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Investing in listed shares can be a rewarding financial endeavor, but it's essential to understand the tax implications when you eventually sell those shares and realize a profit. In India, the taxation of profits from listed shares held as investments is governed by specific provisions outlined under section 111A and 112A of the Income Tax Act.

This article deals with the computation of long-term capital gain (STCG) from listed equity under the provisions of Section 112A of the Income- Tax Act.
 

Long-Term Capital Gains (LTCG) u/s 112A:

If you hold listed shares for more than one year before selling them, any profit realized is categorized as long-term capital gains. The tax rate applicable to long-term capital gains on listed shares exceeding ₹1 lakh is currently 10% in cases where the securities transaction tax (STT) has been paid on the sale of such shares.

However, the condition of payment of security transactions tax is not applicable where the listed equity shares are sold on recognized stock exchanges located in International Financial Services Centres (IFSC) where consideration for such transactions is paid or payable in foreign currency.

Further, if total income, after reducing the long-term capital gains, falls below the maximum amount not chargeable to income tax, then the Long-term gains are adjusted up-to the basic exemption limit to cover such a shortfall before applying the 10% tax rate.

Let’s understand with examples for better understanding:

(1) Example under the Old Tax Regime

Facts :

• Total Income = Rs 10,00,000/-
• Long -term gains included in the total income = Rs 8,00,000/-
• Basic Exemption Limit = Rs 2,50,000/-

Important points in computation of taxable LTCG

• Long-term capital gain exceeding Rs 1,00,000 are taxable.
• The long-term gains are adjusted against the total income (excluding LTCG) to ensure it do not fall below the income tax exemption threshold, the Basic Exemption Limit (Rs 2,50,000).

Computation of Taxable LTCG :

• After excluding LTCG, the total Income works out to Rs 2,00,000/- [Rs 10,00,000 (-) Rs 8,00,000]
• Total income after excluding LTCG (Rs 2,00,000/-) which is below the basic exemption limit of Rs 2,50,000/-
• Hence, LTCG of Rs 50,000/- out of Rs 8,00,000/- is adjusted to the basic exemption limit
• Out of balance LTCG of Rs 7,50,000/-, the LTCG exceeding Rs 1,00,000/- i.e. Rs 6,50,000/- is taxable.

Tax Calculation on LTCG:

• Taxable Long -term Gains = Rs 6,50,000/-
• Tax payable on Long-term gains (10%): 10% of Rs 6,50,000 = Rs 65,000/-

Total Tax Liability ( Excluding cess and Surcharge):

(A) Tax on total income including LTCG of Rs 50,000/- = Nil

(B) Tax on Long-term gains = Rs 65,000/-

Tax on total income of Rs 10,00,000/- [(A) +(B)] = Rs 65,000/-

(2) Example under the New Tax Regime

Facts :

• Total Income = Rs 10,00,000/-
• Long -term gains included in the total income = Rs 8,00,000/-
• Basic Exemption Limit = Rs 3,00,000/-

Computation of taxable LTCG

• Long-term capital gains exceeding Rs 1,00,000 are taxable.
• The long-term gains are adjusted against the total income (excluding LTCG) to ensure it do not fall below the income tax exemption threshold, the Basic Exemption Limit (Rs 3,00,000).

Computation of Taxable LTCG :

• After excluding LTCG, the total Income works out to Rs 2,00,000/- [Rs 10,00,000 (-) Rs 8,00,000]
• Total income excluding LTCG is Rs 2,00,000/- which is below the basic exemption limit of Rs 3,00,000/-
• Hence, LTCG of Rs 1,00,000/- out of Rs 8,00,000/- is adjusted to the basic exemption limit
• Out of balance LTCG of Rs 7,00,000/-, LTCG exceeding Rs 1,00,000/- i.e Rs 6,00,000/- is taxable.

Tax Calculation:

• Taxable Long -term Gains = Rs 6,00,000/-
• Tax payable on Long-term gains (10%): 10% of Rs 6,00,000 = Rs 60,000/-

Total Tax Liability ( Excluding cess and Surcharge):

(A) Tax on total income including LTCG of Rs 1,00,000/- = Nil

(B) Tax on Long -term gains = Rs 60,000/

Tax on total income of Rs 10,00,000/- [ (A) +(B)] = Rs 60,000/-

Conclusion

Understanding the tax implications of profit from listed shares held as investments is crucial for investors to effectively plan their financial strategies and comply with the applicable tax regulations. It's advisable to consult with a tax advisor or financial expert to ensure proper tax compliance and optimize tax efficiency when dealing with investments in listed shares.

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Disclaimer:

The article is only for educational purposes and is not to be construed as tax advice. The relevant provisions of the Income-tax Act may be referred to, for complete understanding.