With the availability of multiple investment avenues, rapidly growing technology, and increase in investor awareness, more and more people are encouraged to invest in the securities market. Whether you are a new or an active investor, you must know that any income from trading in these securities is taxable under the Income Tax Act, 1961.
What is capital gains from securities?
Any profit arising from the sale of any of the financial securities like equities, debt, mutual funds, and derivatives is known as a capital gain. This profit is considered as your income and thus you will have to pay tax on this amount in the same year you sell the securities. This is known as capital gains tax.
The investment horizon or the duration for which an investor holds his securities decides the rate of tax levied on this gain. However, this tenure differs for every asset. Below is the duration chart that will help you categorize the marketable securities as long-term or short-term at the time of selling the securities.
| Type of Asset | Short-term Duration | Capital Gain | Long-term Duration | Capital Gain |
| Shares | Less than 1 year | Short-term Capital Gain (STCG) | More than 1 year | Long-term Capital Gain (LTCG) |
| Equity-oriented Mutual Funds | Less than 1 year | STCG | More than 1 year | LTCG |
| Debt Securities | Less than 3 years | STCG | More than 3 years | LTCG |
| Debt-oriented Mutual Funds | Less than 3 years | STCG | More than 3 years | LTCG |
Applicable tax rates
Following are the tax rates applicable on capital gains for each of the marketable securities for the FY 2021-2022.
| Security | Investment Horizon | Tax Applicability | Illustrations |
| Shares / Equity Oriented Mutual Funds | Long-term |
|
Holding Period – 24 months Net Sell Price – 2,75,000 LTCG – ₹95,000 (2,75,000-1,80,000) Capital Gain Tax – NA
Holding Period – 22 months Net Sell Price – 3,00,000 LTCG – ₹1,20,000 (3,00,000-1,80,000) Capital Gain Tax – 2,000 {10% of 20,000 (1,20,000 – 1,00,000)} |
| Shares / Equity Oriented Mutual Funds | Short-term | 15% tax on capital gains | Net Buy Price – 2,00,000
Holding Period – 11 months Net Sell Price – 2,90,000 STCG – ₹90,000 (2,90,000-2,00,000) Capital Gain Tax – 15% of 90,000 |
| Debentures / Debt Securities / Non-equity / Debt Mutual Funds / Debt ETFs / Gold ETFs | Short-term | Capital gain is taxed as per the income tax slab rate applicable for an individual | Income Tax Bracket – ₹7,50,000 – ₹10,00,000
Income Tax Rate – 20% Capital Gain – ₹4,00,000 Capital Gain Tax – ₹80,000 |
| Debentures | Long-term | 20% tax without indexation | Buy Amount – ₹1,50,000
Sell Amount – ₹2,50,000 Capital Gain – ₹1,00,000 Tax – 20,000 (20% of ₹1,00,000) |
| Non-equity / Debt Mutual Funds / Debt ETFs / Gold ETFs | Long-term | 20% tax with indexation benefit | Invested Amount (2018-19) – ₹1,00,000 (Mutual Funds Units @₹20)
Holding Period – 3 years Redeem Amount (2021-22) – ₹2,00,000 (Mutual Funds Units @ ₹40) Capital Gain (without indexation) – ₹1,00,000 ICoA* = 1,00,000*(317/280) ICoA = 1,13,214 Capital Gain (with indexation) = ₹86,786 Capital Gain Tax – ₹17357 (20% of 86786) |
Tax rates mentioned above exclude health and education cess.
*Indexation – A process in which the acquisition cost of security is arrived at after considering the effect of inflation over a period of time. Indexed Cost of Acquisition (ICoA) will be arrived at by using the following formula.
ICoA = Original cost of acquisition * (Cost Inflation Index (CII) of the year of sale/CII of year of purchase)
Conclusion
The profit or loss you earn / bear through the sale of your marketable securities is known as Capital Gain / Loss. It is treated as an income under the Income Tax Act,1961, and is thus taxed accordingly. So, the next time you sell your securities check the above table to know the tax rate applicable. You can use this table to compute your capital gain and tax liability beforehand.
