Did You Know that in India, income-based tax rates are different? Taxes are not due on income up to INR 2,50,000. The  income tax rate remains 5% for income ranging between Rs. 2,50,000 and Rs. 5,00,000. The income tax rate  changes to 10% once the income is between Rs. 5,00,000 and Rs. 7,50,000 and 15% for income ranging  between Rs. 7,50,001 and Rs. 1,00,000, and so on. Before discussing how capital gains taxe is applicable on equities, it is important to understand what equity shares are in  brief.

What Are Equity Shares?

Every business requires some amount of capital for the functioning of their business activities. Sometimes, in  order to raise their capital, businesses issue equity shares by selling off a percentage of their profits. When an  individual do stock trading online and invest in a company’s equity shares, he/she acquires a stake/share in that  company and becomes a stakeholder/shareholder.

Capital Gains Taxation Process

Capital gains are taxed differently based on whether they are short-term capital gain (STCG) or  long-term capital gain (LTCG).

Taxation on Short-Term Capital Gains (STCG)

If equity shares are sold within 12 months of purchase, then the seller of those equity shares will make short term capital gain or experience a short-term capital loss. Equity shares being sold off at a price that is higher  than the purchase price results in short-term capital gain.

According to the Income Tax, short-term capital gains are taxable at the rate of 15% on the total amount of  capital gains. Nevertheless, there is a surcharge and cess that is imposed on the STCG tax that must also be paid  in addition to the base tax of 15%, raising the STCG tax to 17.47%. Along with the standard STCG tax of 15%,  this 17.47 percent comprises a 12% surcharge and a 4% cess.

Also Read: What is Primary Market and Secondary Market?

For example, suppose an investor bought 1000 shares from a company on 6th March 2022 @ Rs. 500 per share.  His/her purchase price will amount to Rs. 5,00,000. The investor decides to sell 1000 shares @ Rs. 617 on 17th  July 2022. He sold his shares at the amount of Rs. 6,17,000. He ended up earning a profit of Rs. 1,17,000. Since  the investor sold his shares in less than 12 months, this is a short-term capital gain. A 17.47% tax of Rs. 1,17,000 is Rs. 20,439.9. Therefore, the net capital gain for the investor is Rs. 96,560.1 (1,17,000 – 20.439.9.) From this example, we were able to understand how STCG tax decreases the net dividends that investors  receive.

Taxation on Long-Term Capital Gains (LTCG)

If equity shares are sold after 12 months of purchase, then the seller of those equity shares will make long-term  capital gain or experience a long-term capital loss. Equity shares being sold off at a price that is higher than the  purchase price results in long-term capital gain.

The LTCG on equity shares was formerly tax-free (exempt) under Section 10 (38) of the Income Tax Act of  1961. The annual budget for 2018 suggested eliminating section 10 (38) and replacing it with section 112A to  assess and determine the tax effects of LTCG on the selling of equity shares. If the net capital gains in a year  exceed Rs. 1,00,000, the excess capital gains are taxed at a rate of 10%. However, additional charges such as a  12% surcharge and a 4% cess will raise the tax to 11.648%.

For example, assume an investor made a LTCG of Rs. 1,80,000 after 1st April 2018, when the taxation on  LTCG was introduced. Keep in mind that if an investor had made a LTCG before 1st April 2018, the entire  amount would have been tax-exempt under Section 10 (38). In this scenario, Out of Rs. 1,80,000, Rs. 1,00,000  will be exempted while the remaining amount, i.e., Rs. 80,000 will be taxable. Since Rs. 80,000 is taxable, a tax  of 11.648% will be applied on it resulting the tax amount to be Rs. 9318.4. This tax amount will be subtracted  from the LTCG of Rs. 1,80,000 resulting the Net LTCG to be Rs. 1,70,681.6.

Take another scenario where an investor made a LTCG of Rs. 50,000 after 1st April 2018. Here, the taxable  capital gain will be NIL since the LTCG amount is not more than Rs.1,00,000. Therefore, the LTCG of Rs. 50,000 will be tax-exempt.