Tax on Sale of Shares

May 17, 2018 | 7 months ago | Read Time: 4 minutes | By CA Karan Batra

When a person invests in the stock market of India, he is subject to capital gain tax on the profit earned through trading done in India.

The Capital Gain is the difference between the cost of purchase and the sale price received.

Capital Gains = Sale Price – Purchase Price – Expenses Incurred

There are two types of capital gains applicable in India:

  • Short Term Capital Gains
  • Long Term Capital Gains

Classification of Long Term and Short Term depends upon the period for which the shares/mutual funds are held.

Short Term Capital Gains

Short term capital gains is the gain that arises when shares/mutual funds are sold within one year of purchase.

The tax rate applicable on the gain is 15%.

Long Term Capital Gains

Long term capital gain is the gain that arises when shares/mutual funds are sold after one year of purchase.

Long Term Capital Gain Tax Rate

The tax rate applicable is as follows:

Shares sold before 31st March 2018 – Exempt

Shares sold on or after 1st April 2018 – 10% (without indexation)

*Indexation is the adjustment in the cost of the purchase due to inflation.

Provisions to calculate Long Term Capital Gain

The revised provisions are applicable from 1.4.2018. Therefore, any capital gains arising from sale of shares/mutual funds during the period 1.2.2018 (announcement of the new provisions) to 31.3.2018 shall be exempt.

Also under the revised provisions, any long term capital gain arising from sale of shares/mutual funds before 31.1.2018 shall be exempt.

Therefore, if you purchase shares/mutual funds on 1-4-2016 and sell shares/mutual funds on 2.5.2018, the capital gain from 31.1.2018 to 2.5.2018 will only be taxable.

While calculating gain on the taxable part, there are additional provisions that need to be taken care of with respect to the calculation of sale and purchase price of the shares/mutual funds. Broadly there are three cases for the same,

Case

Sale Price > Fair Market Value as on 31.1.2018

Actual Purchase Price < Sale Price < Fair Market Value as on 31.1.2018

Sale Price < Actual Purchase Price of shares/mutual funds when acquired

Purchase Price

Actual Purchase Price vs Fair Market Value (whichever is higher)

 

Actual Purchase Price

Sale Price

Sale Price

Fair Market Value

Sale Price

  • Sale Price is more than the Fair Market Value as on 31.1.2018

In this case, the purchase price of the shares/mutual funds will be Actual Cost of shares/mutual funds or the Fair Market Value of shares/mutual funds as on 31.1.2018, whichever has a higher value.

The Sale Price will be the actual sale price.

  • Sale Price is less than the Fair Market Value as on 31.1.2018 but more than the Actual Cost

In this case, the purchase price of the shares/mutual funds will be Actual Cost of shares/mutual funds or the Fair Market Value of shares/mutual funds as on 31.1.2018, whichever has a higher value.

The Sale Price will be the Fair Market Value.

Note: The intention of the law here is to not allow losses generated due to the change in provisions.

  • Sale Price is less than the Actual Cost of shares/mutual funds when acquired

In this case, the purchase price of the shares/mutual funds will be the Actual Cost of shares/mutual funds.

The Sale Price will be the Actual Sale Price.

Note: The intention of the law here is to protect the assessee from genuine hardship and allow actual loss.

Let’s see the provisions with the help of an example

Example:

Mr. Azim purchased shares/mutual funds for Rs. 300,000 on 1.5.2013. He sold the shares/mutual funds on 5.6.2018 at the following rates . FMV as on 31.1.2018 is Rs. 500,000

Case 1: Sale Price- 700,000 (SP>FMV)

Case 2: Sale Price- 400,000 (SP<FMV)

Case 3: Sale Price- 200,000 (SP<Actual Cost)

Let’s compute the capital gains in each case, and calculate the tax liability,

Solution:

Case I: Calculation of capital gain when shares/mutual funds are sold at Rs. 700,000

Since the period of holding is more than 1 year, it will be long term capital gain.

Capital Gain (Taxable Part)=Sale Price – Purchase Price

                                                  = 700,000 – 500,000*

                                                  = 200,000

Calculation of purchase price:

When Fair Market Value is more than the Actual Purchase Price, the Purchase price will be considered as the Fair Market Value.

Here,

FMV= 500,000

Actual Purchase Price= 300,000

Since, FMV>Actual Purchase Price, Purchase price here will be Rs. 500,000

Calculation of sale price:

When Sale Price is more than the Fair Market Value, the Fair Market Value will be considered as the Sale price.

Here,

Sale Price= 700,000

Fair Market Value= 500,000

Since, Sale Price > Fair Market Value, Sale price here will be Rs. 700,000

Case II: Calculation of capital gain when sale price is Rs. 400,000

Since the period of holding is more than 1 year, it will be long term capital gain.

Capital Gain (Taxable Part)=Sale Price – Purchase Price

                                                  = 500,000* – 500,000

                                                  = Nil

Calculation of purchase price:

When Fair Market Value is more than the Actual Purchase Price, the Purchase price will be considered as the Fair Market Value.

Here,

FMV= 500,000

Actual Purchase Price= 300,000

Since, FMV>Actual Purchase Price, Purchase price here will be Rs. 500,000

Calculation of sale price:

When Sale Price is less than the Fair Market Value, the Fair Market Value will be considered as the Sale price.

Here,

Sale Price= 400,000

Fair Market Value= 500,000

Since, Sale Price<Fair Market Value, Sale price here will be Rs. 500,000

Case III: Calculation of capital gain when sale price is Rs. 200,000

Since the period of holding is more than 1 year, it will be long term capital gain.

Capital Gain (Taxable Part)=Sale Price – Purchase Price

                                                   = 200,000 – 300,000*

                                                   = (100,000) Loss

Calculation of purchase price:

When Sale Price is less than the Actual Purchase Price, the Actual Purchase price will be considered as the Purchase Price.

Here,

Sale Price= 200,000

Actual Purchase Price= 300,000

Since, Sale Price<Actual Purchase Price, Purchase price here will be Rs. 300,000.

Calculation of sale price:

When Sale Price is less than the Fair Market Value, as well as less than the Actual Purchase Price, the Actual Sale Price will be considered as the Sale price.

Here,

Sale Price= 200,000

Actual Purchase Price= 300,000

Fair Market Value= 500,000

Since, Sale Price<Fair Market Value, Sale price here will be Rs. 200,000 

Here, you can clearly decipher the intent of the law. The intent of the law is to tax only the amount of gain earned after 1.4.2018. But it also ensures that no undue advantage is taken due to the amendment. Therefore, only actual losses are allowed where the sale price is lower than the actual purchase price. Any loss arising due to the change in law is not permissible.


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