Alrighty, now you have a rough idea about what investment options you have and the pitfalls you should look out for. In addition to that, there’s another important factor to consider while investing. And that of course is taxation. You must understand the tax implications on your investments. In essence, you must know how much tax you will pay to the Government. Now, let’s discuss briefly about the taxation on shares.
Taxation of Dividends
Dividends are the share of profits given by the company earned during the year. Usually, companies give out dividend to the shareholders at the middle and end of a year. And this income too, is taxable. However, there is a relief for the people. An investor must pay tax on dividends only if his total dividend for year is more than ₹10 lakhs. How much?! You will have to pay a flat 10% on the dividends earned by you over and above ₹10 lakhs.
Taxation of Capital Gains
Before that, let’s see what exactly Capital gain is. Capital gain is nothing but the profits which you earn on sale of the shares. In simple terms, it is the difference between selling price and purchase price of shares. Let’s go over some more terms in relation to this:
Sale value: It is the value you receive upon selling the shares.
Cost of Acquisition (COA): It’s quite self-explanatory. It is the cost you spent to purchase the shares you sold.
Transfer expenses: It means the cost incurred in selling the shares. It usually includes the brokerage commission, securities transaction tax (STT) or any other related expenses.
Indexation: Indexation is a relief provided to the taxpayers. In order to calculate the right cost of acquisition, inflation is taken into account by considering the Cost Inflation Index (CII) for the year. However, indexation is applicable only for long term capital gains (LTCG).
You may wonder what LTCG is. Depending on how long you hold the shares, they are classified into long term capital asset (LTCA) and short term capital assets (STCA).
|Type of Share||Period of holding||Category|
|Shares listed in stock exchanges like BSE and NSE||Less than 12 months||STCA|
|Unlisted shares||Less than 36 months||STCA|
|Shares listed in stock exchanges like BSE and NSE||More than 12 months||LTCA|
|Unlisted shares||More than 24 months||LTCA|
Now that we have categorized the assets as short term and long term, let’s understand what it has to do with capital gain. I’m pretty sure you have got it already! Capital gains on LTCA is long term capital gain (LTCG). Whereas the profits made on STCA is short term capital gains (STCG).
We know the type of asset and we also know if we have LTCG or STCG. What difference does it make? What next?! The gains are divided or to be more accurate, categorized as LTCG and STCG to know the rate at which we are taxed.
|Tax Type||Condition||Applicable tax rate|
|LTCG||Sale of equity shares||Upto 1 lakh – No tax|
Above 1 lakh – 10%
|STCG||When STT is applicable||15%|
|STCG||When STT is not applicable||STCG is taxed according to your income tax slab|
Assume a scenario where a Mr. S bought shares of X Ltd on 01.04.2019 for a value of ₹7,00,000. On 30.08.2020, he sold the shares for ₹10,00,000. The Cost Inflation Index for the years are:
Since it is a listed equity share and held for more than 12 months, the gains arising from it can be categorized as LTCG.
Sale Value: ₹10,00,000
Indexed COA: ₹7,00,000 * (301/289) = ₹7,29,066
LTCG: ₹10,00,000-7,29,066 = ₹2,70,934
Tax Payable: ₹(2,70,934-1,00,000) * 10% = ₹17,093