Short-term capital gains can be explained as the profits that have been generated through the sale of capital assets that were held for less than 36 months.
If the gains generated by shares is short-term capital gain or not is decided by its holding period.
Assets like shares that are listed on a recognised stock exchange and has been held for less than 12 months, are treated as short-term capitals. The proceeds earned through them are treated as short-term capital gains.
Such shares include Government securities, debentures, equity-oriented Mutual Funds, UTI units and Zero-Coupon Bonds.
A common question that individuals may have is if short-term capital gains made on shares attract taxation.
The answer is- Yes, they do!
The proceeds earned from the sale of shares is categorised as income under capital gains and is 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 through them 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.
Short-term capital gains that fall 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 where ever 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.
Short-term capital gains that do not fall 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 to 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.
Computation of Tax on STCG 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.
Before computing tax on STCG on shares as per slab, check the below table to calculate short-term capital gains:
|(LESS)||Cost of Acquisition||ZZ|
|(LESS)||Expenditure incurred during the sale||ZZ|
|(LESS)||Cost of Improvement||ZZ|
|Short-term capital gains||XXXX|
Exemptions and deductions under short-term capital gain tax on shares
For 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.
For deductions –
No deduction is made available to individuals under Sections 80C on their tax on STCG on shares that 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 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 tax-saving Mutual funds scheme to improve their scope of earnings and to lower their tax burden.