CAPITAL GAIN TAX

What is Capital Gain?

Capital gain can be described as the profit earned when the selling price of a capital asset like a bond, share, stock, etc. exceeds the purchase price of the same. In simpler terms, it is the difference between the selling price and purchase price of a particular capital asset.

Types of Capital Gain

First, let us understand what are the Types of Capital Gain

Short Term Capital Gain Tax in Stock Market

The short term capital gain is earned when the stock is purchased and sold within one year of purchase. It includes the following types of stock trading:

Intraday Trading: When the stock is purchased and sold on the same day without holding the position overnight, it is called intraday trading.

Short Term Trading: When the stock is purchased and kept for more than one day but less than one year, it is called short term trading.

Long Term Capital Gain Tax in Stock Market

The long term capital gain is earned when the stock is purchased and sold after one year of purchase.
The tax treatment for short term capital gain and long term capital gain is different.

Long term V/s. Short term Capital Gain Tax Rates in Stock Market in India

Type of Capital Gain	Taxation rates
Short Term Capital Gain Tax in stock market (STCG)	The short term capital gain is taxed at the normal slab rates of an individual’s income. It is added to the income earned by an individual during a particular financial year The short term capital gain from equity shares and equity mutual fund will be taxed at 15%
Long Term Capital Gain Tax in stock market (LTCG)	10% on the capital gain from equity shares and mutual fund if gains are more than 1 Lakh

Do you know Income tax slabs changed in Budget 2020? Here are the new Income tax slab rates for 2020-21

Income (in Lakhs)	Tax Rate
0-2.5	Nil
2.5-5	5%
5-7.5	10%
7.5-10	15%
10 -12.5	20%
12.5-15	25%
Above 15	30%

After getting a basic understanding of taxation you might be wondering how capital gain tax is calculated on shares.

How to calculate tax on the long term and short term capital gain earned from the stock market

Long term Capital Gain Tax (LTCG) on shares
If you earned income of ₹2,50,000 and LTCG of ₹400000 then the tax amount would be:

Income	₹250000
LTCG	₹400000
LTCG after the exemption of ₹100000	₹300000
Taxation rate	10%
Taxable Amount (300000*10%)	₹30000

There will be no tax levied on the income of ₹2,50,000 as it is exempted. The tax amount would be ₹30,000.

Short Term Capital Gain Tax (STCG) on shares
Let us understand with example, Here we will consider two scenarios:

Situation 1
If you earned an income of ₹2,50,000 and STCG of ₹1,00,000 then the tax amount would be,

Income	₹250000
STCG	₹100000
Taxation Rate	15%
Taxable Amount (100000*15%)	₹15000

Situation 2
If you earned income of ₹400000 and STCG of ₹100000 then the tax amount would be

Income	₹400000
STCG	₹100000
Taxation Rate on Personal Income	5%
Tax on Income after exemption[(400000-250000)*5%]	₹7500
Tax on STCG (100000*15%)	₹15000
Taxable Amount (100000*15%)	₹22500

Here you should understand that the STCG is taxable at rate of 15% if it is not covered under exempted income.

How you can save capital gain tax in the stock market?

• Tax of LTCG up to ₹1,00,000 is exempted.
• If you have earned LTCG up to ₹2 lakh, split withdrawal in two financial years to keep the gains below ₹1 lakh in both years.
• The solution to your pain can be the Harvesting technique. Harvesting suggests that retain a part of profits and reinvest the proceeds. Suppose you have earned capital gain of ₹4,00,000 you can retain the amount of ₹1,00,000 and invest the remaining amount in the stock market again.
• You can invest LTCG proceeds in residential property.