Capital Gain on Securities — Shares & Mutual Funds | Savlana Init

Capital Gains · Securities

Capital Gain on Securities — Every Wrapper Taxed Differently.

Listed equity, debt funds, unlisted shares, bonds and derivatives each sit under a different provision. A portfolio statement does not tell you the tax; the classification does.

Securities are where capital gains law is at its most fragmented, because the tax follows the wrapper rather than the underlying exposure. Listed equity shares and units of equity-oriented mutual funds on which securities transaction tax has been paid are taxed under Section 111A when short-term and Section 112A when long-term, the latter carrying an annual exemption of one lakh twenty-five thousand rupees. Listed bonds and debentures, units of business trusts, unlisted shares, gold funds and international funds each fall elsewhere, and several are governed by special provisions that deem the gain to be short-term regardless of how long the investment was held.

Two computational rules do a great deal of work. Grandfathering under Section 55(2)(ac) protects gains accrued up to 31 January 2018 on listed equity: the cost is taken as the higher of actual cost and the lower of the fair market value on that date and the full value of consideration. Where a listed share bought in 2012 is sold today, applying actual cost instead of the grandfathered figure overstates the gain substantially. Separately, specified debt-oriented schemes and market linked debentures are governed by Section 50AA, which treats the gain as short-term irrespective of holding period, so the concessional long-term rate is simply unavailable on them.

The anti-avoidance provisions catch what looks like harmless portfolio activity. Section 94(7) disallows the loss arising from dividend stripping where units or securities are bought shortly before a record date and sold shortly after. Section 94(8) does the same for bonus stripping. Since October 2024, amounts received on buyback of shares are treated as deemed dividend in the shareholder’s hands under Section 2(22)(f), with the cost of the shares available as a capital loss — a complete reversal of the previous position. Add in ESOP taxation, derivatives treated as business income rather than capital gains, and deduction at source on non-resident redemptions, and portfolio tax reporting becomes a computation exercise rather than a data-entry one.

Our Securities Capital Gains Services

Portfolio Gain Computation

Complete computation across equity, mutual funds, bonds, ETFs and unlisted holdings, with each instrument classified under its correct provision.

Grandfathering Application

Application of the 31 January 2018 fair market value rule under Section 55(2)(ac) to listed equity acquired before that date.

Debt Fund and MLD Treatment

Correct treatment of specified mutual funds and market linked debentures under Section 50AA, where gains are deemed short-term regardless of holding period.

ESOP and RSU Gains

Two-stage treatment of equity awards — perquisite on exercise or vesting, capital gain on eventual sale — with the correct cost base carried forward.

Buyback and Corporate Actions

Treatment of buyback, bonus, rights, splits, mergers, demergers and delisting, each of which affects cost base and holding period differently.

Stripping Provisions Review

Identification of dividend and bonus stripping under Sections 94(7) and 94(8), where the loss claimed will otherwise be disallowed.

Non-Resident Withholding

Management of deduction at source on redemptions and sales by non-residents, with treaty relief and Section 197 certificates where applicable.

AIS Reconciliation and Reporting

Reconciliation of broker and registrar data to the Annual Information Statement, and complete capital gains reporting in the return.

Our Process

Holding Classification

Every instrument in the portfolio is classified — listed equity, equity-oriented fund, specified debt scheme, bond, unlisted share — since the wrapper decides the section.

Cost Base Construction

Costs are built from contract notes and statements, with grandfathering, bonus and corporate action adjustments applied where relevant.

Gain Computation

Gains are computed instrument by instrument under the applicable provision, and the annual exemption under Section 112A is applied once, not per transaction.

Loss and Disallowance Review

Losses are tested against the stripping provisions, then set off and carried forward within the statutory ordering rules.

Reporting and Reconciliation

The capital gains schedules are prepared, reconciled to the Annual Information Statement, and filed with feedback submitted on incorrect entries.

Why It Matters

✓Each instrument taxed under its own provision, not a blanket rate

✓Grandfathered cost as on 31 January 2018 actually applied

✓Specified debt schemes correctly treated under Section 50AA

✓ESOP cost base carried correctly from perquisite to capital gain

✓Corporate actions adjusted rather than ignored in the cost base

✓Stripping losses identified before they are disallowed on scrutiny

✓Non-resident withholding managed with treaty and Section 197 relief

✓Broker data reconciled to the AIS before the return is filed

Frequently Asked Questions

Where securities transaction tax has been paid, short-term gains on listed equity shares and equity-oriented fund units are charged under Section 111A at twenty per cent, and long-term gains under Section 112A at twelve and a half per cent on the amount exceeding one lakh twenty-five thousand rupees in the year. The exemption is an annual aggregate for the taxpayer, not a per-transaction or per-scheme allowance.

When Section 112A reintroduced tax on long-term equity gains, gains accrued up to 31 January 2018 were protected. Under Section 55(2)(ac) the cost of a listed equity share or equity-oriented unit acquired before 1 February 2018 is taken as the higher of the actual cost and the lower of the fair market value on 31 January 2018 and the full value of consideration on sale. Ignoring it overstates the gain, sometimes very significantly.

Specified mutual funds falling within Section 50AA are treated as giving rise to short-term capital gain regardless of the holding period, taxable at the applicable slab or corporate rate, with no long-term concession and no indexation. Market linked debentures are treated on the same footing. The definitional boundary of a specified fund has been amended more than once, so the scheme’s portfolio composition needs checking rather than assuming.

For buybacks on or after 1 October 2024, the amount received by the shareholder is treated as deemed dividend under Section 2(22)(f) and taxed as income from other sources at the shareholder’s applicable rate, with no deduction for the cost. The cost of the shares tendered is instead treated as a capital loss available for set-off against capital gains. This reverses the earlier regime, under which the company paid buyback tax and the receipt was exempt.

Generally not. Intraday equity trading is treated as speculative business income, and futures and options are treated as non-speculative business income, both reported under profits and gains of business rather than capital gains. That brings expense deduction, presumptive taxation questions and audit thresholds into play, and the loss set-off rules differ from those for capital losses.

Section 195 applies to payments to non-residents, and mutual funds and companies deduct at prescribed rates on redemption and sale. Deduction is frequently at a rate exceeding the actual liability, particularly where grandfathering or the annual exemption under Section 112A would reduce the gain. Treaty relief may apply with a Tax Residency Certificate and Form 10F, and any excess is recovered by filing a return.

Need your portfolio gains computed properly?

Send us your broker, fund and demat statements. We will classify each holding, apply grandfathering and the correct provision, and file the capital gains schedules accurately.