How to Compute Short Term and Long Term Capital Gain Tax From Investments in Stocks

Most of you must be aware that as per Income Tax Act, 1961, any income or gain from any source is liable for payment of tax. Gains from investments in stocks are liable for Capital Gain Tax, which is divided into short term and long term capital gain tax. Gains from investments held for less than one year (but more than one day) is chargeable as STCG Tax and gains from investment held for more than one year is chargeable as LTCG Tax. Calculation of profit and loss from investments in stocks and the resulting tax liability is relatively easy, as it involves simple math. However, many people are often scared when it comes to income tax calculations. In this article, I have explained how to calculate profit and loss and tax from the transactions involving investments in stock.

First of all, let me make it clear that stock trading and investment in stock are two different aspects from the point of view of income tax. In this article, I have not touched income from stock trading (day trading or Intra-Day transactions), and trading in Futures and & Options or income from speculative business, as is known in the Income Tax jargon.

Let's see how to calculate STCG and LTCG Tax.

1. Profit and Loss: Profit and Loss = Cost of Sale - Cost of Purchase (Cost of Acquisition);

Cost of sale = The gross sale or realization amount - Expenses incurred for selling the stocks

Cost of acquisition = Gross purchase amount + Expenses incurred on buying the stocks

2. Expenses: Transactions involving sale and acquisition of stocks include the following types of expenses. You can refer the Contract Notes issued by your broker to find out the exact amount of brokerage, Service Tax, Securities Transaction Tax and Other Statutory Fees

Brokerage: Brokerage paid to your brokers is the main component of expenses on sale and acquisition of stocks.

Service tax and Education Cess: Your stock broker has to pay service tax and education cess at the rate of 10.3% on the brokerage amount, which in turn is passed on to you.

Other Charges: Transactions in stock involve other statutory charges such as stamp duty, turnover tax, and transaction charges of the stock exchanges, which are also passed on to the investors.

DP Charges: It includes DEMAT annual maintenance charges and transaction charges. You can get the amounts from DP Statements issued by your broker.

Securities transaction tax (STT): Although STT is an expense for you but it cannot be claimed as a deduction from the profit and loss from investments in stocks and therefore, in your calculations of profit and loss, you have to exclude STT.

3. Capital Gains Tax: After having calculated the profit and loss, the next step is to calculate the tax liability. At present, the rate of short term capital gain tax is 15% and long term capital gain on investments in stocks is exempted from income tax, that is, long term capital gain tax is zero.

You can visit Financial Awareness Portal to get more info with practical examples on how to compute Short Term and Long Term Capital Gains Tax using a spreadsheet.