Before we proceed on main topic let’s understand capital gain tax rate in India on listed equity shares investment
Short term capital gain tax – 20%
Long term capital gain tax – 12.5%
Holding period of listed equity shares less than 12 months the same shall be fallen under short term capital gain tax and holding period more than 12 months the same shall be fallen under long term capital gain tax.
Long-term capital loss will only be adjusted towards long-term capital gains. However, a short-term capital loss can be set off against both long-term capital gains and short-term capital gain.
Indexation benefit which was available in case of long-term capital gain is not longer available as per amendment in Budget in 2024.
Now let’s take practical example to understand how to save short term capital gain tax on listed equity shares investment
Mr. A purchased listed 10 equity shares each of X Ltd. and Y Ltd on 1st April 24 @ Rs. 100 per share.
Mr. A total investment is Rs. 2,000 (X Ltd Rs. 1,000 and Y Ltd Rs. 1,000)
Now suppose in 25 March 25 price of X Ltd increase to Rs. 200 per share and price of Y Ltd decrease to Rs. 25 per share
Hence Mr. A decided to sold equity shares of X Ltd on 25 March 25 and book profit of Rs. 1000 (Rs. 2000 (10*200) selling price – Rs. 1000 (10*100) purchase price).
Mr. A liable to pay short term capital gain tax @20% on aforementioned short term capital gain of Rs. 1,000 because holding period of shares of X Ltd is less than 12 months. Short term capital gain tax is Rs. 200 (Rs. 1,000 gain*20% tax rate).
Mr A wants to hold Y Ltd shares for long-term even price of said shares has been reduced by 75% to Rs. 25.
In this case in order to save short term capital gain tax on selling of X Ltd shares, Mr. A can sold Y Ltd shares on 25th March 25 and can book short term capital loss of Rs. 750 (Rs. 250 (10*25) selling price – Rs. 1000 (10*100) purchase price).
On next day i.e. 26 March 25, Mr A can re-purchase shares of Y Ltd which may be available at same rate i.e. Rs. 25 per share aggregating total Rs. 250 (10 equity shares of Rs. 25) because he wants to retain the same shares for long-term.
By doing this exercise Mr. A saved Rs. 150 short term capital gain tax (Capital gain on X Ltd Rs. 1000 – Capital loss on Y Ltd Rs 750 = Net Capital gain Rs. 250. Short term capital gain tax @20% on Rs. 250 = Rs. 50. Earlier short-term capital gain tax was Rs. 200 which is reduced to Rs. 50).
Now question will arise by selling Y Ltd shares in loss on 25 March 25 in order to take advantage of short-term capital loss, Mr. A loose the advantage of holding period of Y Ltd. shares because on 01 April 25 the same will be converted into long term if the same was not sold on 25 March 25.
Therefore, Mr A needs to identify such stocks in his portfolio which is under short term capital loss and not going to be converted into profit within next 12 months or which he does not intends to sold in next 12 months in order to save short term capital gain tax.
Let’s understand this situation by taking practical example.
As mentioned above Mr A Ltd sold Y Ltd shares in loss on 25 March 25 in order to take advantage of short term capital loss and re-purchased the same shares on 26 March 25.
Now suppose on 30 March 26 (i.e. 12 months after from the date when Mr A re-purchased the shares of Y Ltd), shares price of Y Ltd is increased to Rs 150 and Mr A decided to sell the same shares.
Mr. A sold Y Ltd shares and book the long-term capital gain of Rs. 1250 (Rs. 1500 (10*150) selling price – Rs. 250 (10*25) purchase price).
Mr. A liable to pay long term capital gain tax @12.5% on aforementioned long term capital gain of Rs. 1250 because holding period of shares of Y Ltd is more than 12 months (26 March 25 to 30 March 26). Long term capital gain tax is Rs. 156.25 (Rs. 1,250 gain*12.5% tax rate).
Now let’s see how much net saving done by Mr. A by doing all aforementioned exercise.
Mr. A saved Rs. 150 short term capital gain tax as mentioned above.
Suppose if Mr A has not done above exercise and paid full short term capital gain of Rs. 200 in that case long term capital gain in case of Y Ltd shares shall be different and same is calculated as below
Original purchase price of Y Ltd shares on 01 April 24 was Rs 100 per share i.e. total Rs. 1000 (10 shares of Rs 100)
Mr. A sold Y Ltd shares at Rs 150 per shares i.e. in total Rs. 1500 on 30 March 26 and hence long-term capital gain in this case is Rs 500.
Long term capital gain tax on above is Rs. 62.5 (Rs. 500 gain*12.5% tax rate).
Therefore, without doing any exercise Mr A paying long term capital gain tax on Y Ltd shares is Rs 62.5 and by doing all aforementioned exercise he paying long term capital gain tax on Y Ltd shares is Rs. 156.25.
Accordingly, Mr. A paying higher long term capital gain tax by doing all aforementioned exercise by Rs. 93.75 (Rs. 156.25 – Rs. 62.5).
However, by doing all aforementioned exercise Mr. A was saving short term capital gain tax of Rs 150 which is more than extra long-term capital gain tax paid by Mr A i.e. Rs 93.75.
Net gain for Mr. A by doing all aforementioned exercise is Rs. 56.25 (Rs. 150 – Rs. 93.75).
In addition to above Mr. A can also earn time value of money on short term capital gain tax which he saved for the FY 2024-25. Mr. A saved Rs. 150 short term capital gain tax as mentioned above. By taking conservative view if he kept the same amount in Bank FD @ 7% p.a. intertest for one year (i.e. 25.03.2025 to 30.03.2026) then additional return in the form of interest he can earn Rs. 10 on the same.
Therefore, net gain for Mr. A is Rs. 66.25 (including additional Rs. 10 interest income he can earn on Bank FD).
Disclaimer: The above article is meant for informational and educational purposes only, and should not be considered as any investment and financial advice. Articles oasis suggests its readers/audience to consult their financial advisors before making any money related decisions.