Trading in shares.. when we hear this, we feel very comfortable . This is because most of us do this very frequently in our daily life. Whatever business you do or whichever profession you practice, today, almost everyone trade in shares.   

Though its being a common practice, we still faces many doubts during trading or we do not know proper tax treatment to save tax on such transactions. Let us try to understand few of them.

Capital Gain

Profits or gains arising from transfer of a capital asset are called “Capital Gains” and are charged to tax under the head “Capital Gains”.

Long/ Short Term Asset

• The period of holding for shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014) shall be more than 12 months to classify as Long Term Capital Asset.

If shares are not listed then period of holding shall be considered as 36 months instead of 12 months.

• If listed shares held for 12 months or less then it shall be considered as Short Term Capital Asset.

If shares are not listed then period of holding shall be considered as 36 months instead of 12 months.

Note: what if when shares purchased were unlisted and subsequently it got listed on stock exchange? In this case how to determine that shares are long term or short term?

In such cases, nature of gain on sale of hare shall be determined by the status of shares on the date of sale of such shares.

Instance: A purchased unlisted shares on 01.02.2014. On 1^st August, 2014 shares got listed on the stock exchange. A sold shares on 01.03.2015.

In this case, shares are listed on the date of sale. Thus, listed shares are held for more than 12 months. Hence, capital gain would be long term capital gain.

Computation of Short Term Capital Gain (STCG)

Particulars
Full value of consideration (i.e., Sales value of the asset)	XXXXX
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, etc.).	(XXXXX)
Net Sale Consideration	XXXXX
Less: Cost of acquisition (i.e., the purchase price of the capital asset)	(XXXXX)
Less: Cost of improvement (i.e., post purchases capital expenses on improvement of capital asset )	(XXXXX)
Short-Term Capital Gains	XXXXX

 

As per Sec. 115A, STCG on shares shall be taxable @15% (plus surcharge and cess as applicable), if following conditions satisfied:

• Shares shall be equity shares or units of equity oriented mutual-funds
• Transfer shall be through recognised stock exchange
• Transaction is liable to securities transaction tax

Note: Sec 115A shall not be applicable on Preference Shares.

If not covered under Sec. 115A then, normal rate of tax shall be charged.

Long Term Capital Gain

Sale consideration

Less: brokerage/commission paid

Less: indexed cost of acquisition of shares (share purchase value)

Note:

• If shares are listed then, Gain may be calculated without indexation. In such cases tax shall be paid @ 10 per cent.
• When shares are purchased in lots and delivery is taken in one lot and subsequently sold in parts, FIFO method will apply to determine period of holding.
• Similarly, FIFO method will apply for dematerialized stock.

Calculation of capital gains tax in various cases:

Type of share	Cost of acquisition	Period of holding
Original shares	Purchase value	From the  date of the broker’s note /date of contract of sale to the date of transfer
Right shares purchased from the company	Amount paid to purchase shares	From the date of allotment of right shares to the date of transfer
Right shares purchased from another person	Amount paid to renounce	From the date of purchase to the date of transfer
Bonus shares	NIL	From the date of allotment of bonus shares to the date of transfer
Debentures which are converted into shares	Purchase value of debentures	From the date of conversion of shares into debentures to the date of transfer

 

Split Shares

Sometimes company splits the face value of shares.

Instance:

A has 1 share of Rs. 100 each purchased at Rs. 200. Company splits the shares in 10 shares of Rs. 10 each. Now, among these, A sold 5 shares of Rs. 10 each at Rs. 500. In this case, capital gain shall be calculated proportionately.

Sale Value of each share: Rs. 100

Purchase Value of each share: Rs. 20 (Rs. 200/10)

Capital Gain on each share: Rs. 80 (100-20)

Total Capital Gain: Rs. 400 (80*5)

Tax rate: As per period of holding of shares

Period of holding of shares: From the purchase date of share (before splitting) to the sale date of shares.

Set-off of Losses

Intra-head set off:

• Long term capital gain on shares can be set off against long term capital loss.
• Short term capital gain on shares can be set off against long term capital loss as well as short term capital loss.
• For setting off capital loss, file income tax return before due date.

Inter head set off:

• Capital loss, whether long term or short term, can be set off only against capital gains income.

Carry forward of Loss

• Past year losses can be set-off against income from that respective head of income (Inter head adjustment is not possible)
• Capital Loss shall be carried forward and set-off for 8 subsequent financial years following the Previous Year in which such loss arose.

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