Taxation of Equity Investments

As we are a community of stock traders and investors, things which always pop into our mind are that is there any tax payable on our stock market transactions, is it necessary to show them in our income tax return, what is capital gain, what about losses? Here, I am going to explain these things in simple manner so that any person who does not have any knowledge about income tax laws can understand the same. 

After reading this article, you will be able to understand the following things InshaAllah:

• Understand what is Capital Gain on stock market transactions
• Understand different types of Capital Gains/Losses
• Understand the taxability of the Capital Gains/Losses
• Understand ITR (Income Tax Return) applicability

Before we jump into the discussion, please note that this article is not applicable for intraday, derivatives (F&O) & forex transactions.

So, let’s begin with our journey of understanding the income tax on Stock Market Transactions.

Capital Gains/Losses:

Let us assume that you have bought 500 shares of Company A at Rs.100 per share. After few days, the price of share went up to Rs.110 per share. So, now you have notional profit of Rs.10 per share and total notional profit of Rs.5000 (Profit of Rs.10 per share x 500 shares). This can be presented as follows:

Notional profit means unrealized profit, which in simple terms means that as you have not yet sold these shares hence not realized the profit. There is no taxation of such unrealized profit. 

Remember, Income Tax provisions will apply only when you sell the shares, so you do not need to worry about taxes until you sell them. 

Once you have sold the shares and if you are at profit as explained above then the same profit is called as Capital Gain. And in opposite situation, if you have sold the shares at loss, the same is called as Capital Loss.

Types of Capital Gains/Losses:

The shares which you hold are your assets and in terms of Income Tax Laws such assets are called as Capital Assets. In very basic terms, if the shares which you have sold were purchased by you within 1 year from the date of sell then such shares are called as Short Term Capital Assets and any gain or loss arising on sale of such shares is called as Short Term Capital Gain/Loss. 

In other cases, if you have been holding the shares for more than 1 year from the date of purchase then such shares are called as Long Term Capital Assets and any gain or loss arising on sale of such shares is called as Long Term Capital Gain/Loss. Please note that method of calculating gain/loss for shares acquired before 31/01/2018 is slightly different.

1. Example of Short Term Capital Gain

2. Example of Long Term Capital Gain

Taxation of Capital Gains/Losses on Shares:

As you may know, the financial year starts from 1^st April and ends on 31^st March of next year. Any sales transactions made within the financial year are subject to Capital Gains Tax provisions. While filing your ITR for 2021-22, you need to consider your sales transactions executed between 01/04/2021 to 31/03/2022. 

If you have sold any shares during this period then you first need to determine your holding period of such shares. Once you have determined the holding period then you will be able to differentiate between Short Term Capital Asset and Long Term Capital Asset. Once you have differentiated, calculate you gain or loss for a transaction and the same will be Short Term Capital Gain/Loss as per the period of holding. 

The Short/Long Term Capital Gains/Loss details can be calculated by yourself or the same can be gathered from your Broker’s report section.

I hope now you are comfortable with the above concepts.

Now, as you are aware about concepts of Capital Gains/Losses, let us talk about their taxation.

No tax is payable on capital losses. Additionally, your capital losses can be set off against your capital gains and your capital gains can be reduced by such losses for taxation purpose. Suppose you have total of capital gain of Rs.80000/- and total of capital loss of Rs.30000/- then these 30000 can be reduced from 80000 and only net 50000 will be taxable. But for such deduction, there are specific rules under Income Tax hence do not blindly reduce your losses from gains to arrive at net gains. We will discuss these deduction/set-off rules in next article.

Now, the following points are discussed assuming that you have incomes other than capital gains and your gross total income including capital gains exceeds Rs.250000/- and subject to other provisions of Income Tax Act, 1961.

Taxation on Short Term Capital Gain

Once you have calculated your net Short Term Capital Gains, you are required to pay tax @ 15% on such capital gain. Remember, the tax is calculated even if you have total short term capital gain as low as Rs.1. 

E.g. You have earned Short Term Capital Gain of Rs.4000/- then the tax will be Rs. 600/- (Rs.4000 x 15%).

Taxation on Long Term Capital Gain

Once you have calculated your net Long Term Capital Gains, your Long Term Capital Gains up to Rs.1,00,000/- are exempt from Income Tax as per Sec. 112A of Income Tax Act, 1961. Any Long Term Capital Gains exceeding Rs.1,00,000/- are taxable @ 10%. 

E.g. You have earned Rs.1,45,000/- as Long Term Capital Gain then tax liability will be calculated on Rs.45000 only. Hence, tax will be Rs.4500/- (Rs.45000 x 10%). 

Filing of Income Tax Return:

You are required to disclose your Capital Gains/Loss transactions in your Income Tax Return irrespective of amount of the same and whether or not any tax payable on them. The Income Tax Department is very well aware of your Stock Market Transactions and if you do not disclose or disclose incorrect information in your ITR then you are most likely to receive notice from the department. I would advise you to take help of tax consultant / CA for preparing your ITR as the same is little bit of technical and you need to have good knowledge of Income Tax Act for filing it yourself. If you have proper knowledge of Income Tax Provisions then you can also proceed to file your ITR yourself.

One word of advice, if you are a salaried employee and also have stock market income then you cannot file ITR-1 as there is no field in ITR-1 to show your Share Market Transactions. You are required to select other ITR as applicable to you.

If you require any assistance with your ITR, taxation or this article, please contact us at our Telegram group IslamicStock.in

( https://t.me/IslamicStock )

Author
Akib Shaikh
(CA Team Member IslamicStock.in)