Any profit that is realised from disposition, transfer or sale of any investment property or asset is known as a capital gain. If holding term for these properties is less than 12 months (36 or 24 months in some case), then profit generated from their sale is termed at short term capital gain.
In case of equity shares, a holding period of less than 12 (or 36) months is considered to be short term investment. Short term capital gain on shares is the difference between the basis of a short term share or its purchase price and price received on its sale. The calculation of gains from share is crucial to comprehend tax implications on the same.
Following is an expansion on short term capital gain, its calculation and its taxation under the Income Tax Act, 1961.
Under India’s Income Tax Laws, when an investor decides to hold a capital asset for a period of less than 36 months, it is termed as a short-term asset. However, since shares and stocks are faster-moving assets, a holding period of less than 12 months is considered to be short term.
However, this period of 12 months is considered only for shares listed under a recognised stock exchange like Bombay Stock Exchange (BSE), National Stock Exchange (NSE), etc. For shares not traded through or listed under these stock exchanges, holding period is considered to be 36 months.
Gains acquired from the sale or transfer of these assets is known as short term capital gain on shares.
Alternatively, if these equity shares are sold at a price lower than their acquisition cost, an investor incurs a capital loss on them.
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.
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)
For any short term equity share purchased before 1st February 2018, the calculation of the cost of acquisition is as follows –
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.
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.
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.
Mr Dutta invested in 300 listed equity shares in December 2017 at the rate of Rs. 100 per share and paid a total sum of Rs. 30,000 on them. Next, he sold the shares at the rate of Rs. 150 per share in May 2018, after 5 months and acquired Rs. 45,000 as profit. The Brokerage charges (0.5%) levied at the time of transfer of the shares was Rs. 225.
The short term capital gain on shares is illustrated in the table below –
|Particulars||Amount (in Rupees)|
|Less:||Cost of asset acquisition||30,000|
|Less:||Cost of asset improvement||–|
|Less:||Expenses incurred in course of sale or transfer of assets||225|
|Short term capital gains||14,775|
Thus, the short term capital gain acquired by Mr Dutta on the sale of equity shares is Rs. 14,775.
Short term equity gains on shares are taxed under Section 111A of the Income Tax, 1961. This section gives the tax liability on gains from equity shares along with equity-oriented mutual funds, business trust units, etc. sold through a recognised stock exchange on or before 1st October 2004. The above mentioned capital assets are also liable to bear Securities Transaction Tax.
The gains generated from shares not listed under any recognised stock exchange, however, are not liable for taxation under Section 111A of ITA. These shares are included in the investor’s income during income tax filing and are charged according to respective income tax slabs. The shares that do not fall under equity shares are also included in this category of taxation.
Let us assume, Mr Singh, a 37 years old Indian resident, is a salaried individual employed at Z Ltd and has an annual salary of Rs. 6,30,000. In May 2017 he invested in 500 equity shares at the rate of Rs. 100 per share and proceeded to sell them off in January 2018, after 8 months, at the rate of Rs. 120 per share (at Rs. 2 brokerage charge per share). Also, these were sold through the Bombay Stock Exchange and STT charges were levied on them).
The table below illustrates the particulars of Mr Singh’s tax liabilities on the short term capital gain from equity shares.
|Particulars||Amount in Rupees|
|Salary of Mr Singh||6,30,000|
|Short term capital gains (calculation illustrated in the table below)||9000|
|Gross total income||6,39,000|
|Less: Deductions applicable (under Sections 80C,80U)||–|
|Mr Singh’s total taxable income||6,39,000|
|Tax liability on income (here, Mr Singh’s salary is taxed at 20% as per ITA, and STCG is taxed at 15%)||1,26,000+ 1350= 1,27,350|
|Add: 4% additional cess||5094|
|Mr Singh’s total tax liability||1,32,444|
Calculation of STCG for the example above –
|Particulars||Amount in Rupees|
|Sales value||500×120= 60,000|
|Less: Expenses incurred in due course of sale or transfer of the assets||500×2= 1000|
|Net sale value||59,000|
|Less: Cost of asset acquisition||500×100=50,000|
|Less: Cost of asset improvement||–|
|Short term capital gain||9000|
Therefore, in the illustration above, Mr Singh is liable to pay a short term capital gain tax of Rs. 1,32,444 on the transfer of equity shares for the assessment year 2018-19.
In case of loss incurred from short term gain shares, it is set off against the gains from transfer of any other such asset. However, this loss cannot be set off against any other income. The loss, in this case, can be carried forward for a period extending up to 8 assessment years, from the year it was incurred.
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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