Understanding Tax Implications on Capital Gains from Shares and Mutual Funds

Income generated through the sale of shares and mutual funds falls under the category of ‘Income from Capital Gain.’ This can be classified into two main types:

i. Long Term Capital Gain (LTCG):

• Occurs when equity shares listed on a stock exchange are held and sold after 12 months of purchase.
• Taxed at 10% if the gain exceeds Rs 1 Lakh during the financial year.
• Applicable to equity shares on recognized stock exchanges and equity-oriented Mutual Funds where Security Transaction Tax (STT) is paid.

ii. Short Term Capital Gain (STCG):

• Arises when equity shares listed on a stock exchange are held and sold within 12 months of purchase.
• Taxed at 15.6% for equity shares and equity-oriented Mutual Funds.
• For shares other than equity shares and Mutual Funds other than equity-oriented ones, normal slab rates apply.

Taxation on Long Term Capital Gain (LTCG):

• Taxed at 10% on gains exceeding Rs 1 Lakh during the financial year.
• Applicable to equity shares on recognized stock exchanges and equity-oriented Mutual Funds where STT is paid.
• No benefit of indexation available.

Taxation on Short Term Capital Gain (STCG):

• Taxed at a flat rate of 15.6% for equity shares and equity-oriented Mutual Funds.
• For other shares and Mutual Funds, taxed as per normal slab rates.

Tax Rates and Calculation:

• Long-term Capital Gain: Added to the taxable income and taxed as per the applicable income tax slabs.
• Short-term Capital Gain: Taxed at a flat rate of 15.6% irrespective of the individual’s income or tax slab.

Calculation of Tax:

• Long-term Capital Gain: Added to the total taxable income, and tax is computed based on the applicable income tax slabs.
• Short-term Capital Gain: Calculated as Sale Price minus Expenses on Sale minus Purchase Price.

Understanding the tax implications on capital gains is essential for investors to effectively plan their financial activities and comply with the tax regulations. Whether it’s the holding period determining long-term or short-term status or the different tax rates applied, investors should be aware of these aspects to make informed decisions and ensure tax efficiency.