Introduction
Capital Gain is the profit realized from selling
- an Equity or
preference share of a listed company in recognized stock exchange in India. - Securities (like debentures, bonds, govt
securities etc.) listed on a recognized stock exchange in India. - Units of UTI,
whether quoted or not. - Units of equity
oriented mutual fund, whether quotes or not. - Zero coupon bonds,
whether quoted or not.
What is Short Term Capital Gain (STCG)?
STCG is the profit made
from selling the above-mentioned assets for a holding period of 1 year or less.
For example, ABC person has purchased shares of company XYZ ltd from a
recognized Stock Exchange, say NSE, 1000 shares of value Rs.200 each on 1st
April 2024 and sell at Rs.250 each on 1st March 2025.
The difference
of Rs.50*1000=50000 is the Capital gain made in 11 months, Rs.50000 is the
taxable STCG.
What is Long Term Capital Gain (LTCG)?
LTCG is the profit made
from selling the above-mentioned assets of holding period of more than 1 year.
For example, if the same person stays invested till 1st May 2025,
the same Rs.50000 will now be considered as LTCG as the holding exceeded 12
months period and taxed accordingly.
Importance of STT Transactions in reducing tax on Capital gains
STT-paid transactions enjoy benefit of lower tax rate as compared to non-STT
transactions done in Unlisted securities and off-limit market (STCG at
individual income slab).
Tax Rates
|
Asset |
Tax type |
Tax rate (After |
Computation of |
1. Listed Equity share
|
Short-term |
20% |
Purchase price=Rs.100000 Sale price=Rs.120000 STCG= Rs. (120000-100000) = Rs. 20000 Tax payable= 20% of 20000= Rs. 4000 |
|
Long term capital |
12.5% on gains |
Purchase price=Rs.100000 Sale price=Rs.170000 LTCG= Rs. (170000-10000) = Rs. 70000 Tax payable: Since Rs.70000 is below the exemption |
|
2. Listed
|
Short-term |
Normal Tax rate (as |
Purchase price=Rs.100000 Sale price=Rs.180000 STCG= Rs. (180000-100000) = Rs. 80000 Tax payable: If individual comes under 20% income |
|
Long term capital |
12.5% without |
Purchase price=Rs.100000 Sale price=Rs.250000 LTCG= Rs. (250000-100000) = Rs. 150000 Tax payable: 12.5% of (150000-125000)=Rs.3125 |
|
3. Securities
|
Short-term |
Normal Tax rate |
Purchase price=Rs.120000 Sale price=Rs.270000 STCG= Rs. (270000-120000) = Rs.150000 Tax payable: If individual comes under 30% income |
|
Long term capital |
12.5% without indexation. |
Purchase price=Rs.50000 Sale price=Rs.250000 LTCG= Rs. (250000-50000) = Rs. 200000 Tax payable: 12.5% of 200000=Rs.25000 |
|
4. Units of UTI,
|
Short-term |
Normal Tax rate |
Purchase price=Rs.200000 Sale price=Rs.220000 STCG= Rs. (220000-200000) = Rs. 20000 Tax payable= 20% of 20000= Rs. 4000 |
|
Long term capital |
12.5% without |
Purchase price=Rs.5000000 Sale price=Rs.7500000 LTCG= Rs. (7500000-5000000) = Rs. 2500000 Tax payable: 12.5% of (2500000-125000)=Rs.296875 |
|
5. Units of
|
Short-term |
20% |
Purchase price=Rs.400000 Sale price=Rs.600000 STCG= Rs. 600000-400000) = Rs. 200000 Tax payable= 20% of 200000= Rs. 40000 |
|
Long term capital |
10% on gains |
Purchase price=Rs.50000 Sale price=Rs.250000 LTCG= Rs. (250000-50000) = Rs. 200000 Tax payable: 10% of (200000-125000)=Rs.7500 |
[Capital gains from sale of units of a specified mutual acquired on or
after 1st April 2023 and market-linked debentures will be treated as
STCG, regardless of holding period.]
Exemptions and Deductions an investor can benefit from:
1. LTCG exemption is Rs.1.25lakh, an investor is taxed on the amount
left after deducting the exemption amount from LTCG.
2. Tax Saving strategy:
- Tax
harvesting to minimize tax on LTCG (a strategy to minimize taxable gain by
selling investments at a loss). - Holding stocks for more than 1 year to benefit
from lower tax (LTCG). - Invest in Section 54EC bonds (to reduce real
estate gains).
3. Setting off against capital losses (setting off short-term capital
losses with STCG and LTCG, long-term capital losses with LTCG)
Impact of STCG and LTCG on investment decisions
- Investors must decide on the Holding period of a
stock for which they should hold investments for a longer period to enjoy
reduced Tax liability. - Tax-averse investors may go for long-term
investments. - Investors can select Equity-oriented investments
over debt investments holding period more than equity) to get favorable LTCG
tax treatment.
Conclusion
To make wise financial decisions, investors must have knowledge of how capital
gains are taxed. While long-term capital gains (LTCG) enjoy lower tax rates and
exemptions, which encourage long-term investments, short-term capital gains
(STCG) are subject to higher tax rates.
Investors can reduce their tax
obligations by employing tax-saving techniques such as tax harvesting, putting off
capital losses, and the Securities Transaction Tax (STT).
Investors can
maximize their profits while conforming to tax compliance by carefully
determining their asset allocation and investment horizon.
A well-thought-out
investment plan that takes capital gains taxation into account can greatly
improve financial growth and wealth accumulation.
FAQs
How are non-financial assets taxed for Capital
Gains?
A uniform tax of 12.5% is applicable on LTCG of
all asset classes.
Is an exemption available on STCG?
There is no exemption on STCG. It is calculated using the total amount
of the gain. However, up to ₹1.25 lakh exemption can be obtained on LTCG.
How does Indexation
impact LTCG?
Indexation enables you to adjust the Purchase price of an asset to incorporate inflation, which reduces the taxable capital gain.
However,
for specific assets such as publicly traded equity shares or equity mutual
funds, indexation is not applicable to Long-Term Capital Gains (LTCG).