All you need to know about capital gains tax

Are regulations on equity income taxation in India confusing you? Don’t worry; you’re not the only one. While there are many people who will give you advice on which stocks to invest in, there are few who correctly tell you how equity gains will be taxed. Here is all you need to know about equity income taxation in India.

Long-term capital gains: Holding a stock for 12 months or more is considered long term. So, if you sell a share after 12 months or more of purchasing it, the stocks will be considered to have been held for the long term. This will attract ‘Long-Term Capital Gains Tax’. Right now, this tax is 0. So, the profit you make on selling such shares is exempt from tax. Note that the taxation rules for long-term capital gain only apply to shares that are bought and sold on a stock exchange. Off-market sales, sales of unlisted securities, and sale of shares in a buyback or a tender offer are taxed differently.

Securities Transaction Tax: In addition to capital gains, you also have to pay Securities Transaction Tax. STT is the tax that you have to pay each time you buy or sell a security on the stock market. It is automatically added to your buying/selling price by most brokers.

Short-term capital gains: Shares that you sell within 12 months of purchasing are considered to have been held for the short run. Profits from the sale of such shares are taxed at the short-term capital gains tax rate of 15%. Again, this rate will apply only if you have paid the STT, and only to shares bought and sold on the stock market.

Unlisted shares: Shares of companies that are not listed on a stock exchange are known as unlisted shares. Since these companies are not listed on an exchange, their shares have to be exchanged privately between parties, without the involvement of an exchange. Long-term capital gains arising from the sale of unlisted shares are taxed at 20% and receive indexation benefits. In other words, they are adjusted for inflation before being taxed. Profits earned from the sale of unlisted shares that were held for the short term are considered a part of the shareholder’s income and are taxed at the rate that applies to his income tax bracket.

Off-market sales: The off-market category constitutes of shares that are sold by a shareholder in response to a tender offer or a stock repurchase by the issuing company. Profits generated from the sale of such shares are taxed at a flat rate of 20% with indexation or 10% without indexation. You can adjust your gains for inflation. This is called indexation. This helps reduce your tax liability.

RGESS shares: Shares bought under the Rajiv Gandhi Equity Savings Scheme (RGESS) are subject to a tax deduction up to Rs 25,000, provided that you fulfill certain conditions. Your total annual income must be equal to or below Rs 12 lakh and the investment you have made in the scheme shouldn’t exceed Rs 50,000. In addition to this, there are some lock-in requirements too that you’ll have to meet to be eligible. Anything over the deductable limit is taxed at the standard rate.

Taxation of dividends: In India, shareholders are not taxed directly on their dividends. Dividends are taxed at the company level itself. Companies that pay dividends are required to pay 15% of the dividend amount as tax, before they distribute the dividend to shareholders. This tax is known as Dividend Distribution Tax (DDT). In your hands, however, dividends are tax-free.