Capital Gain on Securities — Shares, Mutual Funds, Bonds and Unlisted Holdings

Securities generate more capital gains transactions than every other asset class combined, and almost none of them are individually large. A portfolio might produce hundreds of disposals in a year across equity, mutual funds, bonds and, increasingly, unlisted holdings from ESOPs or angel investments. Each is governed by a different combination of holding period, rate and cost rule.

This is where taxpayers most often rely on a broker’s capital gains statement and file whatever it produces. Those statements are useful and frequently wrong at the edges — grandfathered costs on pre-2018 holdings, units acquired across the debt fund transition date, corporate actions, and transfers between demat accounts are all places where the automated computation does not match the law.

N D Savla & Associates computes and reports securities capital gains across listed and unlisted holdings, reconciles them against broker records and the department’s own information statement, and advises on the timing decisions that determine the liability. Where unlisted shares are involved, the valuation position needs settling before the transfer rather than after.

How Are Different Securities Taxed?

The starting question is always the same — holding period, then rate — but the answer varies by instrument more than most investors realise.

Which Cost Rules Cause the Most Errors?

The 31 January 2018 grandfathered cost

For listed equity and equity-oriented units acquired before 1 February 2018, the cost is the higher of actual cost and the lower of fair market value on 31 January 2018 and the sale consideration. The construction is awkward but its purpose is simple — to tax only appreciation after that date while ensuring the rule never converts a real gain into a loss. Holdings from before 2018 should always be checked against this rule, because applying actual cost alone overstates the gain, sometimes very substantially.

Bonus and rights shares

Bonus shares have nil cost of acquisition, and their holding period runs from allotment rather than from the original purchase. Rights shares carry the amount actually paid as cost, while a renounced right has its own treatment. Portfolios that have received several bonus issues over the years frequently show incorrect gains because the automated statement has averaged cost across the whole holding.

Assets acquired by inheritance or gift

Where securities are inherited or received as a gift from a relative, there is no transfer at that point and the cost is that of the previous owner, with the holding period including theirs. This is favourable, but it requires records going back to the original purchase — which is the practical difficulty in most estates. Establishing this properly is part of the capital gain computation and should be done while the records still exist.

Deemed consideration on unlisted transfers

Where unlisted shares change hands below fair market value determined under the prescribed method, that value is substituted as the seller’s consideration. Separately, the recipient may be taxed on the shortfall as income from other sources. A transfer at book value between family members or group entities can therefore create tax on both sides on money nobody received.

ESOP shares

The cost is the fair market value used to compute the perquisite at exercise, and the holding period runs from allotment. Employees who treat the exercise price as cost pay tax twice on the same appreciation. ESOP advisory at the point of scheme design saves considerably more than remedial work at sale.

How Has the Taxation of Securities Changed?

No asset class has seen its tax treatment reversed as often as listed equity, and the current position only makes sense against that sequence.

Through the decades following the Income-tax Act, 1961, gains on shares were taxed like gains on any other asset — with indexation for long-term holdings and slab or specified rates depending on the taxpayer. The stock market was small, retail participation was limited, and equity taxation was not a policy priority in its own right.

Liberalisation changed that. The Securities and Exchange Board of India was established in 1992, the National Stock Exchange began operating in 1994, and dematerialisation through the depositories from 1996 onwards transformed both the volume of transactions and the visibility of them to the tax administration. For the first time, the department could see securities transactions systematically.

The decisive intervention came in 2004 with the introduction of the Securities Transaction Tax. The bargain was explicit: a small tax on every transaction, and in exchange long-term capital gains on listed equity became exempt while short-term gains were taxed at a low concessional rate. The reasoning was administrative as much as economic — a transaction tax collected at source by the exchange is far easier to enforce than a capital gains tax on millions of individual disposals. For fourteen years, long-term equity investing in India was tax-free.

The exemption was withdrawn in 2018 as the revenue forgone became difficult to justify against a market that had grown enormously. A ten per cent rate on long-term gains above one lakh rupees was introduced, with gains accrued up to 31 January 2018 grandfathered — a substantial concession, and the reason that date still governs the cost of older holdings today.

The debt side was rationalised next. Debt mutual funds had for years offered indexation on long-term holdings, making them materially more efficient than fixed deposits for investors with a multi-year horizon. From 1 April 2023 that advantage was removed for units acquired on or after that date, with gains treated as short-term at slab rates whatever the holding period. Market-linked debentures received similar treatment.

Budget 2024 then aligned equity with the general regime. The long-term rate rose to 12.5 per cent, matching most other assets, while the exemption threshold rose to 1.25 lakh rupees. The short-term rate on equity rose to twenty per cent. Indexation was removed generally across asset classes in exchange for the lower long-term rate. And under the Income-tax Act, 2025, in force from 1 April 2026, buyback proceeds returned to capital gains treatment after a period during which they were taxed as deemed dividends in the shareholder’s hands.

How Should Securities Gains Be Handled — Step by Step?

1. Separate the Portfolio by Acquisition Date

   Pre-February 2018 listed equity needs grandfathered cost. Debt fund units need splitting either side of 1 April 2023. Transfers made before and after 23 July 2024 attract different rates. A single consolidated statement conceals all three distinctions.

2. Rebuild Cost Where the Broker Cannot

   Bonus issues, rights, mergers and demergers, transfers between demat accounts and inherited holdings all break automated cost tracking. These need manual reconstruction from contract notes and corporate action records, and it is the bulk of the work in any securities computation of any size.

3. Use the Annual Exemption Deliberately

   The ₹1.25 lakh threshold on long-term equity gains applies per financial year and lapses unused. Booking gains up to the threshold and reinvesting resets the cost base higher without tax, reducing the eventual liability. The reinvestment should be genuine, and the practice should be applied consistently rather than as a year-end scramble.

4. Plan Loss Set-off Before the Year Ends

   Long-term losses can only be set off against long-term gains; short-term losses can be set off against both. Where a portfolio holds unrealised losses and realised gains, booking the loss before 31 March converts a paper position into a usable one. After the year end, nothing can be done.

5. Settle Valuation Before Any Unlisted Transfer

   The deemed consideration rule bites on both parties, and the fair market value must be determined under the prescribed method. A valuation report obtained before the transfer is far more useful than a valuation reconstructed during an assessment.

6. Reconcile Against the AIS

   Securities transactions, mutual fund redemptions and dividend receipts are reported to the department by the exchanges, registrars and companies. Download the statement from incometax.gov.in and reconcile before filing — discrepancies here are the most frequent trigger for a notice on a return that is otherwise correct.

7. Report Scrip-wise Where Required

   Long-term gains on listed equity claimed under the concessional regime require transaction-level reporting of purchase and sale details in the return, including the grandfathered value where applicable. Prepare this alongside the computation rather than at the point of filing ITR-2.

8. File on Time to Preserve Losses

   Any capital loss not reported in a return filed by the due date cannot be carried forward. For an investor with a loss year, the return is worth filing precisely because there is no tax to pay.

Who Needs Advice on Securities Gains?

Frequently Asked Questions on Securities Taxation