How To Calculate Capital Gains Tax On Shares
Investors rarely talk about the volatility of Indian equity and its consequences on capital gains. As a result, they often need clarification about taxes on equity-based assets (for example, shares) and non-equity assets. To aid better, we at Tax2win are introducing a comprehensive guide stating the capital gain taxation rules for 2023. Get a clear idea of tax liabilities on capital gains on equity investments such as shares, etc., and evaluate a real investment value to file your ITR.
What are Capital Gains?
Capital gains are profits from capital assets such as investment properties, shares, homes, cars, bonds, stocks, and even collectibles. It includes almost everything you own and recorded at the time of depreciation in ITR. Take the help of a professional CA if you are not assured.
For example: If you sell a car. Then the car is considered a fixed asset or capital asset. The capital gains on selling a car are the ‘profit’ earned on the capital asset’s value. It attracts taxes only if it is used for business purposes. It doesn’t attract tax if it is used for a personal purpose.
Taxation Implications on Capital Gain from Shares in 2023
Image 1(a) shows different tax rates on different assets. The holding time of the assets is also important to evaluate the taxation implications. It would be best if you calculated capital gains separately for different types of assets. Plus, the tax slab rate differs for short-term and long-term equity investments. Capital gains on shares lie down in equity and equity mutual fund types of assets.
|Capital Gain Tax Rates on Different Assets||Short Term||Long Term|
|Equity & Equity MF||15%||10% without indexation|
|Non Equity MF (Gold ETFs, Debt Funds, Liquid Funds, ets.)||Slab Rate||20% without indexation|
|Bonds||Slab Rate||10% without indexation|
|Real Estate||Slab Rate||20% without indexation|
- Tax Rate on Short-term Capital Gain Shares
Under section 111A of the Income Tax Act, 1961, a 15% tax rate is applicable on short-term capital gain on listed equity shares,excluding surcharge + cess. Slab rate will be applicable on other short term assets. As compared with long-term capital gains, short-term capital gains get preferential tax treatment.
- Tax Rate on Long-term Capital Gain Shares
A 10% tax rate is applicable on long-term capital gain on shares without indexation.
For investors who want to determine the levied taxes on long-term gains, the Cost Inflation Index (CII) is a new term they must know. The Income Tax Department notifies this number for tax calculation on long-term gains in a specific financial year. Using this number, the investors can calculate the indexed cost of a capital asset. It also carries information related to the inflation-adjusted price of a particular asset.
The CII number is 331 for FY2022-23. See image 1(b) to fetch the CII values for the last five years here:
Index CII number Financial Year 1. 331 2022-23 2. 317 2021-22 3. 301 2020-21 4. 289 2019-20 5. 280 2018-19
How to calculate Short-Term Capital Gains Tax?
Understand the economic concept of capital gains on shares for short term.
Short-term Capital Gain on Shares
The short-term capital gain on listed shares is the profit earned on the transfer of shares that are owned for one year or less time. Profit on transfer of unlisted shares held for not more than 24 months will be treated as short term capital gain. Its computation is done using the formula:
Short-term capital gains = Final sale price - (cost of acquisition + improvement cost + cost of transfer)
How to calculate Long-Term Capital Gains Tax?
Long-term Capital Gain on Shares
Long-term capital gain on listed shares is the profit earned on the transfer of shares owned for more than a year. Profit on transfer of unlisted shares held for more than 24 months will be treated as long term capital gain. Its computation is done using the formula:
Long-term capital gains = Final sale price – (indexed cost of acquisition + indexed improvement cost + cost of transfer)
What is the eligibility for tax relief in Long-Term Assets?
For equity and equity-based investments such as mutual funds, the investors should hold the assets for two or more years. Then only they are eligible to get tax relief under the umbrella of long-term capital gain shares. Image 1(c) shows the qualification years required to be considered a long-term asset. Moreover, it showcases in image 1(c) that bonds need to hold for at least one year, real estate properties need to hold for at least two years, and non-equity mutual funds need to hold for at least three years to qualify for long-term assets consideration.
Which ITR form is filed for Capital Gain on Shares?
Individual taxpayers need to file the ITR-2 form to report their capital gains or profit to the income tax department in India on equity-based investments.
Frequently Asked Questions
Q- What is LTCG?
The full form of LTCG is Long Term Capital Gains. It represents the profit earned on the shares trading.
Q- How are capital gain taxes calculated?
A 15% tax rate is applicable on short-term capital gain on shares chargeable to securities transaction tax under section 111A, excluding some surcharge + cess. As compared with long-term capital gains, short-term capital gains get preferential tax treatment. Whereas a 10% tax rate is applicable on long-term capital gain on shares without indexation.
Q- How much capital gain is tax-exempted?
The first one lakh in LTCG (Long-Term Capital Gains) on equity-based investments is considered tax-free under section 112A of the Income Tax Act, 1961.
Q- How to avail of up to 1 lakh tax exemption on LTCG?
In LTCG (on equity), the initial earned one lakh rupees are liable for tax relief under the Income Tax Act of India. However, the capital gain above INR 1 lakh is subject to taxation at a 10% rate + underlying surcharge and cess rates.
Q- How to avoid capital gains tax on shares?
Up to 1 lakh, long-term capital gains under section 112A are tax-free.
Q- What is the tax-free limit on LTCG in 2023?
Hopefully, the tax exemption on LTCG in 2023 will be the same as it is for 2022, i.e., 1 lakh rupees in a financial year. Use Tax2win’s Tax Planning Optimizer before filing your ITR for FY 2022-23.
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