According to Section 45 of income tax act 1961, Any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income-tax under the head “Capital gains”, and shall be deemed to be the income of the previous year in which the transfer took place.
Here you can find how to calculate capital gains on sale of shares and mutual fund easily.
As per section 2(14), capital asset includes shares and mutual funds.
There are two types of capital gains:
Computation of Capital Gain on sale of Shares and Mutual Funds
|Full value of consideration||XXX|
|Less||Cost of Acquisition/Indexed Cost(in case of long term gain)||(XXX)|
|Less||Expenditure incurred for sale of shares||(XXX)|
Calculation of Short Term Capital Gain
There is a flat tax rate i.e.15% on short-term capital gains under Section 111A of the Income Tax Act. This includes equity shares, equity-oriented mutual-funds, and units of business trust provided that:
- The transaction of sale is entered on or after October 1, 2004.
- Such transaction is chargeable to securities transaction tax (STT) i.e. transaction is through recognized Stock Exchange.
Section 111A do not cover Debt-mutual funds and Preference shares.
Example: Mr. A purchased shares of XYZ ltd for ₹1,20,000 and sold them after 8 months on 21 November,2006 for ₹1,80,000. Since Mr. A sold the shares within 1 year, this gain will qualify as a short-term capital gain under section 111A. In present case, the short-term gain is ₹60,000 (₹180,000 less ₹120,000), and the short-term capital gain tax will be ₹9,000 (15% of ₹60,000).
Calculation of Long Term Capital Gain
Long-term capital gains that fall under Section 10(38) of the Income Tax Act are not taxable. Equity shares, equity-oriented mutual-funds, and units of business trust cannot be subject to tax if:
- The sale is taxable under the STT,
- The shares are a long-term capital asset, and
- The sale has happened on or after October 1, 2004.
However these gains are required to be disclosed at the time of filing Income Tax Returns (ITR) i.e. ITR-2
Example : Mr. X purchased shares of PQR ltd on 1 January 2005 for ₹100,000 and sold them on 15 June 2008 for ₹150,000 through a recognized stock exchange and security transaction tax (STT) of ₹1500 is paid. Since Mr. X sold the shares after 1 year, this gain will qualify as a long-term capital gain. In such a case, the long-term gain will be covered under section 10(38) and hence exempt from tax.
Points to be remembered:
- In case of debt mutual funds, both short-term and long-term capital gains are taxed. Short-term capital gains are added to the income and taxed as per the individual’s income tax slab. Long-term capital gains from debt mutual funds are taxed at 20%.
- According to Fifth Proviso to Section 48, STT levied on sale of shares and equity oriented mutual funds shall not be allowed as deduction in computing income chargeable under the head Capital Gain neither in form of cost of purchase nor as deduction as expense of transfer i.e. sale of shares and mutual funds.
- Cost of acquisition of Bonus Shares is deemed to be NIL and the period of holding would be considered from the date of allotment of such shares.
- If normal income other than short term gain is less than exemption limit i.e. ₹2,50,000 then in case of individual, short term gain will be reduced to amount by which the other normal income fall short of ₹2,50,000.
Example: Mr. A has salary income of ₹90,000 and short term gains of ₹2,50,000 which are covered under section 111A. His total income is ₹3,40,000. No tax will be levied upto ₹2,50,000 and amount that is above ₹2,50,000 i.e. ₹90,000 would be taxed at flat rate of 15%.
About the Author
Arpit Goyal is pursuing CA and B.com & also working as an article assistant in Gurgaon. He has an immense interest in Taxation. He loves to use technology to spread knowledge about taxation & accounts.