Income Tax on Shares: Taxation of Income Earned by Selling Shares

Income earned from the sale or purchase of shares, especially equity shares, is treated differently under the Income Tax Act. Unlike income from salary, rental income, or business income, the income or loss from shares falls under the head ‘Capital Gains’ and is taxed at special tax rates rather than the usual slab rates. This is particularly relevant for homemakers, retired individuals, and investors who actively engage in the stock market. Understanding the rules and conditions governing capital gains, including how losses can be set off and carried forward for up to 8 years, is essential for accurate tax filing and financial planning. In this article, you will learn about how the income tax on shares works.

Let's connect with IndiaFilings experts now to report your capital gains on shares and file the ITR effortlessly!

Get Started!

What is Capital Gains and its Types?

A capital gain is the profit earned when a capital asset—such as shares, bonds, real estate, or other investments—is sold for a price higher than its original purchase cost. It is a key component of investment income and is realised only when the asset is actually sold. These gains are broadly classified into two types based on the duration for which the asset was held before sale: Short-term capital gains and Long-term capital gains.

Below, we have given a table classifying the short and long-term capital gains based on the holding period of assets:

Short-term Capital Gains

Short-term capital gains (STCG) are profits realised from the sale of capital assets that have been held for a relatively short period, typically one year or less for most financial assets like stocks and bonds. For listed equity shares in India, if you sell the shares within 12 months of purchase, any profit made is considered a short-term capital gain. These gains are usually taxed at a higher rate than long-term gains and must be reported on the annual income tax return. STCG is particularly relevant for active traders and investors who frequently buy and sell assets within short timeframes. The tax treatment of STCG can vary depending on the type of asset and jurisdiction, but the defining feature is the short holding period before sale.

Long-term Capital Gains

Long-term Capital Gains (LTCG) arise when a capital asset is sold after being held for a longer period—more than one year for listed equity shares and more than two or three years for other asset classes, depending on the type of asset. LTCG typically benefits from lower tax rates or specific tax exemptions in many tax systems. For example, in India, gains from listed shares held for more than 12 months are classified as long-term and are taxed at a concessional rate, often with certain exemptions or thresholds. The rationale behind this favourable treatment is to encourage long-term investment and stability in the financial markets.

Taxation on Gain from Equity Shares

Capital gains from equity shares are categorised as Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) based on the holding period of the investment. The tax treatment varies for each type.

Short-Term Capital Gains (STCG)

If listed equity shares are sold within 12 months of purchase, the profit is considered a short-term capital gain and is taxable.

• Applicable Tax Rate:
• 15% up to July 22, 2024
• 20% effective from July 23, 2024 (as per the latest amendment)

STCG Calculation Formula:

STCG = (Sale Price – Expenses on Transfer) – (Cost of Acquisition + Cost of Improvement)

Example:

Suppose Ravi purchased 300 shares of a listed company at ₹180 each in November 2024, totaling ₹54,000. He sold them after 4 months at ₹215 each, earning ₹64,500. Brokerage charges were ₹300.

STCG Calculation:

Ravi will pay 20% tax on ₹10,200, as the sale occurred after July 23, 2024.

Long-Term Capital Gains (LTCG)

If listed equity shares are sold after 12 months, any profit is considered a long-term capital gain. Prior to FY 2018-19, such gains were tax-free. However, as per the Budget 2018, LTCG exceeding ₹1 lakh is taxable at 10% (plus surcharge and cess), without indexation benefits.

• Taxable LTCG = LTCG – ₹1,00,000
• Tax Rate: 10% on the excess amount

This tax applies to gains arising on or after February 1, 2018, with relief for earlier gains through the grandfathering clause.

Example:

Anita bought 400 shares of a listed company at ₹250 per share (₹1,00,000) in December 2019. She sold them in March 2025 at ₹500 per share, receiving ₹2,00,000. The LTCG is ₹1,00,000.

Since the total gain is ₹1,00,000, which is within the exemption limit, no LTCG tax is payable.

However, if the gain had been ₹1,50,000, the taxable portion would be ₹50,000 and the tax liability would be ₹5,000.

Note: While calculating the capital gains from the sale of shares, certain expenses incurred during the transaction, such as registration charges, brokerage fees, and other related charges, are deducted from the sale proceeds. 

Grandfathering Clause for Long-term Capital Gains

The Grandfathering Clause is a tax provision that protects investments made before a certain cut-off date from new tax rules. In the case of Long-term Capital Gains (LTCG), this clause was introduced when the Finance Act, 2018 reintroduced the LTCG tax on listed equity shares and equity-oriented mutual funds, effective from April 1, 2018.

Before this, gains from such investments were exempt from tax. To avoid taxing past gains, the government applied the grandfathering clause: any capital gains earned up to January 31, 2018, remain tax-free. Only gains made after this date are subject to tax.

Grandfathering Clause Formula: How is the Acquisition Cost Calculated?

The cost of acquisition under the grandfathering clause is determined using the following formula:

• Step 1 (Value I): Choose the lower of:
• Fair Market Value (FMV) as of January 31, 2018
• Actual sale price
• Step 2 (Value II): Choose the higher of:
• Value I (from Step 1)
• Actual purchase price
• LTCG = Sale Price – Acquisition Cost (Value II)

Tax Implications:

• LTCG exceeding ₹1 lakh in a financial year is taxed at 10%, plus surcharge and cess.
• Gains up to ₹1 lakh remain exempt.

Example

Let’s say:

• Purchase Price: ₹150 (on July 1, 2017)
• FMV on January 31, 2018: ₹220
• Sale Price: ₹280 (sold on March 15, 2024)

Value I: Lower of ₹220 (FMV) and ₹280 (sale price) = ₹220

Value II: Higher of ₹220 and ₹150 (purchase price) = ₹220

LTCG = ₹280 – ₹220 = ₹60

Since the gain is within the ₹1 lakh exemption limit, no tax is payable in this case.

What about Losses in Equity Shares?

When investors incur a loss from the sale of equity shares, the Income Tax Act provides certain provisions to offset and carry forward these losses, depending on whether they are short-term or long-term.

Short-Term Capital Loss

A short-term capital loss arises when listed equity shares are sold within 12 months at a price lower than the purchase cost. This loss can be set off against:

• Short-term capital gains (STCG)
• Long-term capital gains (LTCG)

If the entire loss cannot be set off in the same year, the remaining amount can be carried forward for up to eight assessment years. During this period, it can be adjusted against any short-term or long-term capital gains.

Important: The loss can be carried forward only if the Income Tax Return is filed within the due date, even if your total income is below the taxable limit.

Long-Term Capital Loss

Before FY 2018–19, long-term capital gains (LTCG) on equity shares were tax-exempt, so long-term capital losses were not recognised under the tax law.

However, from April 1, 2018, after LTCG above ₹1 lakh became taxable at 10%, long-term capital losses on listed equity shares are now also recognised for tax treatment.

• Loss from shares can only be set off against LTCG; it cannot be adjusted against STCG.
• Like Short-term capital gains loss, Long-term Capital Gains loss can also be carried forward for up to eight years to be set off against future LTCG.
• Filing the ITR by the due date is mandatory to avail this benefit.

Securities Transaction Tax (STT)

Securities Transaction Tax (STT) is a tax levied on the purchase or sale of equity shares listed on a recognized stock exchange in India. This tax is applicable only to transactions carried out on the stock exchange and not on off-market trades. STT is charged at the time of executing the transaction—either while buying or selling the listed securities.

It is important to note that the tax implications discussed under capital gains taxation are applicable only to shares on which STT has been paid. Therefore, gains arising from the transfer of listed shares, where STT is applicable, qualify for prescribed tax treatment under the Income Tax Act.

Filing Income Tax Returns on Shares

Income earned from selling shares is taxable under the head Capital Gains and must be reported while filing your Income Tax Return (ITR). Whether you incur a gain or a loss, proper disclosure is essential for compliance and to claim benefits like set-off or carry forward of losses.

Which ITR Form to Use?

• ITR-2: Most individual investors and Hindu Undivided Families (HUFs) who have income from capital gains but no business income should file ITR-2. This form accommodates reporting of capital gains from shares, mutual funds, and foreign assets.
• ITR-3: If you treat your income from share trading as business income (e.g., frequent trading, derivatives trading), you must file ITR-3, which is meant for income from business or profession.

Reporting Capital Gains

• For shares purchased before 31 January 2018, details must be provided in Schedule 112A due to the grandfathering clause.
• Gains from unlisted shares and foreign shares must also be reported, with foreign shares disclosed under Schedule FSI (Foreign Source Income).
• Dividends received from shares, including foreign dividends, should be reported under Income from Other Sources (Schedule OS).

Reporting Foreign Assets and Income

• If you hold foreign shares (e.g., US stocks), you must disclose these under Schedule FA (Foreign Assets), providing details such as the number of shares and their value in INR.
• Foreign capital gains and dividends are taxable in India, and you must report them accurately after converting values to INR using the prescribed exchange rates.
• To avoid double taxation on foreign dividends, you can claim credit under the Double Taxation Avoidance Agreement (DTAA) by filing Form 67 and reporting in Schedule TR (Tax Relief).

Taxation on Unlisted and Foreign Shares

Unlisted shares are equity shares of companies that are not traded on recognized stock exchanges like NSE or BSE. These shares are typically bought and sold privately, often through over-the-counter transactions. Since unlisted shares do not attract STT, they do not qualify for the concessional tax rates available to listed shares. Capital gains from unlisted shares are taxed at the investor’s applicable income tax slab rates for short-term gains, while long-term gains are taxed at 20% with indexation benefits.

Foreign shares refer to equity shares of companies listed outside India, such as US or European stocks. Like unlisted shares, foreign shares are not subject to STT. Capital gains from foreign shares are taxable in India based on the holding period, with short-term gains taxed at slab rates and long-term gains generally taxed at 20% with indexation. Additionally, dividends and capital gains may be taxed in the foreign country, but India’s Double Taxation Avoidance Agreement (DTAA) helps avoid double taxation by allowing credit for foreign taxes paid.

In summary, while STT applies only to listed shares traded on Indian exchanges, unlisted and foreign shares are taxed under income tax laws without STT, with different rates and benefits based on the nature of the shares and applicable tax provisions.

File your ITR For Capital Gains Easily with IndiaFilings!

Don’t let taxes on your share trading profits slow you down. Whether you're an investor, trader, homemaker, or retiree, IndiaFilings makes it easy to report your capital gains and file your Income Tax Return (ITR) accurately. From applying grandfathering rules to claiming loss set-offs, our experts handle it all so you don’t miss deductions or deadlines.

Let’s connect with IndiaFilings to report your capital gains and file the ITR easily & efficiently!

Get Expert Help!

About the Author