When you hold your equity investments for less than 12 months before selling them, they are considered as short-term capital assets. If you hold these investments for more than 12 months before selling them, they are considered as long-term capital assets.

Computing the date of holding of your equity investments

Purchase from the stock exchange
When you purchase shares from the stock exchange, the date of the purchase is taken as the date on the broker’s purchase contract note. Similarly, the date of sale is taken as the date on the broker’s sale contract note.

Right shares
Where you have been allotted right shares, the period of holding will be computed from the date of allotment of the shares. The amount actually paid for purchase of the rights is taken as cost of the shares.

Rights entitlement
Where you have sold your rights entitlements, the period of holding will be computed from the date of offer to subscribe to the shares to the date when such rights entitlement was renounced by you. The cost of rights entitlement is taken as nil. The amount, you receive on selling your rights entitlement, is taken as short-term capital gain.

Bonus shares
When you receive bonus shares, the period of holding is computed from the date of allotment of the bonus shares. The cost of the bonus shares is taken as nil.

Computing the capital gain

Computing capital gain on short-term equity investments (short-term capital gain)

To compute tax on short-term capital gains, reduce the cost of shares from the sale value of the shares and compute tax at 10 per cent + surcharge of 10 per cent, if applicable (if your total income exceeds Rs10 lakh, surcharge is applicable to you) + education cess of 2 per cent.

Tax rate on short-term capital gains:

Computing capital gain on long-term equity investments (long-term capital gain)
Long-term capital gains earned on your equity investment is completely tax-free so there is no question of computing gain for tax purposes. However, this exemption is available only when you sell your equity through the stock exchange.

If you have incurred a capital loss, the tax authorities allow you to use this loss to reduce taxable capital gains from another source under certain conditions. Here is a simplistic example for explanation. If you have incurred a loss of Rs 1,000 from sale of shares of Company ABC and you have made a profit of Rs 2,000 from sale of shares of Company XYZ, you can use the loss on sale of shares of Company ABC to reduce the taxable capital gains earned on sale of shares of Company XYZ. In other words, you will pay capital gains tax on only Rs 1,000 (gain of Rs 2,000 earned on sale of shares of Company XYZ – loss of Rs 1,000 incurred on sale of shares of Company ABC).

Long-term capital losses
Since long-term capital gains earned on your equity investment are tax-free, long-term capital losses incurred on your equity investment cannot be used to reduce taxable capital gains.

Short-term capital losses
Short-term capital losses incurred on your equity investment can be set off against any capital gain (long-term or short-term). If in the current year you don’t have any taxable capital gain to set off the loss against, you can carry forward this loss for 8 years and set it off against any future taxable capital gain (long-term or short-term).