Taxation of Income Earned from Selling Shares

Investing in shares is one of the most popular ways to build wealth in India. But you need to keep in mind that once you sell your shares and make capital gains, this income does not come tax-free. That’s right! Selling your shares is subject to the rules outlined in the Income Tax Act, 1961. Income earned from selling your shares will be subject to tax based on the type of shares, the holding period, the nature of the transaction (whether the transaction is regarded as investment or trading), and applicable tax rates.

This blog delves into the tax rules around selling shares in India, explains the difference between short-term and long-term capital gains, describes what is exempt from taxation, and provides tips to legally minimise your tax liability.

Introduction

When an individual or a corporation sells shares and the result is a profit, that profit is either capital gains or business income, based on the type of transaction.

• When you invest in shares with the expectation of holding them to grow the value and then sell, the profit is classified as capital gains.
• When you buy and sell shares regularly (like a trader), the profit is considered business income and taxed at the slab rates.

Understanding the difference is very important because it establishes not only the tax rate but also the deductions and exemptions.

Taxation of Shares – Key Classifications

1. Based on Holding Period

Shares are classified as short-term or long-term depending on how long you hold them –

• Short-Term Capital Asset: Listed shares held for 12 months or less.
• Long-Term Capital Asset: Listed shares held for more than 12 months.

(For unlisted shares, the threshold for long-term is 24 months.)

2. Short-Term Capital Gains (STCG)

• Selling listed equity shares (stock) within 12 months and achieving a gain is categorised as STCG.
• The tax rate is 15% under section 111A, plus a surcharge and cess, when a sale takes place through a recognised stock exchange, subject to securities transaction tax (STT).
• Example – You bought XYZ Ltd stock in January for ₹200 for 500 shares and sold them in June for ₹250. Therefore, your profit was ₹25,000 → taxed at 15%.

In the case of off-market transactions (a transaction with no STT), the gain would be taxable at your slab rate.

3. Long-Term Capital Gains (LTCG)

• Selling listed equity shares (stock) after 12 months of holding is considered an LTCG.
• The tax rate is 10% (under s. 112A) on gains above ₹1,00,000 for the financial year (but no indexation).
• Example – You bought shares worth ₹2,00,000 in April 2022 and sold them for ₹3,50,000 in June 2024. Therefore, your LTCG was ₹1,50,000 and your tax payable was 10% of ₹50,000 = ₹5,000.

4. Business Income from Shares

If trading in shares is your main insistence, i.e. buying and selling shares on a frequent basis with a profit motive, your income will be considered business income and taxed at slab rates –

• For individuals – As per income tax slabs (5%, 20%, 30%).
• For companies – Corporate tax rates (22% for domestic companies, otherwise 30%). You can deduct expenses, including brokerage, internet expenses, office rent, etc., as business deductions.

Taxation of Dividends vs. Sale of Shares

It is important to differentiate –

• Sale of Shares → Capital Gains Tax (STCG or LTCG)
• Dividends from Shares → Taxable in hands of shareholders at applicable slab rates (since DDT was abolished in 2020).

Exemptions and Deductions

1. Exemption u/s 54F

If you make the LTGC of selling the shares and you invest the sale consideration in residential house property, you can claim exemption (subject to the conditions).

2. Exemption for Agricultural Bonds or Specific Investment

Certain notified bonds allow you to reinvest capital gains in order to save tax.

3. Set off and Carry Forward of Losses

• Short-term capital loss (STCL) – You set off STCL against STCG and LTCG.
• Long-term capital loss (LTCL) – You set off LTCL only against LTGC.
• Both can be carried forward for 8 years.

Advance Tax and Filing Obligations

If your tax liability on share transactions is more than ₹10,000 in a year, you are obligated to pay advance tax in instalments.

All such transactions must be reported using the prescribed ITR forms:

• ITR-2 → For individuals with capital gains (non-business).
• ITR-3 → For individuals earning trading income (business income).

Tax Planning Tips for Shareholders

• Hold your shares for longer than a year to gain from reduced LTCG tax rates.
• Use your ₹1 lakh annual LTCG exemption wisely, by booking profits when appropriate.
• Use any losses to offset against gains to reduce taxable income.
• Consider investing in bonds that save tax under sections like 54EC.
• Maintain accurate records of all transactions, brokerage and charges.

Conclusion

The taxation on income from the sale of shares will be determined by how the income is classified, whether as a short-term or long-term capital gain or business income. The short-term capital gain rate is taxed at 15% while the long-term income rate is concessional at 10% for income above ₹1 lakh. Traders would be taxed using slab rates or at corporate tax rates.

Recognising these rules simply helps investors plan better, enables the use of exemptions and set-offs to minimise tax, and helps minimise surprises relating to filing returns. In the end, smart tax planning is just as important as smart investing in order to build more wealth in the stock market.

Related Service

Share Transfer Online

Reference

The Income Tax Rules, 1962

The Income Tax Act of 1961

https://www.incometax.gov.in/

https://incometaxindia.gov.in/