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Is Income from Stock Market Taxable


Posted on 2019-09-02 in KNOWLEDGE PORTAL

To calculate how much tax will be levied on income gained from acquiring and selling of equity shares and equity-oriented mutual funds, it is necessary to know the types of gains. As per the income tax law, your income from stock market investment is considered as a capital gain. There are different provisions in the Income Tax Act to calculate tax on capital gains. Recently, a new section 112A has been introduced and the old section 10 (38) has been scrapped with effect from 1 April 2018, which is applicable for the financial year 2018-19 and the Assessment Year 2019-20.

 

Things to consider for capital gains taxation

 

Holiding Period

 

To calculate the taxability of capital gains, it's important to calculate the holding period to determine whether it is long-term or short-term capital gain.

 

Long-term holding period – Equity shares or equity-oriented mutual funds that are held for more than 12 months is regarded as long-term.

 

Short-term holding period – When the shares or equity-oriented mutual funds are held for less than 12 months, the holding period is short-term. As per new income tax rules, tax is applicable on short-term capital gains made from any scheme held  for less than 12 months.

 

Capital Gains

 

Short-term Capital Gain: When you hold the shares and sell them before 12 months more than their acquired cost, then it is short-term capital gain. This income is taxable under section 111A at the rate of 15%.

 

Long-term Capital Gain: If you hold and sold shares after 12 months at higher prices than what you purchased at, it is long-term capital gain. The long-term capital gain is taxable under section 112A at the rate of 10%. However, the tax is applicable only on the capital gain that is exceeding 1 lakh rupees.

 

This table on Short-term and Long-Term Capital Gains Taxation will help you understand better.

 

Tax Type

Condition

Tax Applicable

Long-term Capital Gains Tax

Equity shares and equity-oriented mutual funds

10.00% on income exceeding Rs. 1 lakh

Short-term Capital Gains Tax

Income from sale of equity shares and equity-oriented mutual funds within 12 months from the purchase date.

15.00%

 

 

Tax Calculation on LTCG from equity shares and equity-oriented mutual funds w.e.f. 01.04.2018.

 

To calculate long-term capital gains and losses, the grandfathering clause was introduced in the Income Tax Act. For this, the investors have to consider the cost of acquisition (CoA) using the following formula:

 

The CoA of stocks or funds will be:

 

a) The higher of the actual cost of acquisition of stocks and mutual funds

b) The lower of fair market value (FMV) as on Januar 31, 2018

 

Here are the steps to calculate the CoA of equity shares and equity mutual funds:

 

Step 1:

 

Use the lower of the following:

 

a) Fair market value of the asset as on January 31, 2018, which means the highest value of shares on the stock market on this date, or the NAV of mutual funds on this date, or the last traded date of the shares.

 

b) Total value of consideration received from the transfer of the capital asset.

 

Step 2:

 

Use the higher of the following:

 

a) Lower value arrived in step 1

 

b) Actual purchase cost of asset

 

In these situations, the computation of LCTG will be like these:

 

Situation 1 – An equity share is purchased at Rs. 10 on 1 January 2017. Its fair market value is Rs. 20 on 31 January 2018. It is sold at Rs. 30 on 1 April 2018.

 

Here, the actual CoA is less than the fair market value on 31 January 2018. So, the fair market value of Rs. 20 will considered as the cost of acquisition. As such, the long-term capital gain will be Rs. 10 (Rs. 30 – Rs. 20).

 

Situation 2 -  An equity share is purchased at Rs. 10 on 1 January 2017. Its fair market value is Rs. 20 on 31 January 2018. It is sold at Rs. 15 on 1 April 2018.

 

Here, the actual CoA is less than the fair market value on 31 January 2018. But the sale value is also less than the fair market value on 31 January 2018. So the sale value of Rs. 15 will be considered as the cost of acquisition. In that case, the long-term capital gain will be Nil (Rs. 15 – Rs. 15).

 

Situation 3 -  An equity share is purchased at Rs. 10 on 1 January 2017. Its fair market value is Rs. 5 on 31 January 2018. It is sold at Rs. 15 on 1 April 2018.

 

Here, the fair market value on 31 January 2018 is less than the actual CoA. As such, the actual CoA of Rs. 10 will be considered as the actual cost of acquisition. In which case, the long-term capital will be Rs. 5 (Rs. 15 – Rs. 10).

 

Situation 4 -  An equity share is purchased at Rs. 10 on 1 January 2017. Its fair market value is Rs. 20 on 31 January 2018. It is sold at Rs. 5 on 1 April 2018.

 

Here, the actual CoA is less the fair market value on 31 January 2018.  But the sales value is also less than the fair market value on 31 January 2018 and actual CoA on 1 January 2017. So actual CoA of Rs. 10 will be considered as the cost of acquisition. As such, the long-term capital loss will be Rs. 5. (Rs. 5 – Rs. 10).

 

To simply further, let's say you have acquired shares of 1 lakh rupees. And in less than 12 months, you sold them at 2 lakh rupees. Then it will be your short-term capital gain, and you have to pay 15% tax. If you had sold them after 12 months, then it would have been your long-term capital gain.  In which case, you don't have to pay any tax because the capital gain is 1 lakh rupees only since any LTCG up to or less than 1 lakh is exempted from tax. Had the capital gain exceed 1 lakh rupees, then you would have to pay 10% tax on the amount exceeding 1 lakh rupees.







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