Benefits not allowed from Capital Gains

Capital gain is the profit earned when the sale consideration of a capital asset exceeds its cost of acquisition plus any allowable expenses. For listed equity shares, the gain is classified as short‑term (STCG) if the holding period is 12 months or less, and long‑term (LTCG) if it exceeds 12 months.

STCG on listed shares is taxed at the investor’s applicable income‑tax slab rate, while LTCG exceeding the Rs 1 lakh exemption is taxed at a flat 10 % (as per the Finance Act 2018). Both heads are subject to Securities Transaction Tax (STT) at the time of purchase and sale, which is a prerequisite for the LTCG exemption.

For the NISM exam, remember the holding‑period rule, the 10 % LTCG rate, and the Rs 1 lakh exemption threshold – these form the basis for evaluating what deductions are permissible.

The only benefits explicitly allowed against capital gains on equity are the cost of acquisition, brokerage charges, and the STT paid on the transaction. These amounts are deducted from the sale consideration to arrive at the net capital gain.

For LTCG, the first Rs 1 lakh of net gain is exempt from tax. This exemption can be claimed only once in a financial year and cannot be carried forward.

Exam‑wise, any question that asks you to compute taxable LTCG will expect you to deduct only the above three items – no other expenses are permissible.

Unlike salary income, capital gains do not enjoy a host of deductions available under other heads of the Income‑Tax Act. The following items are expressly prohibited from being set off against capital gains on equity:

Interest on margin loans used to purchase shares, depreciation on securities, standard deduction under Section 16, and any losses from other heads (e.g., business loss) cannot be claimed.

These restrictions are designed to keep capital gains taxation simple and to prevent double‑counting of expenses that are already accounted for in the acquisition cost.

In the exam, a frequent trap is to assume that a client can reduce capital gains by the interest paid on a loan taken for buying shares – this is not permissible.

Capital losses can be set off only against capital gains, not against any other income such as salary, house‑property, or business income. This rule applies separately for short‑term and long‑term losses.

A short‑term capital loss (STCL) may be set off against both STCG and LTCG in the same assessment year. Conversely, a long‑term capital loss (LTCL) can be set off only against LTCG.

If after set‑off a loss remains, it can be carried forward for up to eight assessment years. The carried‑forward loss continues to be restricted to set‑off only against capital gains of the same type.

Only the brokerage charged by the broker is allowable as a transaction expense. Other costs such as stamp duty, registration fees, or advisory fees are not deductible from capital gains on listed equity shares.

These expenses, if incurred, are treated as part of the cost of acquisition for the purpose of computing the gain, but they cannot be separately claimed as a deduction.

For the NISM exam, remember the phrase “Brokerage only” – any answer suggesting additional expense deductions will be marked wrong.

Standard deduction under Section 16 (available to salaried employees) does not apply to capital gains. Similarly, depreciation under the Income‑Tax Act, which is relevant for business assets, cannot be claimed on securities.

This rule eliminates any confusion about applying the Rs 50,000 standard deduction to capital gains from equity. The capital‑gain head stands alone.

Exam candidates should keep this distinction clear: deductions that exist under other heads are irrelevant for equity capital gains.

STT is a tax levied on the purchase and sale of listed securities. For equity shares, STT must be paid on both buy and sell sides to qualify for the LTCG exemption under Section 10(38).

If STT is not paid (e.g., in off‑exchange transactions), the gain is treated as a short‑term gain, even if the holding period exceeds 12 months, and it becomes taxable at the slab rate.

This nuance is frequently tested: the exam may present a scenario where STT was omitted and ask you to determine the correct tax treatment.