Income earned from the sale or purchase of shares, particularly equity shares, is treated distinctly under the Income Tax Act. Unlike other types of income such as salary, rental income, or business profits, the income or loss from shares is classified under the head ‘Capital Gains’ and is taxed at special rates, rather than the regular income tax slabs. This is especially important for homemakers, retirees, and active stock market investors. Understanding the rules governing capital gains, including how to set off losses and carry them forward for up to 8 years, is crucial for accurate tax filing and effective financial planning. In this article, we will delve into how income tax on shares is applied and what you need to know to manage your tax obligations.
Income Tax on Shares: Taxation of Income from the Sale of Shares
What is Capital Gains and its Types?
A capital gain refers to the profit earned when a capital asset, such as shares, bonds, real estate, or other investments, is sold for a price higher than its original purchase cost. This gain is a significant component of investment income and is only realised when the asset is actually sold. Capital gains are classified into two categories based on the holding period of the asset: Short-term capital gains (STCG) and Long-term capital gains (LTCG).
Here’s a table outlining the classification of short-term and long-term capital gains based on the holding period for various assets:
| Asset Type | Short-Term Capital Gain (STCG) Holding Period | Long-Term Capital Gain (LTCG) Holding Period |
|---|---|---|
| Listed Equity Shares | 12 months or less | More than 12 months |
| Unlisted Shares/Real Estate | 24 months or less | More than 24 months |
| Debt Mutual Funds | 36 months or less | More than 36 months |
| Gold, Bonds, Other Assets | 36 months or less | More than 36 months |
Short-term Capital Gains (STCG)
Short-term capital gains (STCG) are profits generated from the sale of capital assets that have been held for a relatively short period—typically one year or less for financial assets like stocks and bonds. In India, if listed equity shares are sold within 12 months of purchase, the profit is considered a short-term capital gain. These gains are typically taxed at a higher rate compared to long-term capital gains and must be reported in the annual income tax return.
STCG is especially relevant for active traders and investors who frequently engage in buying and selling assets in the short term. The tax treatment of STCG may vary based on the asset type and jurisdiction, but the main characteristic of STCG is the shorter holding period before the asset is sold.
Long-term Capital Gains (LTCG)
Long-term capital gains (LTCG) arise when a capital asset is sold after being held for a longer duration—more than one year for listed equity shares and more than two or three years for other asset classes, depending on the type of asset. LTCG generally benefits from lower tax rates or special tax exemptions in many tax systems.
For example, in India, gains from listed equity shares held for more than 12 months are treated as long-term and are taxed at a concessional rate, often with specific exemptions or thresholds. The reason for this favorable treatment is to encourage long-term investment, promote financial market stability, and discourage speculative trading
Taxation on Gain from Equity Shares
Capital gains from equity shares are classified into Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) based on the holding period of the investment. The tax treatment varies for each type of gain.
Short-Term Capital Gains (STCG)
If listed equity shares are sold within 12 months of purchase, the profit earned is considered a short-term capital gain and is taxable.
Applicable Tax Rate:
15% until July 22, 2024
20% effective from July 23, 2024 (as per the latest amendment)
STCG Calculation Formula:
STCG = (Sale Price – Expenses on Transfer) – (Cost of Acquisition + Cost of Improvement)
Example:
Ravi bought 300 shares of a listed company at ₹180 each in November 2024, totaling ₹54,000. He sold them after 4 months at ₹215 each, receiving ₹64,500. The brokerage charges amounted to ₹300.
STCG Calculation:
| Particulars | Amount (₹) |
|---|---|
| Sale Consideration | 64,500 |
| Less: Expenses on Transfer | (300) |
| Net Sale Consideration | 64,200 |
| Less: Cost of Acquisition | (54,000) |
| Short-Term Capital Gain | 10,200 |
Ravi will pay 20% tax on ₹10,200, as the sale occurred after July 23, 2024.
Long-Term Capital Gains (LTCG)
If listed equity shares are sold after 12 months, the profit is considered a long-term capital gain. Prior to FY 2018-19, such gains were tax-free. However, as per the Budget 2018, LTCG exceeding ₹1 lakh is taxable at 10% (plus surcharge and cess), without the benefit of indexation.
Taxable LTCG Formula:
Taxable LTCG = LTCG – ₹1,00,000
Tax Rate:
10% on the amount exceeding ₹1,00,000
This tax applies to gains arising from February 1, 2018, onward, with relief for earlier gains through the grandfathering clause.
Example:
Anita bought 400 shares of a listed company at ₹250 per share (total ₹1,00,000) in December 2019. She sold them in March 2025 at ₹500 per share, receiving ₹2,00,000. The LTCG is ₹1,00,000.
Since the total gain is ₹1,00,000, which is within the exemption limit, no LTCG tax is payable.
However, if the gain had been ₹1,50,000, the taxable portion would be ₹50,000, and the tax liability would be ₹5,000.
Important Notes:
When calculating capital gains from the sale of shares, expenses incurred during the transaction, such as brokerage fees, registration charges, and other related charges, are deducted from the sale proceeds to determine the gain
Grandfathering Clause for Long-Term Capital Gains
The Grandfathering Clause is a provision introduced to protect investments made before a specific cut-off date from new tax rules. In the case of Long-Term Capital Gains (LTCG), this clause was introduced when the Finance Act, 2018 reintroduced the LTCG tax on listed equity shares and equity-oriented mutual funds, effective from April 1, 2018.
Before this, gains from such investments were exempt from tax. To prevent the taxation of gains accrued before this date, the government applied the Grandfathering Clause. Under this clause, any capital gains earned up to January 31, 2018, remain tax-free. Only gains made after this date are subject to tax.
Grandfathering Clause Formula: How is the Acquisition Cost Calculated?
The acquisition cost under the grandfathering clause is determined using the following formula:
Step 1 (Value I): Choose the lower of:
Fair Market Value (FMV) as of January 31, 2018
Actual sale price
Step 2 (Value II): Choose the higher of:
Value I (from Step 1)
Actual purchase price
The Long-Term Capital Gain (LTCG) is then calculated as:
LTCG = Sale Price – Acquisition Cost (Value II)
Tax Implications:
LTCG exceeding ₹1 lakh in a financial year is taxed at 10%, plus surcharge and cess.
Gains up to ₹1 lakh remain exempt from tax.
Example:
Let’s assume:
Purchase Price: ₹150 (on July 1, 2017)
FMV on January 31, 2018: ₹220
Sale Price: ₹280 (sold on March 15, 2024)
Step 1:
Value I = Lower of ₹220 (FMV) and ₹280 (sale price) = ₹220
Step 2:
Value II = Higher of ₹220 (Value I) and ₹150 (purchase price) = ₹220
LTCG Calculation:
LTCG = ₹280 – ₹220 = ₹60
Since the gain of ₹60 is within the ₹1 lakh exemption limit, no tax is payable.
What about Losses in Equity Shares?
The Income Tax Act provides provisions for offsetting and carrying forward losses arising from the sale of equity shares, depending on whether they are short-term or long-term losses.
Short-Term Capital Loss
A short-term capital loss occurs when listed equity shares are sold within 12 months at a price lower than the purchase cost. This loss can be set off against:
Short-term capital gains (STCG)
Long-term capital gains (LTCG)
If the loss cannot be fully set off in the same year, the remaining loss can be carried forward for up to eight assessment years. During this period, it can be adjusted against future STCG or LTCG.
Important: To carry forward the loss, the Income Tax Return (ITR) must be filed within the due date, even if your total income is below the taxable limit.
Long-Term Capital Loss
Before FY 2018–19, long-term capital gains (LTCG) on equity shares were tax-exempt, and thus long-term capital losses were not recognized under tax laws. However, from April 1, 2018, when LTCG above ₹1 lakh became taxable at 10%, long-term capital losses on listed equity shares are now recognized for tax treatment.
A long-term capital loss can only be set off against LTCG; it cannot be adjusted against STCG.
Like short-term capital gains loss, long-term capital gains loss can also be carried forward for up to eight years to be set off against future LTCG.
Important: Filing the ITR on time is mandatory to avail of this benefit
Securities Transaction Tax (STT)
Securities Transaction Tax (STT) is a tax levied on the purchase or sale of equity shares listed on a recognized stock exchange in India. STT is applicable only to transactions carried out on the stock exchange and does not apply to off-market trades. STT is charged at the time of executing the transaction—either when buying or selling the listed securities.
It is crucial to note that the tax implications discussed under capital gains taxation are applicable only to shares on which STT has been paid. Therefore, gains from the transfer of listed shares, where STT applies, qualify for the prescribed tax treatment under the Income Tax Act.
Filing Income Tax Returns on Shares
Income earned from selling shares is taxable under the Capital Gains head and must be reported while filing your Income Tax Return (ITR). Whether you incur a gain or a loss, proper disclosure is essential for compliance and to claim benefits like set-off or carry forward of losses.
Which ITR Form to Use?
ITR-2: Most individual investors and Hindu Undivided Families (HUFs) who have income from capital gains but no business income should file ITR-2. This form accommodates reporting of capital gains from shares, mutual funds, and foreign assets.
ITR-3: If you treat your income from share trading as business income (e.g., frequent trading or derivatives trading), you must file ITR-3, meant for income from business or profession.
Reporting Capital Gains
For shares purchased before January 31, 2018, details must be provided in Schedule 112A due to the Grandfathering Clause.
Gains from unlisted shares and foreign shares must also be reported, with foreign shares disclosed under Schedule FSI (Foreign Source Income).
Dividends received from shares, including foreign dividends, should be reported under Income from Other Sources (Schedule OS).
Reporting Foreign Assets and Income
If you hold foreign shares (e.g., US stocks), you must disclose these under Schedule FA (Foreign Assets), providing details such as the number of shares and their value in INR.
Foreign capital gains and dividends are taxable in India, and you must report them accurately after converting values to INR using the prescribed exchange rates.
To avoid double taxation on foreign dividends, you can claim credit under the Double Taxation Avoidance Agreement (DTAA) by filing Form 67 and reporting in Schedule TR (Tax Relief).
Taxation on Unlisted and Foreign Shares
Unlisted shares refer to equity shares of companies that are not traded on recognized Indian stock exchanges such as the NSE or BSE. These shares are typically bought and sold through private placements or over-the-counter transactions. Since Securities Transaction Tax (STT) is not applicable to unlisted shares, they do not enjoy the concessional tax rates granted to listed shares.
Short-Term Capital Gains (STCG) from unlisted shares—when held for 24 months or less—are taxed at the investor’s individual income tax slab rates.
Long-Term Capital Gains (LTCG)—for shares held more than 24 months—are taxed at a flat rate of 20%, with the benefit of indexation to adjust for inflation.
Foreign shares are equity shares of companies listed outside India (e.g., U.S. or European companies). Like unlisted shares, foreign shares are not subject to STT, and hence are taxed similarly:
Short-term gains (holding period 24 months or less) are taxed at slab rates.
Long-term gains (held for more than 24 months) are taxed at 20% with indexation.
In addition to Indian taxes, income from foreign shares (capital gains and dividends) may also be taxed in the foreign country. However, India has signed Double Taxation Avoidance Agreements (DTAAs) with many countries, allowing taxpayers to claim credit for taxes paid abroad, helping avoid double taxation.
Summary
| Asset Type | Holding Period for LTCG | STCG Tax Rate | LTCG Tax Rate |
|---|---|---|---|
| Unlisted Shares | More than 24 months | Slab Rate | 20% with indexation |
| Foreign Shares | More than 24 months | Slab Rate | 20% with indexation |
Note: STT applies only to listed shares traded on recognized Indian stock exchanges. Unlisted and foreign shares are taxed under regular income tax provisions
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About the Author
Muskan
Muskan is a seasoned content writer with expertise in business registration, tax laws, trademark regulations, and corporate compliance. His articles are known for their clarity and practical insights, making it easier for entrepreneurs and businesses to understand and manage complex legal and regulatory requirements
