds. The taxation of these types of income is determined by the taxpayer's selected tax regime and income tax slab. Homemakers and retirees are frequently involved in the buying and selling of shares as a means of generating income, but they may not be aware of how this income is taxed. Gains or losses from selling equity shares are classified as "Capital Gains."
The Bombay High Court's decision last week regarding share gifts and the implications of capital gains tax in India may have an effect on asset transfer plans. The Jai Trust v. Union of India ruling made clear how capital gains from bequeathed financial assets are taxed.
According to Dr. Suresh Surana, founder of RSM India, "Calculating capital gains in India is a complicated topic because there are a lot of factors to take into account. These include the length of time the shares have been held, whether they were bought on the primary or secondary market, whether they were given as a gift or inherited, whether they were bought on the market and required to pay Securities Transaction Tax (STT) or whether they were bought off the market without paying STT, and whether or not the listed shares were bought before January 31, 2018 (i.e.the availability of grandfathering of cost)."
Taxes Associated with Trading Listed Shares
Depending on the length of time the taxpayer or investor has held the shares, gains from the transfer of shares listed on any recognized stock exchange in India would be classified as either long-term or short-term gains. If such holding duration exceeds 12 months, the gains earned from them would be regarded as long-term in nature otherwise, short term.
"According to Section 111A of the IT Act, the short-term capital gains on listed shares would be liable to tax at a rate of 15%. On the other hand, long-term capital gains over the Rs. 1 lakh threshold limit in that specific fiscal year are liable to 10% tax under Section 112A of the IT Act. Therefore, in the hands of the taxpayer or investor, long-term capital gains on listed shares up to Rs 1 Lakh for any given financial year will be free from tax," Surana noted.
“The short-term capital gains on listed shares would be subjected to tax at the rate of 15% u/s 111A of the IT Act. On the other hand, the long term capital gains are subject to tax at 10% u/s 112A of the IT Act on the amount of gains exceeding the threshold limit of Rs 1 lakh in that particular financial year. As such, long term capital gains on listed shares up to Rs 1 Lakh for any particular financial year would be exempt from tax in the hands of taxpayer/ investor," Surana said.
"According to Section 111A of the IT Act, the short-term capital gains on listed shares would be liable to tax at a rate of 15%. On the other hand, long-term capital gains over the Rs. 1 lakh threshold limit in that specific fiscal year are liable to 10% tax under Section 112A of the IT Act. Therefore, in the hands of the taxpayer or investor, long-term capital gains on listed shares up to Rs 1 Lakh for any given financial year will be free from tax." -- Dr. Suresh Surana, founder of RSM India
If there is no STT applied to the transaction, long-term capital gains would be taxed at the rate specified in Section 112 of the IT Act, while short-term capital gains would be taxed according to the investor's marginal slab rates. "In accordance with section 112 of the IT Act, the investor has the option to tax such long term gains either at the rate of 20% (with indexation benefit) or 10% (without indexation benefit), whichever is more beneficial to him," Surana stated.
Taxes Associated with Unlisted Share Transfers
With unlisted shares, gains that are attributed to owning them for longer than 24 months are classified as long-term gains; otherwise, they are classified as short-term gains.
"Such short-term capital gains on unlisted shares would be subject to taxation at the investor's applicable slab rate. Conversely, domestic investors' long-term capital gains are subject to a 20% tax under Section 112 of the IT Act and are entitled for the indexation benefit on such gains, according to Surana. Notably, shares held as stock-in-trade rather than capital assets would be taxable under the heading "Profits & Gains under Business & Profession" rather than "Capital Gains."
