How are Capital Gains on Shares Taxed in India?
By Himanshu Joshi, Accounts Associate, Dezan Shira & Associates
Apr. 4 – The Income Tax Act of India recognizes shares as capital assets. Therefore, any gains derived from the sale of shares are treated as capital gains, which are taxable.
To determine the effective tax rate on capital gains derived from the sale of shares, we first need to determine whether the gain is considered a long term capital gain (LTCG) or a short term capital gain (STCG). Specifically, if a share is held for one year or less, any gains are considered STCG; if a share is held for more than one year, any gains are considered LTCG.
Short Term Capital Gains
There is no special tax rate applicable for STCG, and it is taxed normally based on the applicable slab rate (i.e., 30 percent for companies and firms and the applicable slab for individuals).
However, if the sale of a company’s equity shares is subject to the Security Transaction Tax (STT), the STCG will be taxed at a rate of 15 percent (as per Section 111A of the Income Tax Act). STT must be paid when the shares of a company are sold on the Indian Stock Exchange. It is added on top of any taxable amounts that an individual needs to pay in respect of the applicable income tax slab rate on their respective income.
Non-residents have to pay the 15 percent STT on STCG regardless of their taxable income and applicable slab rate.
Long Term Capital Gains
When LTCG is derived through the sale of shares, it is taxed at a rate of 20 percent. To calculate the actual LTCG amount, the indexed value of the costs must be considered and adjusted for inflation through referencing the Government issued Cost Inflation Index (CII) released each financial year. The CII indexes the costs of all assets in addition to adjusting them in line with the most current inflation rates.
For LTCG on the sale of shares of a listed company, the tax rate will be the lower of the two rates listed below:
- 20% of capital gains (considering the index value of cost); or
- 10% of capital gains (without the benefit of indexation).
Non-residents, however, do not have the benefit of indexation to determine their tax rates. As per the First Proviso to Section 48 of the Income Tax Act, the capital gains of a non-resident (whether it be LTCG or STCG) is determined through converting the actual amount that the shares are sold for into the currency in which the shares were initially bought. After which, the total amount of capital gains earned through the sale will then be converted into Indian rupees at the rate applicable on the date of the sale, which is then taxed at 10 percent.
In short, a non-resident’s LTCG is taxed at a rate of 10 percent.
If LTCG is derived from the sale of a company’s equity shares, and such sale happened on or after October 1, 2004, and if it is subject to the STT, then the LTCG is exempted from being taxed per Section 10(38) of the Income Tax Act. The exemption, which applies to both residents and non-residents, is available only when the assessee holds the equity shares as capital assets and not as stock in trade.
There are no tax exemptions for STCG.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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