The nature of capital gains taxation in India
According to Benjamin Franklin, “nothing can be said to be certain, except death and taxes”. Though Ben Franklin penned those words in a letter in 1789, the import behind the maxim is very much relevant in the 21st cent. As far as death is concerned, you’ll meet it sooner or later but you’ve to keep paying taxes as long as you’re alive. You’re taxed for your earnings, for buying goods and services, for booking a flight or hotel room, and so on.
In fact, you’ve pay taxes for almost anything that involves a monetary gain or transaction. Many traders and investors comprising retired individuals, housewives, and students who deal in stocks for additional income have the impression that earnings from shares enjoy tax exemption. Of course, this is not true. ‘Capital Gains’-the omnibus term used to denote proceeds/losses from trading in equity shares-is very much subject to taxation.
In this article, we shed light on capital gains and how the same is taxed in India.
Long-term and short-term gains or losses
If you sell stock exchange-listed equity shares within a year of having bought them, and earn a profit, you make a capital gain in the short run. Alternatively, you’ve a short-term capital loss if you lose money from selling those equity shares. The formula or equation for calculating capital gains in the short run is-Capital gain (short-term) = selling price (minus) sales expenses (minus) cost price
However, if you’ve sold the equity shares after holding them for at least 3 years (36 months) and made a profit, your gains are termed as long-term. And by the same token, if you’ve incurred a loss, the same will be treated as long-term loss. The duration of 3 years is calculated from the day you purchased the shares.
How gains or earnings from shares are taxed?
All capital gains you make from sale of shares in the first twelve months of purchase will be taxed at the rate of 15%. The same 15% tax rate applies regardless of the tax bundle rate (10%, 20%, 30%, and so on) your short run capital gain falls under. Additionally, if your yearly earnings (not including the short term capital gains) is much less than the minimum taxable income (Rs. 2, 50, 000 for FY 2016-17), the capital gains can be factored in for compensating the deficit.
Once the shortfall is replenished, if any amount (of capital gains) remains is liable to be taxed at the rate of 15% + 3% as cess. You’d be delighted to learn (in case you don’t know) that capital gains made over the course of 3 years and above do not attract tax. The finance budget (2017-18) presented by the finance minister in the Parliament on 1st February 2018 had a new clause on long-term capital gain.
According to the clause, an investor whose capital gains exceeded 1, 00,000 would have to pay a 10% tax on the earnings. The stipulation was applicable to all or any transfer made on 1st April, 2018 and thereafter. Hitherto, capital gains in the long run were not liable to taxation u/s 10 (38).
Will you have to pay taxes even if you’ve lost money by dealing in stocks?
You can adjust your short term or long term capital losses with your corresponding capital gains. Resorting to this strategy helps you to save money that would’ve been used up to pay taxes had you not made the adjustment. You can carry forward the losses for a maximum period of 8 years, in case you fail to adjust the same from one year to the other. However, bear in mind that you’ll have to file an income tax return in order to validate the capital losses you’ve carried forward.
Are dividends earned from shares subject to taxation?
You do not need to pay any taxes on dividend income which you’ve earned from stocks or shares of any Indian firm or company. On the other hand, the company or companies that have paid dividends on their shares need to pay ‘Dividend Distribution Tax’. The minimum dividend distribution tax that a company has to pay is 15%.
Logically speaking, the dividend tax which should have been incumbent on you is borne by the company awarding the dividend.
However, be in the know that you’ve pay a STT (securities transaction tax) when or whenever you sell or buy stock exchange listed shares. The tax provisions discussed above apply to only those equity shares for which you’ve paid STT.
Rounding up, it can be inferred that the nature of taxation pertaining to capital gains in India is remarkably simple.