How to Calculate Capital Gains on Shares

Calculating capital gains on shares involves determining the profit or loss made when selling shares by comparing the sale price with the purchase price, adjusted for relevant expenses. The calculation differs slightly for short-term and long-term capital gains, based on the holding period of the shares.

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

Understanding Capital Gains on Shares

Capital gains arise when shares are sold at a price higher than their purchase price. Conversely, a capital loss occurs if shares are sold at a lower price. For tax purposes, shares held for one year or less typically attract short-term capital gains tax (STCG), while those held for more than one year are subject to long-term capital gains tax (LTCG). This holding period definition can vary depending on jurisdiction but generally follows this rule for listed shares.

Calculating Short-Term Capital Gains (STCG)

To calculate STCG on shares, use this formula:
STCG = Sale Price − (Purchase Price + Expenses on Purchase and Sale)

The purchase price includes the cost of acquiring the shares along with brokerage or transaction fees. Expenses on sale may include commission and other selling costs. The gain is taxable at the applicable short-term capital gains tax rate, which may differ by country.

For example, if you bought shares for ₹10,000 (including brokerage fees) and sold them for ₹12,000 after paying ₹200 in selling fees, your STCG is:
12,000 − (10,000 + 200) = 1,800

This ₹1,800 would be the taxable short-term capital gain.

Calculating Long-Term Capital Gains (LTCG)

LTCG calculation is similar but often includes adjustments like indexation (adjusting purchase cost for inflation) or grandfathering provisions, depending on the tax laws:
LTCG = Sale Price − (Indexed Cost of Acquisition + Expenses on Sale)

Indexation adjusts for inflation to reduce tax liability. Grandfathering rules protect gains that existed before a certain date from tax. Long-term capital gains tax rates are generally lower than short-term rates.

If indexation is not applicable, LTCG is simply the difference between sale price and cost price adjusted for allowable expenses.

Important Points

Keep records of purchase price, sale price, and related expenses for accurate calculation. Tax laws may offer exemptions or threshold limits for capital gains tax. Losses can often be set off against gains to reduce tax liability. Different rules may apply for listed versus unlisted shares.

Calculating capital gains accurately helps in tax planning and ensures compliance with tax regulations. Always check the specific tax provisions applicable in your country or consult a tax professional when calculating gains on shares for investment or tax returns.

This method gives a clear picture of how to calculate capital gains for shares both in the short term and long term, helping investors understand their tax obligations and plan their investments accordingly.