Capital Gains Tax on Sale of Equity Shares: Understanding STCG and LTCG in India
When you sell any equity share, you must pay a tax on the capital gain realized from that sale. The tax rules in India vary based on the type of stocks you hold and the duration of your holding period. This article delves into the specifics of Short-Term Capital Gains Tax (STCG) and Long-Term Capital Gains Tax (LTCG).
Listed Domestic Stocks
Listed domestic stocks are those that are traded on a stock exchange. There are different tax implications based on the duration of your holding period.
Short-Term Capital Gains (STCG)
If you hold a listed domestic stock for less than one year, the gains from its sale are considered Short-Term Capital Gains (STCG). The tax rate for STCG is 15%, regardless of your income tax bracket (whether it is 10%, 20%, or 30%).
Long-Term Capital Gains (LTCG)
For stocks held for more than one year, the gains are classified as Long-Term Capital Gains (LTCG). The tax on LTCG is levied at 10% for gains above Rs 1 lakh (approximately $1,175 USD), and at 20% with indexation benefits for gains up to Rs 1 lakh.
Unlisted Domestic Stocks
Unlisted domestic stocks refer to those not traded on the stock exchange. The holding period for these stocks is typically 24 months.
Short-Term Capital Gains (STCG)
If you hold these stocks for less than 24 months, the gains from their sale are subject to Short-Term Capital Gains tax.
Long-Term Capital Gains (LTCG)
If you hold these stocks for 24 months or longer, the gains are treated as Long-Term Capital Gains. The tax on LTCG is typically 20% with indexation benefits.
Implications of Short-Term and Long-Term Capital Gains
The tax treatment of short-term capital gains is straightforward: all short-term gains are added to your total income and taxed at your applicable income tax rate, which can be 10%, 20%, or 30%, depending on your income slab.
In contrast, long-term capital gains tax involves a more complex computation due to the indexation benefit. This benefit adjusts the cost basis of the asset to its fair market value at the time of purchase, reducing the realized gain and thereby lowering the tax liability.
Examples of Capital Gains Tax
To provide clarity, let's consider an example:
Example 1: You bought a stock for INR 10 and sold it for INR 20 after one year. The stock was priced at INR 15 at the time of sale. Thus, you realize a gain of INR 10. The tax will be levied on half of the gain (INR 5), as the market value serves as a reference. Example 2: If you hold the same stock for more than one year and sell it for INR 20, the tax will be levied on the entire gain of INR 10, as it is now classified as LTCG, and taxed at 10% if it exceeds Rs 1 lakh.Consulting a financial advisor or broker, such as Motilal Oswal, can help you make informed decisions about which type of capital gains are most beneficial for your specific situation.
By understanding the nuances of STCG and LTCG, investors can optimize their tax liability and make informed decisions about their investment strategies. For more detailed guidance on personal finance and tax planning, follow us.
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