So you decided to sell your stocks? You need to understand the taxation of income earned from selling shares.

In this blog post, you can learn all about the taxation of income earned from selling shares in a way that’s easy to understand. We’ll talk about concepts like short-term and long-term profits and how the type of stocks you own can change how much tax you owe. 

Differentiating Between Short and Long-Term Assets

Understanding the difference between short-term capital assets and long-term capital assets allows traders to improve their investing strategies, reducing tax obligations and enhancing overall returns. The following table lists the differences between the two:

Short-Term Capital AssetsLong-Term Capital Assets
Holding PeriodHeld for no more than one yearHeld for more than one year
Tax TreatmentSubject to higher tax rates than LTCGSubject to lower tax rates than STCG
StrategyOften traded frequently for short-term gainsHeld for long-term growth and stability
Tax ImplicationsHigher tax obligations due to short-term gains, indicating volatilityLower tax liabilities due to long-term investment, indicating stability
Impact on ReturnsHigher tax rates may reduce overall returnsLower tax rates may enhance overall returns

Understanding Capital Gains Taxes

The right terminology for selling shares at a profit would be capital gains. These capital gains are divided into short-term capital gains (STCG) and long-term capital gains (LTCG). 

Short-Term Capital Gains (STCG): These are profits made from selling stocks that you have owned for less than a year. For example, if you bought 100 shares of XYZ Company in January 2023, and sold them in December 2023 with a profit of ₹50,000, this profit would be a short-term capital gain. And it will attract income tax as per your applicable slab rate.

Long-Term Capital Gains (LTCG): On the other hand, if you sell your shares after a period longer than one year, the profit is considered to be long-term capital gain. Consider a scenario where during January 2022, you acquired 100 shares of company Y, and by January 2024 their value has appreciated by ₹1,50,000. This gain would be categorized as long-term capital gains because the holding period extends more than twelve months. As it exceeds ₹1 lakh, a tax rate of 10% has to be paid.

Securities Transaction Tax (STT): Furthermore, there is something called Securities Transaction Tax (STT). This refers to a duty payable when buying or selling stocks, derivatives or mutual funds in India. It is levied on both buyers and sellers for monitoring stock market activities and generating revenue for government purposes. STT varies depending on which securities one engages in trading. Thus, always count it as an expense while calculating gains and costs associated with trading equities.

Long-Term Capital Loss: Long-term capital loss (LTCL) happens when you sell an investment you’ve held for more than 12 months (except unlisted securities and property is 24 months). This loss can be used to offset long-term capital gains, reducing your tax burden. 

Short-Term Capital Loss: Short-Term Capital Loss (STCL) happens when you sell an investment like stocks or equity funds within 12 months of purchase. This loss can be used to offset taxes, but only against other short-term or even long-term capital gains.

Managing Expenses 

In addition to calculating gains and losses, investors and traders must also consider brokerage fees, commissions, and other trading charges. While these expenses can minimise their overall tax liability by reducing overall profits, they ultimately reduce the net profits further. Every investor and trader must keep records of all transactions and expenses to calculate their taxable income accurately.

Investors should become aware of tax-saving investing options such as equity-linked savings schemes (ELSS) and tax-saving mutual funds. These instruments can generate income while receiving tax breaks under the old tax regime, Section 80C of the Income Tax Act. By adding tax-saving investments to their portfolios, investors can get the most out of their taxes.

Conclusion

Understanding the taxation of income earned from selling shares is essential for navigating the stock market. Through this blog, we have tried to simplify the taxation of income from selling shares, covering short-term and long-term gains, and losses, to asset differences as well.  By exploring tax-saving investment options, like equity-linked savings schemes and tax-saving mutual funds, you can maximize your profits and achieve your financial goals faster.

FAQs

Can I offset losses to reduce my tax burden?

Yes! You can use long-term capital losses to offset long-term capital gains, and short-term capital losses can offset both short-term and long-term gains.

Will dividends received from shares attract any taxes?

Yes. In India, dividends were previously subject to a dividend distribution tax (DDT) paid by the company. However, DDT was abolished in the 2020 budget.  Currently, dividends are taxed based on an individual’s income tax bracket.

Will I be taxed on the income from selling shares in overseas companies?

Yes, gains from the sale of shares in foreign firms are taxable under the Indian ITA (Income Tax Act), subject to the provisions of the Act and India’s double tax avoidance agreement with the place of incorporation. Taxation rates vary depending on criteria such as holding period, nature of the share traded, and so on.