Short-term Capital Gain Tax on Shares

Short-term capital gains can be explained as the profits generated through the sale of capital assets held for less than 36 months.

The proceeds earned from the sale of shares are categorised as income under capital gains and are liable for taxation.

What is Short Term Capital Gain Tax on Shares?

Short-Term Capital Gain Tax on shares is the tax that is levied on the proceeds earned through the sale of shares.

Only shares that are considered to be short-term capital assets would attract a short-term capital gain tax on them.

To determine the STCG tax rate on shares easily, the gains generated are divided into two categories –

  • Short-term capital gains that fall under Section 111A.
  • Short-term capital gains that fall do not fall under Section 111A.

Tax Implications on Short-Term Capital Gains on Equity Shares

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.

How to Calculate Capital Gains Tax on Shares?

To be able to compute the short-term capital gain tax on shares, first individuals need to find out the amount of capital gains earned through shares.

If the sale price of the capital asset exceeds its purchase price, the difference in the amount would be deemed as the net profit or capital gains.

Computation of Tax on STCG on Shares

Before computing tax on STCG on shares as per slab, check the below table to calculate short-term capital gains:

Sale Value

ZZ

 

(LESS)

Cost of Acquisition

ZZ

(LESS)

Expenditure incurred during the sale

ZZ

(LESS)

Cost of Improvement

ZZ

Short-term capital gains

XXXX

 

STCG Tax Calculation Example

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.

Exemptions & Deductions Under STCG Tax on Shares

Following are the exemptions and deductions under STCG Tax on Shares-

  • Exemptions

Unfortunately, short-term capital gains on shares are not exempted from tax.

However, there are specific income levels under which individuals are exempted from paying income tax on short-term capital gains on shares. 

The below mentioned are a few of such cases which are deemed exempted–

  • Resident individuals who are 80 years or above of age with an annual income of up to Rs. 5 Lakh.
  • Resident individuals who are 60 years or above of age but below 80 years with an annual income of Rs. 3 Lakh.
  • Resident individuals who are below 60 years of age with an annual income of Rs. 2.5 Lakh.
  • Hindu Undivided Families (H.U.F) with an annual income of Rs. 2.5 Lakh.

Individuals should note that only resident individuals and HUF have an advantage of adjusting their exemption limit against short-term capital gains that are covered under Section 111A. They can only make such adjustments after they have successfully adjusted their other income.

  • Deductions

No deduction is made available to individuals under Section 80C on their tax on STCG on shares that are covered under Section 111A.

However, individuals may claim such deductions on short-term capital gains tax on shares that are not covered under Section 111A.

Tips to Reduce the Burden of STCG on Shares

  • Individuals can adjust their short-term capital loss on shares against other short-term or long-term capital gains. However, individuals should refrain from going overboard with this particular tax-saving strategy.

  • Individuals may carry forward their losses as a tax adjustment. Individuals are allowed to carry forward such losses for up to 8 financial years.

There is not much scope for share investors to save on their burden of tax on STCG on shares. Individuals can always opt for a tax-saving Mutual funds scheme to improve their earnings scope and lower their tax burden.

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