Short Term Capital Gain Tax on Shares
Investing in shares offers the potential for substantial returns, but it is equally important to understand the tax implications of such investments. One significant aspect of taxation in India is the short-term capital gains tax on shares. This tax applies to profits earned from the sale of shares held for less than 12 months, categorising them as short-term gains.
Taxation on stock gains ensures compliance with government regulations while encouraging long-term investment strategies. For investors focused on short-term profits, it is essential to understand how capital gains on stocks are calculated, the applicable tax rates, and potential exemptions.
The Union Budget 2024 has brought notable changes to the tax rates on short-term capital gains (STCG) for certain financial assets. The tax on specified financial assets, such as listed equity shares and equity mutual funds, has been increased from 15% to 20%. These changes highlight the government's intent to promote long-term investments while ensuring equity in taxation across different asset classes.
What is the Short-Term Capital Gains Tax on Shares?
Short-term capital gains tax on shares applies to profits earned when you sell stocks within a short holding period. Short-term capital gains are the gains made by selling stocks or equity-oriented mutual funds that have been held for less than 12 months.
Such gains are taxable under specific conditions, ensuring that all investors contribute their share of taxes. This tax incentivises long-term investments while taxing quick trades that aim for short-term profits. Short-term capital gains tax rates depend on whether the transactions are covered under Section 111A of the Income Tax Act or not. Let’s explore these in detail.
Short-Term Capital Gains Tax on Shares under Section 111A
Section 111A governs short-term capital gains on certain equity transactions. Gains from selling listed equity shares or equity-oriented mutual funds on recognised stock exchanges are covered here, provided these transactions are subject to the Securities Transaction Tax (STT). The new changes from the Union Budget 2024 apply here, raising the tax rate from 15% to 20% for such assets.
The short-term capital gains tax rate under Section 111A is fixed at 20% of the gains as per the Union Budget 2024. This rate applies uniformly, irrespective of your income tax slab. However, a cess of 4% and any applicable surcharges increase the effective tax rate marginally.
Example
Suppose you purchase equity shares for ₹ 1,00,000 and sell them within six months for ₹ 1,20,000. Your taxable short-term capital gain will be ₹20,000. At a 20% tax rate, the tax liability will amount to ₹4,000, plus cess.
Key Exemptions
Gains below the basic exemption limit (₹2,50,000 for individuals under 60 years) may be exempt for individuals with no taxable income. Residents of certain categories might be eligible for a rebate under Section 87A.
Short-Term Capital Gains Not Covered Under Section 111A
Not all short-term capital gains on stocks fall under Section 111A. For example, gains from the sale of:
Shares not traded on recognized exchanges.
Debt-oriented mutual funds.
Unlisted equity shares.
Such gains are taxed at your applicable income tax slab rate, which can range from 5% to 30%, depending on your total taxable income.
Calculating Short-Term Capital Gains on Shares
Accurate calculation of capital gains is essential to determine your tax liability.
Formula Short-Term Capital Gain = Full Value of Consideration – (Cost of Acquisition + Cost of Improvement + Transfer Expenses)
Full Value of Consideration: Sale price of shares.
Cost of Acquisition: Purchase price of shares.
Transfer Expenses: Brokerage or other related expenses.
Example
Let’s assume you bought shares for ₹1,50,000 and sold them for ₹1,80,000 within eight months. Paid brokerage of ₹2,000.
Short-Term Capital Gain = ₹1,80,000 – (₹1,50,000 + ₹2,000) = ₹28,000
Your tax liability under Section 111A would be: Tax at 20% = ₹5,600
Cess at 4% = ₹224
Total Tax = ₹5,824
How to Calculate Short-Term Capital Gains on Other Assets
Short-term capital gains are not limited to shares; they also apply to other assets such as real estate, jewelry, bonds, and debt-oriented mutual funds. Unlike shares covered under Section 111A, the taxation rules and rates for these assets differ, primarily based on your income tax slab rate. Understanding these distinctions is crucial for accurate tax planning.
Steps to Calculate Short-Term Capital Gains - H3
Determine the Sale Price: This is the total consideration received from selling the asset. It includes the actual sale amount and any other benefits received in the transaction.
Subtract the Cost of Acquisition: The cost of acquisition refers to the price at which the asset was initially purchased. For inherited or gifted assets, this cost is the value at which the previous owner acquired the asset.
Deduct the Cost of Improvement: Any expenses incurred to enhance the value of the asset, such as renovations for property or customisation for jewellery, can be deducted from the sale price.
Account for Transfer Expenses: Include costs directly related to the sale, such as brokerage fees, registration charges, and legal expenses.
Tax Rate for Short-Term Capital Gains on Other Assets
Unlike shares covered under Section 111A, the capital gains tax on stocks or other assets not traded on recognized exchanges follows your applicable tax slab rate:
5% for individuals in the lowest tax bracket.
20% or 30% for individuals in higher income brackets.
Example
Suppose you purchased a property for ₹40,00,000 and sold it within two years for ₹50,00,000. You incurred ₹1,00,000 on transfer expenses and ₹2,00,000 on property improvements.
Short-Term Capital Gain = Sale Price – (Cost of Acquisition + Cost of Improvement + Transfer Expenses)
Short-Term Capital Gain = ₹50,00,000 – (₹40,00,000 + ₹2,00,000 + ₹1,00,000)
Gain = ₹7,00,000
If your income falls in the 20% tax slab, the tax liability on this gain would be ₹1,40,000 (20% of ₹ 7,00,000), plus cess and surcharges.
Type of Asset | Tax Rate |
Equity shares (Section 111A) | 20% |
Debt mutual funds | Income tax slab rate |
Real estate | Income tax slab rate |
Conclusion
Knowing the income tax on short-term capital gains on shares ensures compliance and maximises your post-tax returns. Whether the gains are under Section 111A or other categories, knowing the applicable rates and exemptions simplifies your financial planning. Correctly calculating your taxable short-term gains, staying updated with changes in tax laws, and filing your taxes correctly ensures compliance while maximising returns. Investors must also consider the impact of surcharges, cess, and applicable exemptions, as these can significantly affect the final tax liability.
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FAQ
What is the tax rate for short-term capital gains under Section 111A?
The tax rate for short-term capital gains under Section 111A is 20%, plus a 4% cess and any applicable surcharge. This rate applies to gains from the sale of listed equity shares or equity mutual funds, provided they are subject to the Securities Transaction Tax (STT).
Are all stock transactions covered under Section 111A?
No, only gains from the sale of listed equity shares and equity-oriented mutual funds traded on recognised stock exchanges are covered under Section 111A. For transactions that do not meet these criteria, such as unlisted shares or debt funds, the gains are taxed according to the individual’s income tax slab rate.
Can I claim exemptions for short-term capital gains?
Yes, if your total taxable income falls below the basic exemption limit (₹2,50,000 for individuals below 60 years), your short-term capital gains may be exempt from tax.
Are short-term capital losses adjustable?
Yes, short-term capital losses can offset short-term or long-term capital gains in the same financial year.
Is brokerage deductible when calculating capital gains?
Yes, brokerage fees and other transfer-related expenses are deductible when calculating capital gains. These expenses are considered as part of the cost of acquisition and can be subtracted from the sale price to reduce your taxable gain, thus lowering your overall tax liability.
Are intraday trades subject to short-term capital gains tax?
No, profits from intraday trades are treated as business income and taxed under regular income tax rules.
What documents are needed to calculate capital gains?
You will need details of purchase price, sale price, brokerage, and related expenses to calculate capital gains accurately.
How can I file taxes on short-term capital gains?
Short-term capital gains must be reported under "Capital Gains" in your income tax return form, ensuring correct calculation of tax liability.
What changes were made to the STCG tax in Union Budget 2024?
The Union Budget 2024 raised the STCG tax rate on specified financial assets to 20%. Additionally, the holding period for listed equity shares and mutual funds was retained at 12 months, while other assets like real estate still require 24 months.