Capital Gains in Share Market

Investing in shares can be rewarding, especially when the value of your investment grows over time. This increase in value is often referred to as a capital gain. Understanding how capital gains work is essential for every investor, particularly when it comes to tax planning and financial decision-making.

In this blog, we’ll explain what capital gains are, the types of gains, how to calculate them, and how they are taxed in India. We’ll also walk through a simple example to make the concept even clearer.

What Are Capital Gains?

Capital gains refer to the profit earned when you sell a capital asset, such as shares, for a higher price than what you paid for it. This gain is realised only when the asset is sold.

For example, if you bought a stock for ₹100 and sold it later for ₹150, the capital gain is ₹50.

Capital assets include:

• Shares

• Bonds

• Mutual funds

• Real estate

• Gold

In the context of the share market, capital gains are mostly linked to equity shares and equity-oriented mutual funds.

Types of Capital Gains

Capital gains in India are categorised based on the holding period of the asset before it is sold:

• STCG: If held for 24 months or less

• LTCG: If held for more than 24 months

These classifications are important because the tax rates vary depending on the type of gain.

How to Calculate Capital Gains

To calculate capital gains, you need to know:

1. Purchase Price (Cost of Acquisition)

2. Selling Price (Sale Consideration)

3. Expenses Incurred on Transfer (such as brokerage, service charges)

4. Indexation Benefit (only applicable to LTCG on some assets)

Basic Formula:

For long-term capital assets (except listed shares and mutual funds), indexation helps adjust the purchase price based on inflation. This reduces the taxable gain.

Indexed Cost = Purchase Price × (CII of Sale Year / CII of Purchase Year)

CII = Cost Inflation Index, notified by the Income Tax Department each year.

Capital Gains Tax Rates in India

Here’s a simplified table to understand the current tax rates:

Note: The above tax rates are exclusive of cess and surcharge, which apply based on income level.

Example of Capital Gains

Let’s consider an example:

• You bought 100 shares of XYZ Ltd. at ₹200 each on 1st April 2022.

• You sold them at ₹300 each on 1st May 2023.

• Brokerage and other charges during the sale = ₹500

Step-by-step:

1. Total Sale Value = 100 × ₹300 = ₹30,000

2. Purchase Value = 100 × ₹200 = ₹20,000

3. Expenses on Transfer = ₹500

4. Capital Gain = ₹30,000 – ₹20,000 – ₹500 = ₹9,500

Since the holding period is more than 12 months, it qualifies as long-term capital gain.

In this case, the gain of ₹9,500 is below ₹1 lakh, so no tax is payable on this amount.

Conclusion

Capital gains are a vital part of any investor’s journey in the share market. Knowing how they are calculated and taxed helps you plan your investments better and stay compliant with tax regulations. Whether you’re booking short-term profits or holding for the long term, being aware of your capital gains position is essential.