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Capital Gain on Equity Shares and Mutual Funds

IndianMoney.com Research Team | Posted On Saturday, February 29,2020, 05:44 PM

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Capital Gain on Equity Shares and Mutual Funds

 

 

What is Capital Gain?

The gain or income from the sale of any capital asset is termed as capital gain. Capital assets are all kinds of properties (movable, immovable, tangible and so on) that generate value over time. Example: land, buildings. This profit falls in the category of “income”. Hence you will have to pay a tax on the same.

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Capital Gain on Equity Shares and Mutual Funds​

Equity Shares and Capital Gain

Equity share means part-ownership in a company. An investor can purchase equity shares of a company from the stock market. The profits earned by selling these shares are termed as capital gains from equity shares.

Capital gains on equity shares can be divided into two types based on the holding period. These are:

Short Term Capital Gains (STCG): If an immovable property is held for less than 2 years, then gains earned from its sale are termed as short term capital gains. But when it comes to equity shares, it is different. Equity shares are considered as fast moving and if they are held for less than 12 months, then profits from their trading will fall under STCG. This is applicable, only if the stocks are traded via the stock exchange. Unlisted or over the counter securities will be treated same as immovable properties.

See Also: What You Must Know About Mutual Funds?

Long Term Capital Gains (LTCG):

If an immovable property or unlisted equity share is held for more than 2 years, then the gains from the sale are termed as long term capital gains. In case of equity shares, this period is 12 months. Any gains realized after trading equity shares after holding it for more than a year will be termed as LTCG.

It is important to differentiate between short term and long term capital gains for the purpose of taxation. Capital gains are taxed differently according to their holding period.

Taxation of Equity Shares:

According to the income tax laws, short term capital gains are taxed at 15% + cess. Long term capital gains above Rs 1 Lakh are taxed at 10% without indexation.

See Also: Understand Capital Gains Tax

How to Calculate Capital Gains?

 In order to calculate STCG or LTCG, there are few terms to be aware of.

Cost of Acquisition: The value for which the seller acquired the asset.

Cost of Improvement: Money spent by the seller for any alterations or additions.

Full Value of Consideration: The amount received by the seller in exchange for the trade of the asset.

STCG Calculation: From the full value of consideration, the following are to be deducted.

  • Cost of acquisition
  • Cost of improvement
  • Expenses incurred on the process of transfer.

This remaining amount is the short term capital gain.

See Also: Capital Gains Tax in India: Know Everything About It

LTCG Calculation: From the full value of consideration, the following are to be deducted

  • Indexed cost of acquisition
  • Indexed cost of improvement
  • Expenses incurred on the process of transfer.
  • Tax deductions under the sections 54E, 54EC, 54F, 54B.

Mutual Funds and Capital Gains

Mutual fund is an investment which collects money from various investors and then invests in bonds, stocks and other assets.  These funds are managed by expert fund managers.

Taxation on Mutual Funds:

Taxation of mutual funds depends on the type of investment the mutual fund deals with. A brief detail on the type of mutual funds helps understand their taxation.

  1. Equity funds: Equity mutual funds are treated just like shares for taxation purposes.
  2. Debt funds: Long term capital gains on debt funds are taxed at 20% with indexation. Whereas, short term capital gains are added to taxable income and taxed as per income tax slabs he/she falls under.
  3. Balanced funds: Taxation depends on investment exposure. Hybrid equity oriented funds are taxed similar to equity funds and hybrid debt oriented funds are taxed similar to debt funds.
  4. SIPs: The taxation of mutual funds that offer systematic investment plans (SIPs) are quite different. Mode of investment in the deciding factor. Short term and long term gains are decided based on the holding period.
  5. Securities transaction tax (STT): When the units of an equity fund or hybrid equity fund are sold, then the government charges an STT of 0.001% as tax. This is not applicable to debt funds.

See Also: How To Save Long Term Capital Gains Tax on Sale of House?

Conclusion:

One important tip to be kept in mind is that, the longer you hold investments, lower is the taxation. This will fetch greater profits. For the same reason, tax on long term capital gains is lower than tax on short term gains.

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