This is the third blog in the Making Sense of Stocks series, incase you missed the previous blog go check it out and then come back for a better understanding.
This blog is one of the most important in this series as the blog will discuss Capital Gains.
Capital Gains by definition refer to profits from the sale of capital assets. In layman's terms, it refers to the profit earned due to an increase in the price of the asset. So the difference between buying price and selling price represents capital gains. In regards to the stock market capital gains refers to the profit earned from the sale of stocks.
Classification of Capital Gains
On the basis of time period Capital Gains may be classified as follows-
Long-Term Capital Gains- The gains generated from the sale of equity shares that have been held for a period of more than 12 months fall into this category. In the case of unlisted shares, the time period is considered to be 36 months.
Short-Term Capital Gains- The gains generated from the sale of equity shares that have been held for a period of less than 12 months fall into this category. In the case of unlisted shares, the time period is considered to be less than 36 months.
NOTE- Shares that have been listed on a Stock Exchange (e.g.- NSE, BSE, etc ) are known as listed shares. Similarly, the shares that haven't been listed on a stock exchange are known as unlisted shares.
PS: The listing of Stocks will be discussed in detail in future blogs.
Taxation of Capital Gains
NOTE- For a better understanding of Taxation kindly visit the income tax website.
Short-Term Capital Gains Tax
If equity shares are sold before a period of 12 months then it would be considered as Short Term Capital Gains and the investor would be required to pay taxes accordingly.
In the case of short-term capital gains, an investor is required to pay a tax of 15% on the Short Term Capital Gains. Short Term Capital Gains can be calculated as follows:-
Short Term Capital Gains = Sale Price - Expense on Sale - Purchase Price
Sale Price is the price at which the asset (in this case stock) is being sold.
Expense on Sale includes expenses incurred by investors on the sale of assets like brokerage.
Purchase Price is the price at which the asset had been purchased.
Long-Term Capital Gains Tax
If equity shares are sold after a period of 12 months then it would be considered as Long Term Capital Gains and the investor would be required to pay taxes accordingly.
In the case of long-term capital gains, an investor is required to pay a tax of 10% on the Long Term Capital Gains.
That's it for this blog, in the next blog Dividends- meaning, payment, and taxation will be covered.
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