Stock markets are up 50% from the March 2020 lows. For the past two weeks, the BSE Sensex has been hovering around the 38,000-39,000 band and some experts suggest taking money off the table.
We are not suggesting in any way whether you should stay invested or sell, but if you decide to sell some stocks in your portfolio, we will help you understand the capital gains tax impact of such a stock.
Capital gains are the amount of money earned above acquisition cost. In short, it is the difference between the acquisition cost and the product of the sale of the asset, in this case listed shares, carried out through stock exchanges.
From an income tax perspective, it is important to determine whether the gain / loss is short-term or long-term, since the rates and the treatment of the same are different.
Depending on the number of calendar months (and not the financial year) between the buy and sell transactions, the capital gain / loss is classified into Short Term Capital Gain / Loss (STCG / L) or Capital Gain / Loss at long term (LTCG / L).
Short-term capital gain / loss is applicable to those transactions that have been executed within 12 calendar months (1 year) of the purchase and if the asset is sold after 12 months of holding, then it translates into a gain / long-term capital loss.
Short-term capital gain is taxed at 15%, while long-term capital gain is taxed at 10%. The LTCG was introduced as of April 1, 2018. Prior to that, all long-term capital gains were tax-exempt.
For example, let’s say I bought 10 shares of company XYZ for Rs 10,000 on April 1, 2020 and sold them all on September 14, 2020 for Rs 12,500. As I sell within 12 months, this is classified as STCG. My capital gains tax in this case is Rs 375 (Rs 2,500 x 15%).
In the example above, suppose I bought these shares on April 1, 2019. Since I sell after a 12-month holding period, this is classified as LTCG. My capital gains tax in this case is Rs 250 (Rs 2,500 x 10%).
In the example above, suppose I bought these shares on April 1, 2017. Since I bought these shares before the LTCG started (that is, on April 1, 2018), am I tax exempt? The answer is no.
In such cases, the acquisition cost of the shares is higher than the price at which the shares were purchased or the market price as of January 31, 2018. Why January 31, 2018? The Union Budget was announced on February 1, 2018 and the LTCG tax was introduced on that day.
Now suppose that the market value of the shares that I bought on April 1, 2017 for Rs 10,000 was 11,000 Rs on January 31, 2018. In this case, the acquisition cost will be considered as Rs 11,000. My long-term capital gains are Rs 1,500 and the tax in this case is Rs 150 (Rs 1,500 x 10%).
In the example above, if the market price on Jan 31, 2018 is Rs 9,000, then Rs 10,000 will be considered the acquisition cost, the long-term capital gains will be Rs 2,500, and the tax will be Rs 250 (Rs 2,500 x 10%).
The following table summarizes the scope and type of capital gains in different scenarios:
What if I incur a loss by selling the shares? All losses incurred, whether short or long term, can be offset against gains made during the year. Suppose in all the above examples, I sell the shares for Rs 9,000, then my losses in different scenarios would be as follows:
Investors can offset and adjust their capital losses with gains. STCL can be offset by both STCG and LTCG, while LTCL can only be offset by LTCG.
If one does not have enough LTCG or STCG to make up for losses in the current year, both LTCL and STCL can be carried over for the next 8 financial years. The carry-over option means that losses can be offset with LTCG / STCG, as the case may be, over the next 8 financial years.
Now let’s understand the compensation clause through some examples. Suppose I have 4 shares and this is the gain / loss obtained during the year, my tax liability and losses carried forward under different scenarios are presented below:
Long-term capital gain of up to Rs 1 lakh in a financial year is tax exempt.
The termination and surcharge are paid in excess of the tax rates. These rates are applicable for the current financial year (2020-21) and may change based on announcements in upcoming budgets.
STCG / LTCG taxes are self-assessed in nature and must be paid while filing returns, subject to advance tax rules.
The tax calculation for other asset / transaction classes such as real estate, bonds, MF, unlisted securities, off-market transactions is different.
