Capital Gain on Sale of Equity Shares

Capital gains arise when an individual sells an asset at a price higher than its purchase price. In the case of equity shares, capital gains taxation depends on factors like the holding period, the nature of shares (listed or unlisted), and the mode of transaction (recognized stock exchange or off-market).

Types of Capital Gains on Equity Shares

1. Short-Term Capital Gain (STCG)

2. Long-Term Capital Gain (LTCG)

1. Short-Term Capital Gain (STCG)

If listed equity shares are sold within 12 months from the date of purchase, the gain is considered short-term. If unlisted equity shares are sold within 24 months, it is classified as short-term.

Tax Implication on STCG

Listed securities- Short-term capital gains arising from the transfer of Equity Shares, Units of an Equity Oriented Funds or a unit of a business trust which is chargeable to securities transaction tax shall be taxed under section 111A at:

• 15% for any transfer which takes place before 23-07-2024; and

• 20% for any transfer which takes place on or after 23-07-2024.

Now benefit of reduced rate of tax (i.e., 20%/15%) shall be available in respect of income arising from transfer of units of a business trust which were acquired by assessee in lieu of shares of special purpose vehicle as referred to in section 47(xvii).

Unlisted Shares: STCG is taxed as per the individual’s applicable income tax slab.

2. Long Term Capital Gains- If listed equity shares are held for more than 12 months, the gain is classified as long-term. If unlisted equity shares are held for more than 24 months, it is classified as long-term.

Special provision related to cost of acquisition

The cost of acquisitions of a listed equity share acquired by the taxpayer before February 1, 2018, shall be deemed to be the higher of following:

a) The actual cost of acquisition of such asset; or

b) Lower of following:

(i) Fair market value of such shares as on January 31, 2018; or

(ii) Actual sales consideration accruing on its transfer

The Fair market value of listed equity share shall mean its highest price quoted on the stock exchange as on January 31, 2018. However, if there is no trading in such shares on January 31, 2018, the highest price of such share on a date immediately preceding January 31, 2018 on which trading happens in that share shall be deemed as its fair market value.

In case of units which are not listed on recognized stock exchange, the net asset value of such units as on January 31, 2018 shall be deemed to be its FMV.

In a case where the capital asset is an equity share in a company which is not listed on a recognised stock exchange as on 31-1-2018 but listed on the date of transfer, the cost of unlisted shares as increased by cost inflation index for the financial year 2017-18 shall be deemed to be its FMV.

Further, the Finance (No. 2) Act, 2024 has also provided mechanism for computation of fair market value of unlisted shares transferred under an offer for sale to the public included in an initial public offer.

In cases where equity shares were not listed on a recognized stock exchange as of January 31, 2018, or where the shares became the property of the assessee in exchange for unlisted shares as of that date (through transactions not considered as transfers under Section 47), and are subsequently listed on such an exchange after the transfer (pertaining to the sale of unlisted equity shares through an offer for sale to the public as part of an initial public offering); the FMV shall be as follows:

Cost of acquisition x Cost Inflation Index of 2017-18 (i.e., 272)

CII for the year in which shares were first held by the assessee or 2001-02, later

Tax implication on LTCG

a) Long-term capital gains are subject to tax at the rate of:

• 20% for any transfer which takes place before 23-07-2024; and

• 12.5% for any transfer which takes place on or after 23-07-2024.

b) Long-term capital gains arising from transfer of listed securities [other than as referred to in point d) below] or a zero coupon shall be taxable as follows:

If transfer takes place before 23-07-2024, long-term capital gains shall be taxable at the following rate, whichever is beneficial:

• 20% after taking benefit of indexation; or

• 10% without taking benefit of indexation.

If transfer takes place on or after 23-07-2024, long-term capital gains shall be taxable at 12.5% without indexation.

c) Long-term capital gains arising to a non-residents or foreign company from transfer of unlisted securities shall be taxed at the following rates without giving benefit for indexation;

• 10% for any transfer which takes place before 23-07-2024; and

• 12.5% for any transfer which takes place on or after 23-07-2024.

d) Long-term capital gains arising from transfer of listed equity share, or a unit of an equity-oriented fund or a unit of a business trust as referred to in Section 112A shall be chargeable to tax at the rate of:

• 10% in excess of Rs. 1,00,000 for any transfer which takes place before 23-07-2024; and

• 12.5% in excess of Rs. 1,25,000 for any transfer which takes place on or after 23-07-2024.

The aggregate limit of Rs. 1,25,000 shall be considered to compute long-term capital gains from transfer made during 01-04-2024 to 31-03-2025.

The Finance (No. 2) Act, 2024, has provided a uniform tax rate of 12.5% for long-term capital gains on all capital assets and has removed the indexation benefit.