How to calculate tax on capital gains from stocks ?
We all engage in social discussions where we end up giving
or receinving "free advices for life, investment and professional life".
Even ''though'' these conversations can be a kicker for the adrenaline, some topics should
be left to careful observation and well placed opinions.
Especially, when it is about tax planning and investment
decisions, relying on a friend’s casual advice may not be the best way to go.
Why?
Well this might explain…
Can you spot what is wrong with this picture?
What your dear friend doesn’t know is how long you have held
those shares and if the profit you just made is listed as long term or short
term, the point of capital gains tax or indexation or reinvestment of these
profits, might have never come up during the short discussion at the party.
If you are lucky, this friend might be more than a stock
market enthusiast but if that was not the case, you just ensured paying as much
as 15% in taxes.
So now, the real question is, are you willing to take that risk?
Remember, not every time a leap of faith is the right way to
go, Stock Market might be an adventure but taxation is not, Better Safe than Sorry.
Another aspect to this story is, why take this risk when you
can easily avoid it? The power of internet can rescue you from such a debacle,
if you let it.
In order to compress the vast and quite tedious provisions,
let us skip the technical jargon and rush to simplification of the process.
Questions you should ask?
1.Is my
Dividend exempt from income tax?
In the
hands of the receipt, dividend is exempt from any income tax because the
company is already paying Dividend Distribution Tax (DDT) of 17.647% (Basic Rate) &
20.358 (Effective Rate). However, if the aggregate amount of dividend
received by an individual exceeds 10 lakhs, the same will be taxable.
2.Duration of
holding of the share?
Capital
assets are categorized as short term and long term based on their holding period and Gain arising
on transfer of capital asset is charged to tax under the head “Capital Gains”.
Income from capital gains are classified as “Short Term Capital Gains” and
“Long Term Capital Gains”.
Criteria For Classification of Gain/ Loss with
respect to listed equity shares is :
Short Term Capital Gain/ Loss = Holding period
Less Than 12 Months
Long Term Capital Gain/ Loss = Holding period More Than 12 Months
PERIOD OF HOLDING
Long Term > 12 months > Short Term
For example
if you sell the shares within 12 months of buying, it will be called short term capital gain/ loss but
if you retain it for more than 12 months, then it is eligible to become long term capital
asset.
Let us understand this categorization with an example;
Mr. Roy
bought 100 shares of XYZ Ltd on 1st August 2015 and sells them on 25th
July 2016.
Period of Holding = 11 months and 25 days
Since, the period of holding is less than 12 months,
this transaction will be short term,
What if Mr. Roy had sold the shares on 2nd
August 2016?
The same
would be long term since the period of holding would clearly exceed 12 months.
Do I pay tax on shares?
How great would it be if everything could be
determined by following simple steps, we cannot comment about everything but
the answer to this
question can be found at the end of the following steps:
- Step 1
Determine
if the asset was long term or short term.
- Step 2
Determine the amount of profit/loss on such sale
as shown below:
|
|
Full value of consideration /
sale value
|
xxx
|
|
(Less)
|
Expenditure incurred wholly and
exclusively in connection with such transfer / sale
|
(xxx)
|
|
(Less)
|
Cost of acquisition / purchase
value
|
(xxx)
|
|
(Less)
|
Cost of Improvement
|
(xxx)
|
|
|
Capital Gains / Loss
|
xxx
|
- Step 3
Check if the transaction was
chargeable to STT(Security
Transaction Tax) i.e. Transaction executed on Recognized Stock Exchange.
Most transactions in the stock market are chargeable to STT but the same should
be checked for a conservative approach.
- Step 4
If you gained from the transaction
What is Short Term and Long Term Capital Gain Tax on shares?
|
Short term Capital Gain (STCG)
|
|
STT Paid
|
a
|
r
|
|
Income Tax
|
Flat Rate of 15%
|
Include the same in gross income & calculate
at Slab Rate
|
|
Long Term Capital Gain (LTCL)
|
|
STT paid
|
a
|
r
|
|
Income Tax
|
Exempt from Income tax but disclosure is required
|
Flat rate of 20% but indexation is allowed to ease
the burden
|
If there was loss from the transaction
- Short Term Capital Loss (STCL) can be set off with the
profit in the same head that is STCL can be set off against STCG/LTCG.
- Long Term
Capital Loss (LTCL) , is not allowed to be set off against any head (as LTCG is
exempt from tax).
- Capital Loss can however, be carried forward for next
8 years and be set off against income of that financial year, given the above
rules are followed.
4. Is there
any other taxes or charges applicable that I should know of?
Glad you asked, yes there are other taxes and duties,
let us list it out for you;
- Service Tax
One of the columns that show up on
your statement of stock holding is service tax which is charged on stock
broker’s services at a rate 15.00% (14.00% service tax, 0.50% swachh Bharat
cess, 0.50% krishi kalyan cess) .
- Securities Trsnsaction Tax (STT)
[changed effective from 01.06.2016]
This tax is charged on the value of
taxable securities transaction based on the volume weighted average price but
the rate is as low as 0.1%. The significance of STT, however comes in picture while determining capital
gain tax rate as per table given in Step 4 of question no. 3.
- Stamp Duty
It is levied on value of shares
transferred by the state governments and thus differ from state to state but
varies from 0.002% to 0.01% for non- delivery and delivery trade.
- SEBI Turnover Fees
This is usually overlooked due to
the insignificance rate- 0.000005% for debt securities and 0.0002% for
securities other than debt.
Even
though, this might not make taxation easy, knowing what you are getting
yourself in is always a good idea.