Capital Gain from Sale of Shares , Future and Options

There are two types of capital gains: 

“Long-term” and “Short-term”

This depends on how long you hold onto the shares before selling them. Listed equity shares and equity mutual funds have a different holding period from debt mutual funds, and their tax treatment is different. 

For income tax purposes, we’ll focus on listed securities like equity shares, bonds, debentures, units traded on Indian exchanges, and zero-coupon bonds. 

Short-Term Capital Gains (STCG)-

If you sell listed equity shares within one year of buying them, you may experience a “Short-term Capital Gain”. This means that if you sell your shares for more than you bought them, you make a profit. This profit is taxed at 15%, regardless of your income. 

Basic calculation:

To calculate your short-term capital gain, subtract your purchase price and expenses from the selling price. Here’s an example: 

Example:

In 2015, Kuldeep bought 250 shares at Rs.155 each, for a total of Rs.38,750. Five months later, he sold them for a total of Rs.48,000, or Rs.192 per share. After paying brokerage fees of Rs.240 (0.5%), Kuldeep’s short-term capital gain is Rs.9,010 (Rs.48,000 – Rs.38,750 – Rs.240).

Long-Term Capital Gains (LTCG)- 

If you sell listed equity shares after holding them for 12 months or more, you may earn long-term capital gains or losses. Earlier, long-term gains were free from tax. But in 2018, the budget made it taxable at 10% without indexation for gains exceeding Rs.1 lakh, for sales after April 1, 2018. This rule applies to gains starting February 1, 2018. However, gains before January 31, 2018, are calculated differently. This is called ‘grandfathering’. 

Example:

For example, suppose Atul bought shares for Rs.100 on September 30, 2017, and sold them for Rs.120 on December 31, 2018. The value on January 31, 2018, was Rs.110. Out of the Rs.20 gain, Rs.10 is not taxed. The remaining Rs.10 is taxed at 10% without indexation.

Losses from Equity Shares – 

Short-Term Capital Loss (STCL)

You may offset short-term capital losses against short or long-term capital gains from any asset. Unused losses can be carried forward for 8 years. File tax returns on time to carry forward losses.

Long-Term Capital Loss (LTCL) 

Before 2018, long-term losses were not adjustable or carriable. But now, losses from sales after April 1, 2018, can be set off against long-term gains and carried forward for 8 years. So, file on time to use these losses.

Securities Transaction Tax (STT)

Securities Transaction Tax (STT) applies to all listed equity bought/sold on exchanges. However, the above information only covers STT-paid shares.

Grandfathering Clause

A grandfather clause allows existing cases to follow old rules, while new rules apply to future cases. Before 2017-18, long-term capital gains on listed equity were tax-free. But the 2018 Finance Act reintroduced the LTCG tax from April 1, 2018, with a grandfather clause. 

The gains until January 31, 2018, are not taxed. The acquisition cost is calculated based on the lower of the fair market value on January 31, 2018, or actual sale price and the higher of the value I or actual purchase price. 

To calculate LTCG, subtract the acquisition cost from the sales price. The tax liability is the LTCG minus Rs.1 lakh exemption, taxed at 10%.

Business Income vs. Capital Gains

Regarding taxes on investments, it can be confusing to figure out whether your gains or losses should be treated as small business accounting services in Delhi income or capital gains. Typically, if you engage in a lot of trading activity, like day trading or trading in futures and options, the gains or losses are considered business income and are taxed at your income tax rate. However, if you only engage in limited trading, your gains or losses may be considered capital gains, which have a lower tax rate for long-term investments.

Calculation of Future and option trading under Taxation Regime-

If you engage in financial derivatives trading, it’s important to report your gains or losses in your income tax return. Previously, if your trading volume exceeded Rs. 10 crore, you were subject to a tax audit, but the formula for calculating trading volume has been updated. Now, only net gains and losses will be counted. This means that the volume of transactions from speculating on financial derivatives will be significantly lower, and you won’t need to worry about a tax audit as long as your trading volume is below the threshold.

• To follow the tax laws, it is important to keep track of your activities and expenses. If you are trading and your income is more than Rs. 2.5 lakhs per annum or your income exceeds Rs. 25 lakhs in the last three years (or in the first year in case of a new business), you have to keep the financial records. Keeping financial records will help you track your financial activities and ensure that you do your tax work.
• In short, if you do not know how to treat your expenses or losses for tax purposes, it is better to consult with a tax professional to avoid any problems that may arise in the tax department. 
• Calculating your trading volume for futures and options involves multiplying the price difference between the buying and selling prices by the number of units bought or sold. This calculates the profit from each contract. When you sum the profit from all trades, you get your total trading volume. 
• It is important to maintain accurate records of your transactions and expenses to ensure compliance with legal rules and avoid penalties. Keeping track of all trades and their incomes and losses can help you calculate your transactions correctly and avoid errors in your tax information. 
• For example, if Aditya buys 100 units of futures at Rs. 200 and sells them at Rs. 210, and buys 200 units of options at Rs. 300 and sells them at Rs. 290, his volume would be calculated as follows: 
  • Futures: (210-200) * 100 = 1000 
  • Options: (290-300) * 200 = 2000 (negative ignored) 
  • Total Volume (Absolute Profit): 3000