Chapter 9: Taxation on Equity Investments

Whenever you are investing or trading in the stock market, you need to pay taxes on your gain.

We can classify the gain from equity markets in the following categories:

1. Long-Term Capital Gain ( LTCG)
2. Short-Term Capital Gain (STCG)
4. Dividend Income

Let us understand these terms in detail:

9.1 Long-Term Capital Gain (LTCG)

Any profit or gain from equity investments is considered as long-term capital gain, if your holding period is more than a year. LTCG up to Rs. 1 lakh from equity investments in a financial year is exempted from tax. Any gain above Rs. 1 lakh is taxed at 10%. Let us understand this with an example:

Suppose, you invested Rs. 5 lakh in a stock of ABC Ltd. and sold it after 1 year at Rs. 6.5 lakh. The gain of Rs. 1.5 lakh considered as LTCG and will be taxed accordingly. It is important that these transactions should be carried out on recognized stock exchanges.

Until FY 17-18, LTCG tax on equity was zero. In the Union Budget of FY 18-19, a grandfather clause was introduced. As per this clause, for all stocks sold after February 1, 2018, the acquisition cost for computing capital gains would be considered as higher than the actual purchase price or the highest price quoted on the recognized stock exchange as on January 31, 2018.

In case of unlisted stocks, LTCG tax rate is 20% with indexation and the holding period needs to be more than two years to qualify for LTCG.

9.2 Short-Term Capital Gain (STCG)

Any profit or gain from equity investments is considered as short-term capital gain, if your holding period is equal to or less than a year. STCG is taxed at flat rate of 15%. Let us understand this with an example:

Suppose, you bought 100 shares of ABC Ltd. @ Rs. 1000 per share and sold all the shares @Rs. 1050 after 6 months. The gain of Rs. 50*100 = Rs. 5000 is classified as STCG and taxed at a flat rate of 15%.

As per Income tax section 43(5), profits earned by trading equity or stocks for intra-day or non-delivery are categorized under speculative business income. The gain on this type of income is added to your income and taxed as per your tax slab. So, if a person earn Rs. 8 lakh p.a. and earns Rs. 50,000 in intra-day trading, the total taxable income of the person will be Rs. 8.5 lakh and taxed as per the slab rate.

9.4 Dividend taxation

Until FY 19-20, dividend is tax free in the hands of investors, if the total dividend income in the year is less than Rs. 10 lakh. If income is more than Rs. 10 lakh, it is taxable @ 10%. From FY 20-21, all dividends in the hands of investors are taxable as per slab rates. In other words, dividend income will be added to your income and taxed as per your income tax slab.

9.5 Carry forward and set off of capital loss

In an equity investment, capital gains are taxed as mentioned above but losses can also be adjusted. Let us understand about adjustment of capital losses arising due to equity investment.

As per income tax rules, any loss under the head capital gains can be set off with income against that head only. It cannot be set off against any other income head like salary, business income, etc.

Long-term capital losses can be set off only against LTCG and short-term capital losses are allowed to be set off against both LTCG and STCG. There is also a provision to carry forward losses if you are unable to set off your entire loss in the same financial year. Both short-term and long-term capital losses can be carried forward for eight assessment years immediately following the assessment year in which the loss was first computed.

Till March 31, 2018, there was no tax on long-term gains from equity investments, so there was no point in setting off long-term loss with long-term gains. But FY 18-19 onward, LTCG over Rs. 1 lakh in a year on equity investments is taxable, and so it makes sense to adjust long-term capital loss with long-term capital gains.

It is mandatory to file income tax returns of that year before the due date to carry forward losses to the subsequent year.