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For many people who invest in stocks, the thrill of buying low and selling high is a common goal. But the road between the two, especially the tax consequences, is frequently disregarded.
Short-term capital gain on shares is a key consideration among these. This term refers to the money made by selling shares quickly, usually in less than a year. A short-term capital gains tax will be applied to this profit.
Every investor’s net returns are directly affected by this notion, so understanding it is critical. This article seeks to clarify the frequently complicated subject of short-term capital gains tax on share investments and give readers a thorough grasp of the subject.
What are capital gains?
Capital gains are the returns that an individual or business experiences as a result of selling capital assets. Land, buildings, stocks, patents, trademarks, jewellery, leasehold rights, machinery, vehicles, etc. are all tradable capital assets.
Depending on the length of time an asset is held, capital gains can be classified as either short-term or long-term.
Short-term capital gain: Short-term capital gains occur when an asset is sold for a profit within 36 months of its acquisition. For example, short-term capital gains apply to the sale of a property that gets sold within 27 months of the purchase date. The required 36-month period was shortened to 24 months for real estate, buildings, and other immovable assets.
Long-term capital gain: Assets held for a period longer than 36 months are referred to as long-term capital assets or LTCA. Therefore, the profit from the sale of an asset after more than 36 months of ownership is considered long-term capital gain.
Understanding short-term capital gains tax
When an investor sells shares within a year of purchase, they incur short-term capital gains in equity investments. Profit from this sale is considered a short-term capital gain. For example, if an investor purchases shares for ₹10 lakh and sells them a year later for ₹15 lakh, the profit of ₹5 lakh is considered a short-term capital gain.
This type of capital gain is subject to a tax known as the Short Term Capital Gains Tax, or STCG tax. The current STCG tax rate is 15%, not including any surcharge or cess.
However, short-term capital gains that are not covered by Section 111A are taxed according to the individual’s total taxable income and the tax slab they are falling under.
For example, if an individual has a total taxable income of ₹10,00,000 and short-term capital gains of ₹50,000 that do not fall under Section 111A, the tax will be calculated on the total amount of ₹10,50,000.
How to calculate short-term capital gain on shares?
To determine the share capital gains tax for the short term, follow these steps. Here’s a detailed step-by-step process:
- Determine the sale value: This is the price you sold your shares for.
- Subtract the cost of acquisition: You paid this amount when you first bought the shares.
- Subtract any expenditure incurred during the sale: This might involve brokerage fees or any other expenses related to the sale.
- Subtract the cost of improvement: If you have spent any money to enhance the asset (which usually doesn’t apply to shares), subtract that amount too.
Your short-term gain on shares is the value you arrive at.
Example:
If you bought 100 shares at ₹500 each and sold them 8 months later at ₹600 each. The brokerage fee for the sale was ₹200. Here is how the calculation would work:
| Particulars | Calculation | Amount |
| Sale Value | 100 shares₹600 per share | ₹60,000 |
| Cost of Acquisition | 100 shares₹500 per share | ₹50,000 |
| Expenditure incurred | ₹200 | |
| Short-term capital gain | ₹60,000-₹50,000-₹200 | ₹9,800 |
| Tax | ₹9,80015% | ₹1,470 |
Impact of short-term capital gains tax on investment decisions
Investment choices are greatly affected by the short-term capital gains tax. It affects the strategies that investors use when trading in stock markets. For example, an investor may decide to keep a profitable investment for a longer time to avoid the higher short-term capital gains tax and opt for the lower long-term capital gains tax instead.
Also, the tax implications can impact when you decide to buy or sell. Investors may choose to sell investments that are not performing well to balance out gains and lower the amount of taxes they owe.
Bottomline
Learning about short-term capital gains tax can make a significant difference when navigating the financial landscape of equity investments, which can be complex. Recognising the tax implications and planning accordingly is just as important as making profitable investments.
FAQs
Short-term capital gains (STCG) tax is generally applicable to all gains. However, if your total taxable income, including STCG, is below the basic exemption limit, then you pay no tax. The basic exemption limit is Rs. 2.5 lakhs for individuals, Rs. 3 lakhs for senior citizens (60 years or more but less than 80), and Rs. 5 lakhs for super-senior citizens (80 years of age and above). So, effectively, some amount of short-term capital gain can be tax-free if it falls within the unexhausted basic exemption limit.
Avoiding Short-Term Capital Gains (STCG) tax on equity can be challenging, but there are a few strategies you can consider:
Hold investments longer: If you hold your equity investments for more than a year, they qualify for Long-Term Capital Gains (LTCG) tax, which is usually lower than STCG tax.
Offset gains with losses: You can offset your short-term capital gains with short-term capital losses from other investments in the same financial year.
Tax harvesting: This involves selling shares that are in a loss position to offset the gains.
No, tax is not automatically deducted from your Demat account. When you sell shares from your Demat account, the gains are subject to capital gains tax. However, this tax is not directly deducted from the Demat account. It’s the investor’s responsibility to calculate and pay this tax when filing their income tax return. The broker provides contract notes detailing the transactions, which can be used to calculate the tax. It’s advisable to consult with a tax advisor to understand these concepts better and ensure compliance with tax laws.
Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) are two types of profits made from the sale of capital assets, but they differ in several ways:
Holding period: STCG arises when assets are held for less than a year (for shares) or three years (for other assets). LTCG applies to assets held for more than a year (for shares) or three years (for other assets).
Tax rates: STCG is taxed at normal income tax rates or at 15% when Securities Transaction Tax (STT) is applicable. LTCG is taxed at 20% or 10% for equity shares and units of equity-oriented mutual funds over and above Rs 1 lakh.
Risk and investment: STCG usually involves higher risk and short-term investment strategies, while LTCG involves lower risk and long-term investment strategies.
No, indexation is not allowed on equity shares. Indexation is a method used to adjust the purchase price of an investment to reflect the effect of inflation on it. However, this benefit is not available for equity shares or equity-oriented funds. The capital gains on these are calculated by deducting the cost of acquisition from the full value of consideration on transfer. It’s always advisable to consult with a tax advisor to understand these concepts better and ensure compliance with tax laws.