Investing in equities offers the potential for significant returns, but it's essential to understand the tax implications associated with these investments. In India, capital gains from equity investments are categorized into Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG), each with distinct tax treatments.

Investing in equities offers the potential for significant returns, but it's essential to understand the tax implications associated with these investments. In India, capital gains from equity investments are categorized into Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG), each with distinct tax treatments.

Understanding Capital Gains

A capital gain arises when you sell a capital asset, such as equity shares, for more than its purchase price. The duration for which you hold the asset determines whether the gain is classified as short-term or long-term.

Short-Term Capital Gains (STCG)

If you sell equity shares listed on a recognized stock exchange within 12 months of acquisition, the profit is considered a Short-Term Capital Gain. As per the Union Budget 2024, STCG on listed equity shares and equity-oriented mutual funds is taxed at 20%, effective from July 23, 2024.

Long-Term Capital Gains (LTCG)

When equity shares are sold after being held for more than 12 months, the profit qualifies as a Long-Term Capital Gain. According to the Union Budget 2024, LTCG exceeding ₹1.25 lakh in a financial year is taxed at 12.5%, effective from July 23, 2024.

Key Differences Between LTCG and STCG

• Holding Period: STCG applies to assets held for 12 months or less, while LTCG applies to assets held for more than 12 months.
• Tax Rates: STCG is taxed at 20%, whereas LTCG exceeding ₹1.25 lakh is taxed at 12.5%.

Tax Calculation Examples

1. Short-Term Capital Gain Example:

   • Purchase: 100 shares at ₹100 each = ₹10,000
   • Sale (within 12 months): 100 shares at ₹150 each = ₹15,000
   • STCG: ₹15,000 - ₹10,000 = ₹5,000
   • Tax Payable: 20% of ₹5,000 = ₹1,000

2. Long-Term Capital Gain Example:

   • Purchase: 100 shares at ₹100 each = ₹10,000
   • Sale (after 12 months): 100 shares at ₹200 each = ₹20,000
   • LTCG: ₹20,000 - ₹10,000 = ₹10,000
   • Taxable LTCG: ₹10,000 - ₹1,25,000 exemption = ₹0 (since the gain is below the exemption limit)
   • Tax Payable: Nil

Important Considerations

• Securities Transaction Tax (STT): STT is levied on transactions of listed equity shares and equity-oriented mutual funds. For STCG and LTCG tax benefits to apply, STT must have been paid at the time of purchase and sale.
• Exemptions: LTCG up to ₹1.25 lakh in a financial year is exempt from tax. Gains exceeding this threshold are taxed at 12.5%.
• Set-Off and Carry Forward: Short-term capital losses can be set off against both short-term and long-term capital gains, while long-term capital losses can only be set off against long-term capital gains. Unadjusted losses can be carried forward for eight assessment years.

Conclusion

Understanding the distinction between STCG and LTCG, along with their respective tax rates and holding periods, is crucial for effective tax planning in equity investments. Staying informed about the latest tax regulations ensures compliance and helps in optimizing returns on your investments.

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