Three conditions that define capital gains tax on shares

Arnav PandyaInvestors are still not clear about the time period when the capital gains from their equity holdings are not subject to tax when they are long term capital assets. This happens as there are several conditions related to the sale which leads to variations in the manner in which the transaction has been completed and hence the applicable conditions for the specific holding needs to be considered by the investor. There is however a simple way in which the investor can check the conditions that will provide this benefit and then go ahead and claim the required benefit. Here is a detailed look at the entire issue and how this will work out.Nature of benefitAn equity investment that is in the nature of an equity share can have two types of gains earned on it. If the holding period of the shares is less than one year, then any gains earned on this would be short term capital gains. On the other hand when the holding of the shares is for a period of one year or more than the gains will be called as long term capital gains. The Income Tax Act gives a favourable treatment for capital gains from equities with the short term capital gains being taxed at 15 per cent while the long term capital gains having a tax rate of zero per cent. This ensures that for smart and savvy investors holding shares for a longer time frame will mean that the income becomes tax free in their hands. This concessional rate will however be applicable only if there are some additional conditions met and these are the areas that need some close scrutiny.Securities Transaction Tax (STT) paidOne of the primary conditions that have to be fulfilled when the individual claims capital gains for a benefit is that there has to be securities transaction tax paid on the sale transaction. This will happen as the order is executed and then the required amount is paid at the time of the calculation of the various additional costs that are incurred on the sale. A close look at the contract for the trade that an investor gets from their broker will show that there are various heads under which the investor pays several charges. While the basic is the price at which the transaction was undertaken there would be broker’s commission plus securities transaction tax plus stamp duty plus service tax as some of the heads that are present under which various amounts are recovered. One way of confirming that the STT has been paid is by checking the contract note after the sale has been complete.Traded on a recognised stock exchangeAnother condition that has to be met is that the transaction for the share has to be conducted on a recognised stock exchange. The major stock exchanges in the country like the BSE and the NSE have been notified as recognised stock exchanges so if the transaction has taken place here then once again the condition is met and this will enable the individual to take the benefit of the lower rate of tax. There has to be an element of caution exercised in this whole dealing because of the fact that there are several other types of sale which includes a buy back from the company or submission of the shares in an open offer that might not fulfill this condition and hence the benefits can be blocked. Also both the conditions have to be met and hence just one of them being fulfilled will not be enough for the investor to get the required benefits.