Short Term Capital Gains Tax: Meaning, Tax Rates, Deductions And More

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. 

What are Short-term Capital Assets?

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:

• Raw materials or stocks held for business or professional use
• Personal goods, like clothes, furniture, movable property
• Agricultural land in a rural area
• Special bearer bonds

What is Short-term Capital Gains Tax?

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)

Tax Implication on Short-term Capital Gains

For the purpose of taxation, short-term capital gains can be categorised as follows:

• Gains under Section 111A of the Income Tax Act

The short term capital gains that fall under this category are given below:

1. Gains from selling equity shares listed on a recognised stock exchange are subject to Securities Transaction Tax (STT) 
2. Profits earned from selling equity mutual fund units 
3. The profit one receives by selling units of a business trust
4. Gains from the sale of equity shares, equity mutual funds, business trust through a recognised stock exchange located in any International Financial Services Centre. The consideration is payable in foreign currency, and the gain falls under this category even if the transaction of sale does not include STT charges. 

• Gains not provided under Section 111A of the Income Tax Act

The STCG that fall under this category are given below:

1. Gains from selling equity shares not listed on a recognised stock exchange. 
2. Short-term gains from selling shares other than equity shares. 
3. Profits obtained through selling mutual funds other than equity funds, like debt-oriented funds. 
4. Capital gains from selling government securities, debentures, and bonds.
5. Profit received from the sale of immovable property, silver, and gold. 

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

Short-term Capital Gains Tax Application

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.

Particulars	Amount
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

Tax Deductions on Short-term Capital Gains

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.

Also Read: Old or New Tax Regime- Which Is Best For You?

Final Word

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. 

Frequently Asked Questions

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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