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April 28, 2020

How to calculate long term and short term Capital Gain on Shares and Mutual Fund in Income Tax

How to calculate long term and short term Capital Gain on Shares and Mutual Fund in Income Tax

Capital gain is profit from sale of property or an investment. As per section 45(1) any profit and gain arising from transfer of a capital asset shall be chargeable under the head capital gain in the previous year in which transfer took place. The article will highlight rules for calculation of capital gains in case of shares and securities including mutual funds.  

First thing you need to know is Rate of Tax

Capital assetLong term capital gainShort term capital gain
Listed equity shares10% if capital gain more than Rs. 1 Lakh, Else 15% if STT paid
Unlisted equity shares20%Slab rates
Equity oriented mutual funds10% if capital gain more than Rs. 1 Lakh15% if STT paid
Debt mutual funds20%Slab rates

Secondly you should Know What is Long Term and Short Term

The Capital Gain or Loss is classified as Long Term or Short Term depending upon period of holding of the investment

Capital assetLong term capital gainShort term capital gain
Listed equity sharesMore than 12 months or 1 yearLess than 12 months or 1 year
Unlisted equity sharesMore than 24 months or 2 yearsLess than 24 months or 2 years
Equity oriented mutual fundsMore than 12 months or 1 yearLess than 12 months or 1 year
Debt Mutual fundsMore than 36 months or 3 yearsLess than 36 months or 3 years

How to Calculate Capital Gain on Listed Equity Shares

Shares or security listed on a recognized stock exchange in India means shares of a company which are listed on the NSE (National Stock exchange) or BSE (Bombay Stock Exchange).  The capital gain arising from sale of such shares are taxable in the year of sale. In this case the full value of consideration shall be the amount paid at the time of purchase of shares.

Calculation of Cost of acquisition of Shares is very important from year 2018 onward, as there is change in way of calculating. If the listed shares are purchased on or before 01/02/2018 then as per section 112A the cost of acquisition shall be higher of Step 1 and Step 2 as below

Step 1: Cost of acquisition: It shall be the amount paid at the time of purchase of shares or in case shares are purchased on or before 01/04/2001 than cost of acquisition shall be the FMV (Fair Market Value) as on 01/04/2001.

Step 2: Lower of FMV as on 31/01/2018 or Sale Value (Full Value Of Consideration – FVOC)

Cost of acquisition can be calculated as follows:

Date of AcquisitionCost of Acquisition
Purchased after 01/04/2001Purchase cost
Purchased on or before 01/04/2001Fair Market Value as on 01/04/2001
Purchased on or before 01/02/2018Higher of step 1 or step 2
Step 1: Purchase cost of shares   
Step 2: Lower of i or ii
i) Fair Market Value as on 31/01/2018
ii) Sale value(Full Value of Consideration)

Capital gain at the time of sale of listed equity shares will attract income tax. The sale will attract long term or short term capital gain depending on the period of holding:

Long term capital gain: In case the listed shares are sold after 12 months or 1 year of holding period then gains arising from such transaction shall be classified as Long term capital gains and will be taxed at the rate of 10% on gains in excess of Rs. 1 lakh as per section 112A of the Income Tax Act. No indexation benefit is available on transfer of equity shares listed on stock exchange.

Short term capital gain: In case the listed shares are sold within 12 months of purchase then gains arising from such transaction shall be classified as short term capital gains and will be taxed as per section 111A. As per section 111A, tax at the rate of 15% shall be charged on short term capital gain if securities transaction tax is paid on such shares.

Lets us understand by Example

In case of sale of listed equity shares (Long term capital gain)

Mr. X has purchased 500 shares of XYZ Ltd for Rs. 100 on 24/04/2008. On 01/03/2020 sold all the shares of XYZ Ltd for Rs. 500. XYZ ltd is listed on NSE. Calculate the capital gains in the hands on Mr. X. The FMV of shares of XYZ ltd as on 01/02/2018 is Rs. 400

Step 1: Calculation of Cost of acquisition of XYZ ltd

 ParticularsAmount
aCost of Purchase (Rs. 100 X 500 shares)50,000
bFMV as on 31/01/2018 (Rs. 400 X 500 shares)2,00,000
cSale value of XYZ ltd (Rs. 500 X 500 shares)2,50,000
dLower of b and c2,00,000
eCost of acquisition (Higher of a and d)2,00,000

Step 2: Computation of Capital Gains

ParticularsAmount
Full Value of Consideration (500 shares X Rs. 500 each)2,50,000
Less: Cost of Acquisition (Note 1)2,00,000
Taxable Long term Capital Gains50,000
Tax on above at 10% in excess of Rs. 1 lakh as per 112A0
Health and Education cess at 4%0
Total tax payable by Mr. X0

In case of sale of listed equity shares (Short term capital gain)

Mr. X has purchased 500 shares of XYZ Ltd for Rs. 300 on 24/04/2019. On 01/03/2020 sold all the shares of XYZ Ltd for Rs. 500. XYZ ltd is listed on NSE. Calculate the capital gains in the hands on Mr. X.

ParticularsAmount
Full Value of Consideration (500 shares X Rs. 500 each)2,50,000
Net Consideration2,50,000
Less: Cost of Acquisition (500 shares X Rs. 100 each)1,50,000
Taxable Short term Capital Gains1,00,000
Tax on above at 15% as per 111A15,000
Health and Education cess at 4%600
Total tax payable by Mr. X15,600

How To Calculate Capital Gain Sale of  Unlisted Shares:

Unlisted shares are shares which are not listed on recognized stock exchange i.e. company not listed on NSE (National Stock exchange) or BSE (Bombay Stock Exchange). In this case the full value of consideration shall be the amount paid at the time of purchase of shares. If the unlisted shares are purchased on or before 01/04/2001 then the cost of acquisition shall be the FMV as on 01/04/2001. Cost of acquisition can be summarized as follows:

Date of AcquisitionCost of Acquisition
Purchased after 01/04/2001Purchase cost
Purchased on or before 01/04/2001FMV as on 01/04/2001

Capital gain at the time of sale of unlisted equity shares will attract income tax. The sale will attract long term or short term capital gain depending on the period of holding:

Long term capital gain: In case the unlisted shares are sold after 24 months or 2 year of holding period then gains arising from such transaction shall be classified as Long term capital gains and will be taxed at the rate of 20% on gains as per section 112 of the Income Tax Act. No indexation benefit is available on transfer of equity shares listed on stock exchange. Indexation benefit is available on transfer of unlisted equity shares.  Cost of acquisition can be summarized as follows:

Date of AcquisitionCost of Acquisition
Purchased after 01/04/2001Purchase cost
Purchased on or before 01/04/2001FMV as on 01/04/2001

Short term capital gain: In case the unlisted shares are sold within 12 months of purchase then gains arising from such transaction shall be classified as short term capital gains and will be taxed at the normal rate of tax i.e. slab rates.

Lets us understand by Example

In case of sale of unlisted equity shares (Long term capital gains)

Mr. X has purchased 500 shares of XYZ Ltd for Rs. 100 on 24/04/2008. On 01/03/2020 sold all the shares of XYZ Ltd for Rs. 500. XYZ ltd is not listed on recognized stock. Calculate the capital gains in the hands on Mr. X. The cost inflation indexation is as follows: 2008-09: 137 2019-20: 289

ParticularsAmount
Full Value of Consideration (500 shares X Rs. 500 each)2,50,000
Net Consideration2,50,000
Less: Indexed Cost of Acquisition (500 shares X Rs. 100 each)= 50000*289/1371,05,475
Taxable Long term Capital Gains1,44,525
Tax on above at 20%28,905
Health and Education cess at 4%1,156
Total tax payable by Mr. X30,061

In case of sale of unlisted equity shares (Short term capital gains)

Mr. X has purchased 500 shares of XYZ Ltd for Rs. 300 on 24/04/2018. On 01/03/2020 sold all the shares of XYZ Ltd for Rs. 500. XYZ ltd is not listed on recognized stock. Calculate the capital gains in the hands on Mr. X. Also the other income of Mr. X is Rs. 4,50,000. Calculate Mr. X tax liability for AY 2020-21 assume that Mr. X is of 35 years of age and had not made any investment during the year.

ParticularsAmount
Full Value of Consideration (500 shares X Rs. 500 each)2,50,000
Net Consideration2,50,000
Less: Cost of Acquisition1,50,000
Taxable Long term Capital Gains1,00,000
Other Income4,50,000
Net taxable income5,50,000
Tax on above at Slab rates22,500
Health and Education cess at 4%900
Total tax payable by Mr. X23,400

Capital gains on sale of Equity Mutual fund

Equity oriented mutual funds means where the fund invested in the listed unit of another fund a minimum 90% of the total proceeds of such fund is invested in the units of other fund and such other fund also invests a minimum of 90% of its proceeds in the listed equity shares of domestic companies. In any other case, a minimum of 65% of the total proceeds of such fund is invested in the listed equity shares of domestic company. In this case the full value of consideration shall be the amount paid at the time of purchase of unit of mutual funds. If the mutual funds are purchased on or before 01/02/2018 then the cost of acquisition as per section 112A shall be higher of Step 1 and Step 2 as below:

Step 1: Cost of acquisition: It shall be the amount paid at the time of purchase of units of mutual fund or in case units of mutual fund are purchased on or before 01/04/2001 than cost of acquisition shall be the FMV as on 01/04/2001.

Step 2: Lower of NAV as on 31/01/2018 or NAV as on Sale Date (FVOC)

Cost of acquisition can be summarized as follows:

Date of AcquisitionCost of Acquisition
Purchased after 01/04/2001Purchase cost
Purchased on or before 01/04/2001Fair Market Value as on 01/04/2001
Purchased on or before 01/02/2018Higher of Step 1 or Step 2
Step 1: Purchase Cost of Mutual Fund
Step 2: Lower of i or ii i.
i)Net asset Value as on 31/01/2018 ii.
ii) Sale value(Full Value of Consideration)

Capital gain at the time of sale of equity oriented mutual funds will attract income tax. The sale will attract long term or short term capital gain depending on the period of holding:

Long term capital gain: In case the mutual funds are sold after 12 months or 1 year of holding period then gains arising from such transaction shall be classified as Long term capital gains and will be taxed at the rate of 10% on gains in excess of Rs. 1 lakh as per section 112A of the Income Tax Act. No indexation benefit is available on transfer of equity oriented mutual funds.

Short term capital gain: In case the mutual funds are sold within 12 months of purchase then gains arising from such transaction shall be classified as short term capital gains and will be taxed at the rate of 15% as per section 111A.

Lets us understand by Example

Mr. X has purchased units of equity mutual fund of XYZ Ltd for Rs. 10,000 on 24/04/2008; he has got 100 units of XYZ ltd at NAV of Rs. 100 each. On 01/03/2020 sold all the units of XYZ Ltd the NAV as on that date is Rs. 500. Calculate the capital gains in the hands on Mr. X. The NAV as on 01/02/2018 is Rs. 450

Step 1 :Calculation of Cost of acquisition of XYZ ltd mutual fund

 ParticularsAmount
aCost of Purchase (Rs. 100 X 100 shares)10,000
bNAV as on 01/02/2018 (Rs. 450 X 100 units)45,000
cNAV as on Sale date (Rs. 500 X 100 units)50,000
dLower of b and c45,000
eCost of acquisition (Higher of a and d)45,000

Step 2: Computation of capital gains

ParticularsAmount
Full Value of Consideration (500 units X Rs. 500 each)50,000
Less: Cost of Acquisition (500 units X Rs. 100 each)45,000
Taxable Long term Capital Gains5,000
Tax on above at 10% in excess of Rs. 1 lakh as per 112A0
Health and Education cess at 4%0
Total tax payable by Mr. X0

In case of sale of Equity oriented mutual funds (Short term capital gain)

Mr. X has purchased units of equity mutual fund of XYZ Ltd for Rs. 10,000 on 24/04/2019; he has got 400 units of XYZ ltd at NAV of Rs. 100 each. On 01/03/2020 sold all the units of XYZ Ltd the NAV as on that date is Rs. 500. Calculate the capital gains in the hands on Mr. X.

Computation of capital gains

ParticularsAmount
Full Value of Consideration (500 units X Rs. 500 each)50,000
Less: Cost of Acquisition (500 units X Rs. 400 each)40,000
Taxable Short term Capital Gains10,000
Tax on above at 15% as per 111A1,500
Health and Education cess at 4%60
Total tax payable by Mr. X1,560

Capital gains on sale of Debt Mutual fund

Debt mutual fund is a type of mutual fund scheme in which a major proportion of assets under management is invested in fixed income securities including bonds and debentures. They are classified as “Non equity mutual funds” as they invest less than 65% of the total fund on investment in listed equity shares of domestic companies. Debt mutual funds include debt mutual funds, balanced funds (debt oriented fund), gold funds, money market funds etc. In this case the full value of consideration shall be the amount paid at the time of purchase of unit of mutual funds. If the units of mutual funds are purchased on or before 01/04/2001 then the cost of acquisition shall be the FMV as on 01/04/2001. Cost of acquisition can be summarized as follows:

Date of AcquisitionCost of Acquisition
Purchased after 01/04/2001Purchase cost
Purchased on or before 01/04/2001FMV as on 01/04/2001

Capital gain at the time of sale of debt mutual funds will attract income tax. The sale will attract long term or short term capital gain depending on the period of holding:

Long term capital gains: Long term capital gain shall arise on debt mutual funds if such debt mutual fund is sold after 3 years of holding. Long-term capital gains on debt fund are taxable at the rate of 20% after indexation benefit. Indexation is a benefit in which cost of acquisition of an asset is adjusted for changes in cost inflation index. It further helps lower the tax liability.

Short term capital gain: In case the debt mutual funds are sold within 36 months or 3 years of purchase then gains arising from such transaction shall be classified as short term capital gains and will be taxed at slab rates.

Lets us understand by Example

Mr. X has purchased units of debt mutual fund of XYZ Ltd for Rs. 10,000 on 24/04/2008; he has got 100 units of XYZ ltd at NAV of Rs. 100 each. On 01/03/2020 sold all the units of XYZ Ltd the NAV as on that date is Rs. 500. Calculate the capital gains in the hands on Mr. X. The cost inflation indexation is as follows: 2008-09: 137 2019-20: 289

Computation of capital gains:

ParticularsAmount
Full Value of Consideration (500 unit X Rs. 500 each)50,000
Less: Indexed Cost of Acquisition (100units X Rs. 100 each) 10,000 * 289/13721,095
Taxable Long term Capital Gains28.905
Tax on above at 20%5,781
Health and Education cess at 4%231
Total tax payable by Mr. X6,012

In case of sale of Debt oriented mutual funds (Short term capital gain)

Mr. X has purchased units of equity mutual fund of XYZ Ltd for Rs. 10,000 on 24/04/2019; he has got 400 units of XYZ ltd at NAV of Rs. 100 each. On 01/03/2020 sold all the units of XYZ Ltd the NAV as on that date is Rs. 500. Calculate the capital gains in the hands on Mr. X. Also the other income of Mr. X is Rs. 5,00,000. Calculate Mr. X tax liability for AY 2020-21 assume that Mr. X is of 35 years of age and had not made any investment during the year

Computation of capital gains:

ParticularsAmount
Full Value of Consideration (500 units X Rs. 500 each)50,000
Less: Cost of Acquisition (500 units X Rs. 400 each)40,000
Taxable Short term Capital Gains10,000
Other Income5,00,000
Net taxable income5,10,000
Tax on above at Slab rates14,500
Health and Education cess at 4%580
Total tax payable by Mr. X15,080