An investor receives profits from selling capital assets in their possession, and these profits are called capital gains. Capital assets include jewellery, land, house property, equity shares, machinery, patents, etc.
As the profit you obtain is part of your earnings, under the Income Tax Act of 1961, you are liable to pay a tax on capital gains. Depending on the period for which an investor holds onto their assets, capital gains are of two types: short-term capital gains and long-term capital gains.
If you decide to add these profits to your income, these two categories will incur different taxes. This article will expand on the tax on short-term capital gains.
Generally, any property that an individual holds for investment or personal use that generates some value over a short period is known as a short-term capital asset. Moreover, securities owned by an investor, adhering to SEBI guidelines, also fall in this category.
However, there are a few exceptions, like the following:
If an investor holds the assets mentioned above for a period of 36 months or less and then redeems the profit, they will incur short-term capital gains tax. However, for immovable assets, like land, buildings, or house property this holding period reduces to 24 months. Meanwhile, if you invest in equity funds for less than 12 months, the capital gains will attract SCGT tax.
The calculation of short-term capital gains can be understood through this easy formula:
STCG = Total gains – (improvement cost + transfer cost + acquisition cost)
For the purpose of taxation, short-term capital gains can be categorised as follows:
The short term capital gains that fall under this category are given below:
The STCG that fall under this category are given below:
Tax Rates on STCG
Depending on the nature of assets, as noted above, one will be subject to different tax rates on short-term capital gains.
|Nature||Rate of Taxation|
|When transaction tax on securities is applicable||15% (adding surcharge and cess)|
|When transaction tax on securities is not applicable||Capital gains get added to the taxpayer’s total income. Thus, tax is estimated based on the income slab.|
Also Read: Section 111A Of The Income Tax Act
Let’s consider an example to understand the calculation of STCG tax and how it applies to your income.
Rahul, an Indian resident, works as a data analyst and earns an annual salary of Rs. 9,20,000. Two years ago, he purchased 100 shares of Tata Consumer Products Ltd at Rs. 400, trading on BSE. Yesterday, he sold them at Rs. 650 per share.
Thus, Rahul’s total short-term capital gain is:
Rs. 65,000 (650 x100) – Rs. 40,000 (400×100) = Rs. 25,000
Now, let’s see how Rahul’s total taxable income will be computed.
|Annual salary||Rs. 9,20,000|
|Short-term capital gains||Rs. 25,000|
|Gross total income||Rs. 9,45,00|
|Deductions under Section 80C to Section 80U||NIL|
|Tax on annual salary||Up to Rs. 2,50,000 — NILRs. 2,50,000 – 5,00,000 @ 5% = Rs. 12,500Rs, 5,00,000 – 9,20,000 @20%= Rs. 84,000|
Total tax on salary = Rs. 96,500
|Tax on STCG||15% of Rs, 25,000 = Rs. 3,750|
|Total tax on income||Rs. 1,00,250|
|Health and Education cess||4% of Rs. Rs. 1,00,250 = Rs. 4,010|
|Total tax liability||Rs. 1,00,250 + Rs. 3,750 = Rs. 1,04,000|
The Income Tax Act specifies tax deductions under Section 80C to Section 80U. However, short-term capital gains that fall under Section 111A do not qualify for any tax deduction/exemption.
Meanwhile, if your capital gains are from sources outside those covered under Section 111A, you can opt for deductions under Section 80C to Section 80U.
Before investing in any asset and deciding when to sell, it is crucial to know the tax implication that your asset carries. This tax system has its own pros and cons and can majorly impact your after-tax income. So, if you are thinking of holding an asset for less than 36 months, you should make yourself aware of short-term capital gain tax.
1. What is the STCG tax rate on selling the equity shares through an unrecognised stock exchange?
Sale of equity shares through an unrecognised stock exchange does not fall under Section 111A of the Income Tax Act. Thus, it does carry securities transaction tax. So, if you decide to sell off these shares within 12 months, the capital gains will be taxable as per your income slab.
2. Who all have to pay Income tax in India?
In India, any citizen below the age of 60 has to pay income tax if their annual income is above Rs. 2.5 Lakh. For those above the age of 60, the minimum income is Rs. 3 lakh.
3. What is securities transaction tax?
When one buys or sells securities listed on a recognised stock exchange, they incur Securities transaction tax. It was introduced in the Union Budget 2004 and is a type of direct tax. For example, when you buy or sell a stock, you pay 0.1% of the share’s value as STT.
4. Do I have to pay STCG taxes on inherited properties?
While passing on inherited property within the family, you do not have to incur any short-term capital gain tax. However, if you are selling an inherited property within 24 months of holding it, the taxation of your STCG will be according to your income slab.
5. Does a 15-year-old have to file income tax returns?
In India, there is no minimum age limit to filing income tax returns. Thus, if 15-year olds earn an income above the taxable slab, their guardian must file ITR on their behalf. But as soon as the taxpayer turns 18, they will have to file ITR by themselves.
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