Short-Term Capital Gains Tax India 2020

Capital gain is the profit that an investor enjoys after selling a capital asset. It is an umbrella term which includes land, house property, building, patents, gold, equity investments and numerous other assets that generate earnings.

The gain from the sale of these capital assets come under the category of “income” of an individual and are thus liable for taxation under the Income Tax Act, 1961. Therefore, any individual who adds the gains from sale of these assets to their income corpus is liable for taxation on the same amount in the year of asset transfer.

The gains from capital assets are divided into two categories depending on the holding period of the assets –

  • Long term capital gain.
  • Short term capital gain.

Following is an expansion on short term capital gains tax implications on individuals investing in short-term capital assets.

What are Considered as Short Term Capital Assets?

Capital assets include the following –

  1. Any property held by assesses. It is not mandatory for the said property to connect to the assessor’s business or profession.
  2. Any security held by Federated Investors, adhering to regulations made under the SEBI Act, 1992.

However, there are a few items excluded from this definition of capital assets, for instance –

  • Stocks in trade excluding (ii) mentioned above, raw materials and consumable stores for purposes of profession or business.
  • Personal effects, including movable property held for personal use by the asset owners or their family. However, this category does not include artworks, jewellery, archaeological collection, sculptures, etc.
  • Agricultural land barring some exceptions.

Among the above mentioned categories, short term assets include those held by owners for 36 months or less time. The period of 36 months is not applicable for immovable properties like building, land, house, etc. These assets are included in the short term category if their holding period is less than 24 months.

Additionally, for equity shares, a holding period of less than 12 months will be considered short term capital assets.

Invest in elss funds

The taxability of short term capital gain from these assets varies according to the nature of the effects.

However, to learn the tax implications on the capital gain from these assets, it is crucial to know how the short-term capital gain generated from them is calculated.

Calculation of Short Term Capital Gains from Capital Assets

The table below illustrates the calculation of STCG generated from the transfer of short-term capital assets –

Particulars Amount in Rupees
Sale value of an asset xx
Less: Expenses incurred in the course of transfer of the assets (including commissions, brokerage, etc. xx
Net Sale consideration xx
Less: Cost of asset acquisition (purchase price of asset) xx
Less: Cost of asset improvement (includes expenses incurred post asset purchase for the improvement of the same) xx
Total short term capital gain xx

Example to Illustrate Calculation of STCG

Mr Gupta is salaried individual. Let us consider he purchased a property worth Rs. 10,00,000 in the month of September 2017. He proceeded on to selling the property in July 2018 for Rs. 10,80,000. The brokerage expenses incurred during the sale of this property was Rs. 12,000.

Since Mr Gupta purchased the property in September 2017 and sold it in July 2018, the holding period of said asset was 10 months. Thus, the gains from the transfer of this property will be taxed under short term capital gains.

In this case, the amount liable for short term capital gains tax will be –

Particulars Amount in Rupees
Sale value of the asset 10,80,000
Less: expenses incurred in course of transfer of the assets 12,000
Net sale consideration 10,68,000
Less: Cost of asset acquisition 10,00,000
Less: Cost of improvement
Short term capital gains 68,000

Tax Liabilities for Gains Generated from Transfer of Short-Term Capital Assets – 

For the purpose of determination of short term capital gain tax rate in India, STCG is classified into the following categories –

  1. STCG covered under Section 111A of the Income Tax Act
  2. STCG excluding those covered under Section 111A of the Income Tax Act

What is the Instances Covered Under Section 111A?

Section 111 A of Income Tax Act covers the following instance of STCG –

  • Gains acquired from the sale of equity shares which are listed under any recognised stock exchange and include Securities Transaction Tax charges.
  • Short term gains generated from the sale of Equity Oriented Mutual Funds which are sold under any recognised stock exchange and liable for STT charges.
  • Gains acquired from selling units of business trusts.
  • Short term gains generated from the sale of Equity Oriented Mutual Fund units, equity shares or business trust units through any recognised stock exchange, which is located in an International Financial Service Centre and the consideration for which is payable in foreign currency. This instance of STCG in included under Section 111A even if the sale transaction is not charged to STT.

What are the Instances Not Covered Under Section 111A?

For the purpose of calculation of short term capital gains tax in India, the following instances do not come under Section 111A of ITA –

  • Gains generated from the sale of equity shares that do not come under any recognised stock exchange.
  • Short term gains generated from the sale of shares except that of equity shares.
  • STCG generated from sale of Non-Equity Oriented Mutual Fund units, that is, debt-oriented Mutual Funds.
  • Short term capital gains acquired from bonds, debentures, Government securities, etc.
  • Gains from the sale of short term assets like silver, gold, immovable property, etc.

Short Term Capital Gains Tax Implications – 

The tax implications on short term capital gains can be illustrated in the table below –

Condition  Rate of Taxation
When transaction tax is based on securities 15% (plus surcharge and applicable cess)
In cases where transaction tax is not based on securities These STCGs are added during the filing of income tax returns and taxed according to income tax slabs

Example of Tax Applicable on Short Term Capital Gains

Ms Agarwal (an Indian resident aged 35 years) is a salaried individual working at X Ltd. with an annual salary of Rs. 7,40,000. In November 2018, she purchased 1000 equity shares at Rs. 100 per share and sold them in March 2019 at Rs. 130 per share (with brokerage at Re. 1 per share). The shares were sold under BSE, and Ms Agarwal paid the STT for them.

Following is the short term capital gains tax in 2019 for Ms Agarwal –

First, Ms Agarwal’s total taxable income has to be calculated, which is illustrated in the following table –

Particulars Amount in Rupees
Salary 7,40,000
Short term capital gains (computation illustrated in the table below) 29,000
Gross total income 7,69,000
Less: Deduction under Section 80C to Section 80U
Total taxable income 7,69,000
Tax on total income (Here, tax on salary is calculated as 20% of Ms A’s total salary as per ITA, and tax on STCG is taken as 15% of 29,000) 4350+1,48,000= 1,52,350
Add: Health and education cess (at 4%) 6094
Total tax liability for 2019 1,58,444

Calculation of STCG for the above example –

Particulars  Amount in Rupees
Sales value (1000×130)= 1,30,000
Less: Expenses incurred during the transfer of capital (brokerage cost) 1000
Net sale consideration 1,29,000
Less: Cost of asset acquisition (1000×100)= 1,00,000
Less: Cost of improvement of the assets
Short term capital gains  29,000

Thus, the total tax liability for Ms Agarwal, including taxes on STCG is Rs. 1,58,444 for the year 2018-2019.

For individuals looking to invest in short term capital asset, it is crucial to understand the taxes levied on the gains from the same. In case of loss incurred from the transfer of any short term asset, it can be set off against the gain from the sale or transfer of any other short term capital asset. However, assesses should remember that this loss cannot be set off against any other income.

Short term capital loss, can, however, be carried forward for a period of 8 assessment years, from the assessment year during which the loss was incurred.

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