Short Term Capital Gain on Shares

A capital gain can be incurred while trading in shares. It can be either a long-term or a short-term capital gain. Usually, a seller is tend to earn a short-term capital gain on shares when he/she sells shares at a price higher than the purchase price.

What is Short Term Capital Gain on Shares?

The profit from the selling of shares that have been held for up to 12 months is referred to as a Short-Term Capital Gain on shares. The gain is considered a Long-Term Capital Gain if the shares are held for longer than a year.

Short-Term Capital Gains on shares are taxed at a greater rate than Long-Term Capital Gains.

In order to find the STCG tax rate on shares, the gains earned through them are split into 2 categories, namely–

  • STCG Under Section 111A

A rate of 15% will be charged as income tax on short-term capital gain on shares that fall under this category. They would further attract surcharge and cess wherever applicable.

Here are a few examples of the STCG that are covered under Section 111A–

  • Gains generated through the sale of equity shares that have been enlisted in a recognised stock exchange.
  • Gains generated through the sale of equity-oriented Mutual Funds that had been enlisted in a recognised stock exchange and had been sold through it.
  • Gains generated through the sale of equity-oriented Mutual Funds, equity shares or units of a recognised business trust.

For example –

Ms Smriti decided to sell units of her equity-oriented funds at the Bombay Stock Exchange and held those units for eight months.

Since short-term capital gains accrued through equity-oriented funds fall under Section 111A, a rate of 15% would be levied as tax on such gains. Additionally, surcharge and cess would have to be paid, if deemed necessary.

  • STCG Not Under Section 111A

The income tax on short-term capital gain on shares other than Section 111A would attract a standard rate of tax.

Such tax on STCG on shares would be decided as per the income tax slab of tax-paying individuals.

Here are a few examples of the STCG that are not covered under Section 111A –

  • Gains generated through the sale of equity shares without being enlisted on a recognized stock exchange.
  • Gains generated through the sale of shares which are not equity shares.
  • Gains generated through debt-oriented Mutual Funds.
  • Gains generated through bonds, debentures and Government securities.
  • Gains generated through assets which are not shares.

For example –

Mr Singh is a 40 years old salaried employee with an annual income of Rs. 8,40,000.

He decided to sell his debt funds which he held for eight months.

Since short-term capital gains are accrued through the sale of debt funds, they do not fall under Section 111A, a standard rate of tax would be applicable on it.

Mr Singh’s tax liability would be calculated on his gross income, which is a sum of his salaried income and the proceeds generated through shares. And it would attract a rate of tax that is based on his tax slab.

Calculation of Short-Term Capital Gain on Shares

It is simple to calculate a share's short-term capital gain. The gain is computed by deducting the share's original cost from its final selling price.

For instance, the short-term capital gain on shares would be determined as follows if you bought 100 shares of XYZ Ltd. at Rs. 100 each and sold them at Rs. 120 each after six months:

Sale Price = Rs. 120 x 100 shares = Rs. 12,000

Purchase Price = Rs. 100 x 100 shares = Rs. 10,000

Short-Term Capital Gain = Rs. 12,000 - Rs. 10,000 = Rs. 2,000

How to Calculate Short Term Capital Gain on Assets?

STCG on shares can be calculated with the help of this formula mentioned below –

STCG = Sale value of an asset – (cost of acquisition + expenses incurred in the course of transfer/sale + cost of asset improvement)

In case of calculation of short term capital gains on equity shares, cost of asset improvement is not applicable. However, investors should learn about other parameters in the formula above for calculating their capital gains.

  • Sale Value

The full value of consideration or sale value of an asset is the amount an assessee receives on the sale of the same. If an asset is an equity share, then the sale value of the asset is given by its gross selling price.

Gross selling price = Sale value of an asset – (brokerage charges + Securities Transaction Tax)

  • Cost of Asset Acquisition

For any short term equity share purchased before 1st February 2018, the calculation of the cost of acquisition is as follows –

  • First, the fair market value of the asset is computed. This is done by multiplying the number of units of shares purchased with their highest price (as on 31st January 2018).

  • Then, this fair market value is compared to the actual sale of the equity shares, and a lower value between the two is chosen.

  • Next, the resultant value (computed in the step above) is compared to the actual value of the purchase of shares, and the higher amount between the two is chosen.

This is the cost of asset acquisition. For the short term equity assets purchased before 31st January 2018, the highest value of the equity shares on the immediately preceding day of trade is considered the cost of acquisition for the same.

  • Cost of Asset Improvement

Improvement cost refers to the amount spent on any modification of the asset. This can include repair costs, expansion of a property or construction charges. However, this section is not applicable for the calculation of STCG generated from equity shares.

  • Expenses Incurred in Due Course of Transfer or Sale 

These expenses can include registration, brokerage and other associated charges incurred in due course of transfer or sale of an asset. For equity shares, if Securities Transaction Tax is levied during the sale of the same, these charges on STT are not deducted during computation of STCG.

Apart from these, calculation of capital gain also requires knowledge about Indexation and holding period of assets.

A holding period is given by the number of months or days during which an investor holds an asset. This period is calculated from the date of asset acquisition to the date immediately before that of the sale of the asset.

On the other hand, indexation is the process through which prices are adjusted according to market inflation. That is why it is not applicable for the calculation of short term capital gain on shares.

For anyone looking to invest in short term capital shares, it is crucial to understand the computation of the gains from the same and the tax liability on them to calculate the profit they can garner from these shares.

For computing short term capital gain on shares, the cost of asset acquisition is given by the purchase price of the asset sold. Purchase price includes brokerage charges paid in due course of asset acquisition.

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