How to compute tax on gains on listed & unlisted shares

Preeti KhuranaAman was a regular at stock markets. Two of his friends opened a start-up and gave him equity for helping them prepare their app’s first release. Aman is getting married in 6 months and is in need of money. He decides to liquidate some of his holdings. Let’s help Aman understand how his gains/losses shall be taxed.Period of holdingUsually, gains from an asset which is sold after 36 months are called long term gains. If you sell the asset before 36 months of holding it, your gains are short term. However, equity shares which are listed on a recognised stock exchange in India are considered long term when held for more than 12 months. And short term when held for less than 12 months.

Important points to consider –• Method of accounting - If the shares sold have been purchased at different points in time, use FIFO (first in first out) method to calculate your gains. Shares purchased first, shall be considered as sold first. Aman bought 200 shares of XYZ ltd on 1st February 2012 at Rs 350 per share. These shares were listed on NSE. He purchased another 300 shares on 15th March 2014 at Rs 414. He also bought another 400 shares on 15th December at Rs 320 per share. On 20th December 2015 he sold 400 shares of XYZ Ltd. To calculate his gains, consider cost of 200 shares @ Rs 350 per share and 200 shares from the next lot @ Rs 414 per share.• Listing of shares - Listed shares means listed on a recognised stock exchange in India. If shares are listed out of India, those are treated as ‘unlisted shares’ for capital gains tax calculation in India.• STT - securities transaction tax must have been paid for listed shares. Do not include STT in sale or purchase price of your shares.Tax on GainsIf Aman sells the shares he bought from NSE and BSE within 12 months of holding them, short term gains shall be taxed at 15%. If these shares have been held for more than 12 months, his gains are exempt from tax. However, he may disclose these under ‘exempt income’ in his tax return.For equity held by Aman in a start-up, the cut off for deciding long term or short term shall be 36 months. If equity was held for 36 months or more, his gains shall be taxed @ 20% after indexation. Indexation means, multiplying cost by CII (cost inflation index) of the year of sale and dividing by CII of the year of purchase. This way cost is adjusted for inflation.
Do note that if total taxable income without including short term gains is less than Rs 2,50,000 (minimum amount exempt from tax), any remaining amount of minimum exempt income can be reduced from short term gains. The balance amount of short term gains shall be taxed at 15%.Aman decided to liquidate his long term holdings of equity shares as well as a portion of equity in the start up. He’s looking forward to his wedding.In the next article we will look at how capital losses from sale of equity shares are treated.Author is a Chartered Accountant and Chief Editor at ClearTax