Tax on sale of shares: Short Term Capital Gains, Long Term Capital Gains, how to minimise tax liability

When investing in stocks, the right tax strategy can make a huge difference to your overall gains.

A large number of Indians – from students to homemakers to working professionals and retired people – actively trade in stocks today with the objective of creating wealth. While it is important to have a risk-appropriate investment strategy, it is equally important to understand the tax implications of the income generated from the investment process.

To do so, the first step is to identify the type of capital gains generated. Proceeds from sale of listed equity shares are broadly classified into two:

• Short Term Capital Gains (STCG) if a listed stock is sold within 12 months of the purchase date.
• Long Term Capital Gains (LTCG) if a listed stock is sold after 12 months from the purchase date.

What is the applicable tax rate on sale of shares?

a) Short Term Capital Gains (STCG)

In case the gains are classified as STCG, the profits are taxed at 15% + surcharge and cess, irrespective of the individual’s tax slab. The effective tax rate comes to 17.16% for resident individuals and HUFs with income up to Rs 1 crore, and 17.94% where the income exceeds Rs 1 crore.

Let’s assume an investor purchased 100 shares of Company X at Rs 655 per share on 10 April 2021 and sold them on 23 August 2021 at Rs 697 each.

Then, the total gain = Rs 4200

Applicable STCG tax will be 4200 x 17.16% = Rs 720.27

b) Long Term Capital Gains (LTCG)

If the total LTCG through sale of stocks or equity mutual funds in a financial year exceeds Rs 1 lakh, the gains above the exempted threshold will be taxed at 10% + surcharge and cess. The effective tax rate comes to 11.44% for resident individuals and HUFs with income up to Rs 1 crore, and 11.96% where the income exceeds Rs 1 crore. How much do you know about LTCG? Find out with this quiz.

Let’s assume an investor purchased 1000 shares of Company X at Rs 240 per share on 10 April 2015 and sold them on 23 August 2021 at Rs 697 each.

Then, the total gain = Rs 4,57,000

Exemption limit = Rs 1,00,000

Applicable LTCG tax will be 3,57,000 x 11.44% = Rs 40,840

How to minimise tax liability on income earned from selling of shares

You may not be able to completely avoid the tax liability, but there are ways to minimise it. Here’s how:

• Income tax threshold: If your total income from all sources during a financial year is below the exemption threshold of Rs 2.5 lakh, STCG till the said limit can be adjusted. If the gains exceed the threshold, the balance will be taxed. If your total income during a financial year exceeds the basic exemption limit, you will have to pay tax on all the short-term gains made during the financial year.

• Exemption limit: With respect to LTCG, gains up to Rs 1 lakh are exempt from any tax. Unless absolutely necessary (say, on account of an emergency or changing market conditions), try to keep your profit redemption under the said limit. If you need funds for a long-term goal, liquidate the holdings gradually in part, starting a couple of years before they are needed. Do bear in mind that the sale of equity-based mutual funds are also factored as a part of the Rs 1 lakh exemption limit in addition to sale of direct equity.

• Gain harvesting: Another strategy to minimise tax under LTCG is to book profits up to Rs 1 lakh in a financial year and reinvest it again. This strategy can be repeated every year as an exercise to keep asset allocation in check and to enable portfolio diversification without any tax implications.

• Tax-loss harvesting: Any losses made through sale of stocks can be offset against other capital gains. Short-term capital loss can be adjusted in lieu of any other short-term or long-term capital gains, but long-term capital loss can only be adjusted against a long-term capital gain. If the loss is not completely absorbed, a taxpayer can carry it forward for subsequent eight years as long as they file their IT returns within the due date. The are required to do so for the benefit even if their total taxable income during the financial year is within the IT exemption limit.

A large number of Indians – from students to homemakers to working professionals and retired people – actively trade in stocks today with the objective of creating wealth. While it is important to have a risk-appropriate investment strategy, it is equally important to understand the tax implications of the income generated from the investment process.

To do so, the first step is to identify the type of capital gains generated. Proceeds from sale of listed equity shares are broadly classified into two:

• Short Term Capital Gains (STCG) if a listed stock is sold within 12 months of the purchase date.
• Long Term Capital Gains (LTCG) if a listed stock is sold after 12 months from the purchase date.

What is the applicable tax rate on sale of shares?

a) Short Term Capital Gains (STCG)

In case the gains are classified as STCG, the profits are taxed at 15% + surcharge and cess, irrespective of the individual’s tax slab. The effective tax rate comes to 17.16% for resident individuals and HUFs with income up to Rs 1 crore, and 17.94% where the income exceeds Rs 1 crore.

Let’s assume an investor purchased 100 shares of Company X at Rs 655 per share on 10 April 2021 and sold them on 23 August 2021 at Rs 697 each.

Then, the total gain = Rs 4200

Applicable STCG tax will be 4200 x 17.16% = Rs 720.27

b) Long Term Capital Gains (LTCG)

If the total LTCG through sale of stocks or equity mutual funds in a financial year exceeds Rs 1 lakh, the gains above the exempted threshold will be taxed at 10% + surcharge and cess. The effective tax rate comes to 11.44% for resident individuals and HUFs with income up to Rs 1 crore, and 11.96% where the income exceeds Rs 1 crore. How much do you know about LTCG? Find out with this quiz.

Let’s assume an investor purchased 1000 shares of Company X at Rs 240 per share on 10 April 2015 and sold them on 23 August 2021 at Rs 697 each.

Then, the total gain = Rs 4,57,000

Exemption limit = Rs 1,00,000

Applicable LTCG tax will be 3,57,000 x 11.44% = Rs 40,840

How to minimise tax liability on income earned from selling of shares

You may not be able to completely avoid the tax liability, but there are ways to minimise it. Here’s how:

• Income tax threshold: If your total income from all sources during a financial year is below the exemption threshold of Rs 2.5 lakh, STCG till the said limit can be adjusted. If the gains exceed the threshold, the balance will be taxed. If your total income during a financial year exceeds the basic exemption limit, you will have to pay tax on all the short-term gains made during the financial year.

• Exemption limit: With respect to LTCG, gains up to Rs 1 lakh are exempt from any tax. Unless absolutely necessary (say, on account of an emergency or changing market conditions), try to keep your profit redemption under the said limit. If you need funds for a long-term goal, liquidate the holdings gradually in part, starting a couple of years before they are needed. Do bear in mind that the sale of equity-based mutual funds are also factored as a part of the Rs 1 lakh exemption limit in addition to sale of direct equity.

• Gain harvesting: Another strategy to minimise tax under LTCG is to book profits up to Rs 1 lakh in a financial year and reinvest it again. This strategy can be repeated every year as an exercise to keep asset allocation in check and to enable portfolio diversification without any tax implications.

• Tax-loss harvesting: Any losses made through sale of stocks can be offset against other capital gains. Short-term capital loss can be adjusted in lieu of any other short-term or long-term capital gains, but long-term capital loss can only be adjusted against a long-term capital gain. If the loss is not completely absorbed, a taxpayer can carry it forward for subsequent eight years as long as they file their IT returns within the due date. The are required to do so for the benefit even if their total taxable income during the financial year is within the IT exemption limit.