When you own equity shares, there are two kinds of incomes that are generated. Firstly, there are dividends that are earned by you on a regular basis when the company pays out the dividends. Most profitable companies do pay out dividends to shareholders and they try to maintain a steady dividend payout ratio. The second source of income from equities comes from capital gains, which is derived only when you sell the shares bought by you. Till the time the gains are notional they are not realized by you and do not constitute income. Capital gains represent the profits made on sale of shares and represent the excess of the sale price less the purchase price. The chart below captures the essence of capital gains and capital losses.

When we talk of the capital gain or capital loss, the actual amount is adjusted for related expenses like transaction costs, statutory charges, borrowing costs if any etc. There are two types of capital gains that we need to be aware of. When it comes to equities, there are two types of capital gains that investors need to be aware of. If the equity shares are held for a period of less than 1 year, then the gain will be taxed as short term capital gains (STCG). If the equity shares are held for a period of more than 1 year then they represent long term capital gains (LTCG). This distinction is important as it impacts the taxation of capital gains and also the set-off of losses, which we shall see in detail later.