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Introduction: Navigating Equity Share Capital Gains under Indian Tax Laws
Capital markets remain a dominant investment arena, especially for individuals and HNIs seeking returns from equity shares. But with gains come tax implications. The Income Tax Act, 1961, lays down a detailed framework for taxation on capital gains arising from the transfer of equity shares.
The taxability depends upon critical determinants like the holding period, listing status of shares, mode of sale, and recent amendments introduced by the Finance (No. 2) Act, 2024. This article explores in detail how capital gains on equity shares are treated, offering clear guidance on tax computation, applicable rates, cost of acquisition mechanics, special provisions, and judicial precedents.
What is Capital Gain?
As per Section 2(14) and Section 2(29A) of the Income Tax Act, equity shares qualify as a capital asset. Capital Gain arises when such shares are transferred (as defined under Section 2(47)) at a consideration higher than their cost of acquisition.
Under Section 45, the profit from the transfer of capital assets is chargeable to tax under the head “Capital Gains” in the year in which such transfer takes place, unless specifically exempt under any other provision (like Section 54F, 47, etc.).
Types of Capital Gains on Equity Shares
1. Short-Term Capital Gain (STCG)
- For listed equity shares, if held for 12 months or less, the gain on sale is considered short-term.
- For unlisted shares, the threshold is 24 months or less.
Taxability of STCG on Listed Shares – Section 111A
Section 111A governs the taxation of STCG from equity shares where Securities Transaction Tax (STT) has been paid both at the time of acquisition and transfer.
Nature of Transaction | Before 23-07-2024 | On or After 23-07-2024 |
STT Paid on listed shares | 15% (Concessional) | 20% (Revised Rate) |
The concessional rate applies only when shares are traded through a recognized stock exchange, and STT is duly paid.
Note: – The benefit of rebate under Section 87A cannot be claimed where income is taxable at special rates.
Taxability of STCG on Unlisted Shares
In the case of unlisted equity shares, STCG is taxed as per the applicable slab rates of the assessee. STT is not applicable here, and no concessional rate under Section 111A is available.
Example: If an individual in the 30% slab sells unlisted shares held for 20 months, the gain shall be taxable at 30% plus surcharge and cess.
2. Long-Term Capital Gain (LTCG)
- For listed shares, held for more than 12 months
- For unlisted shares, held for more than 24 months
LTCG was exempt earlier under Section 10(38), but post Finance Act, 2018, it was made taxable under Section 112A, and the Finance (No. 2) Act, 2024, further modified the applicable rates.
Special Cost of Acquisition Provisions – Grandfathering Clause
Where equity shares were acquired before 01.02.2018, the cost of acquisition shall be deemed to be the higher of:
a) Actual cost of acquisition
b) Lower of:
- Fair Market Value (FMV) as on 31.01.2018
- Sale consideration received
Fair Market Value Definition:
For listed shares – Highest price on stock exchange on 31.01.2018
If not traded on that date – Highest price on the nearest prior trading date
For unlisted units – Net Asset Value (NAV) as on 31.01.2018
Tax Rates on LTCG
Let us now understand the applicable tax rates on LTCG arising from the sale of equity shares:
(A) Listed Shares (STT Paid) – Section 112A
Nature of Transaction | Before 23-07-2024 | On or After 23-07-2024 |
LTCG up to threshold | Exempt up to ₹1,00,000 | Exempt up to ₹1,25,000 |
LTCG in excess | Taxed at 10% (no indexation) | Taxed at 12.5% (no indexation) |
Important Notes:
- Indexation benefit is not available under Section 112A
- Applicable only if STT is paid on both acquisition and transfer
(B) Other Listed Securities – Section 112
Option | Before 23-07-2024 | On or After 23-07-2024 |
With Indexation | 20% | Not Applicable |
Without Indexation | 10% | 12.5% flat (Unified rate) |
Post 23-07-2024, a uniform 12.5% rate has been prescribed by the Finance (No. 2) Act, 2024, without indexation. Indexation benefit has been withdrawn for all capital assets.
(C) Unlisted Shares – Residents
Before 23-07-2024:
- Taxable @ 20% with indexation under Section 112
After 23-07-2024: - Taxable @ 12.5% flat, without indexation
(D) Unlisted Shares – Non-Residents or Foreign Companies
Nature | Before 23-07-2024 | On or After 23-07-2024 |
LTCG (Unlisted Shares) | 10% (No Indexation) | 12.5% (No Indexation) |
Section 115AC, Section 115AD, and Section 115E may apply for specified foreign investors or NRIs, based on structure and nature of investment.
Cost Inflation Index (CII) and Indexed Cost of Acquisition
As per Section 48, where indexation is applicable (before 23-07-2024), the Indexed Cost of Acquisition is:
Indexed Cost = Original Cost × (CII for Year of Sale / CII for Year of Acquisition or 2001-02, whichever is later)
For example:
If a share was purchased in 2010-11 at ₹50,000 and sold in 2023-24, CII for 2010-11 = 167, CII for 2023-24 = 348
→ Indexed Cost = ₹50,000 × (348 / 167) = ₹1,04,490
Note: Indexation benefit is not allowed post 23-07-2024 under the revised regime.
Offer for Sale (OFS) and IPO Transactions – Special Provisions
As per the Finance (No. 2) Act, 2024, where unlisted shares are sold under an Initial Public Offer (IPO) via Offer for Sale (OFS):
- FMV = Cost of Acquisition × (CII of 2017-18 / CII of Year of Acquisition)
- Cost = Adjusted using CII = 272 for FY 2017-18
Applicable where shares were earlier unlisted but listed at the time of transfer.
Set Off and Carry Forward of Capital Losses
As per Section 70 and 71, the following rules apply:
- STCL (Short-Term Capital Loss) can be set off against any capital gains (short or long term)
- LTCL (Long-Term Capital Loss) can be set off only against LTCG
Unabsorbed losses can be carried forward up to 8 assessment years under Section 74, subject to filing ITR within due date u/s 139(1).
Exemptions from Capital Gains – Key Sections
Section | Conditions | Applicability |
Section 10(38) | Only for transfers before 01.04.2018 | LTCG Exempt (Now Withdrawn) |
Section 54F | Investment in Residential House | Only for individual/HUF |
Section 47 | Specified Transfers not treated as ‘transfer’ | Amalgamation, gift, holding-subsidiary, etc. |
Recent Changes by Finance (No. 2) Act, 2024
- Introduction of uniform LTCG tax rate of 12.5% on all capital assets including equity shares
- Withdrawal of indexation benefit for all classes of capital assets
- Enhanced LTCG exemption threshold from ₹1,00,000 to ₹1,25,000 for transactions post 01.04.2024
- Rationalization of taxation for OFS and IPOs involving unlisted shares
Conclusion
Capital gains taxation on equity shares in India is no longer a one-size-fits-all framework. With multiple thresholds, revised rates post July 2024, STT implications, grandfathering clauses, and special treatment for unlisted shares and non-residents, it becomes essential for every investor and tax consultant to stay abreast with the latest developments.
An in-depth understanding of Section 45, 47, 48, 111A, 112, and 112A, coupled with proper documentation, can help avoid unnecessary litigation and optimize tax liability.
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