How is Short-Term Capital Gains Tax Calculated on Shares?

Any property or security in your name is a capital asset for which you are liable to pay taxes as a citizen of India. However, the taxes here apply to capital gains, which is the profit you make upon transferring the capital asset.

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Additionally, the tax applicable to the profit is called capital gains tax. Profit or revenue generated by selling capital assets falls in the “Income” category. Hence, you are liable to pay taxes on the amount as and when the transfer occurs. So, let us dig deeper.

Defining Capital Gains Tax

Capital gain taxes come in two classes depending on the period you hold the asset before transferring or selling – short-term capital gains and long-term capital gains. However, an inherited property is not under the purview of capital gains as there is only a transfer of ownership and not a sale. Accordingly, the IT Act exempts assets owned as gifts through inheritance or will. However, capital gains apply if the same is up for sale. Furthermore, the applicable capital gains tax is 15% for the short term and between 10 and 20% for the long-term assets.

Capital Asset Types

You can understand the significance of capital gains tax only when you study and grasp the meaning of capital asset types. We already know that the two types are short-term and long-term. So, let us dig deeper and understand their meaning.

  1. Short-Term

    Any asset with a holding period of 36 months or less is a capital asset for the short term. However, it is 24 months from the 2017-18 financial year for immovable properties like land, house, or building. In addition, any profit from the property sale after 24 months qualifies for long-term capital gain from 31 March 2017 onwards.

  2. Long-Term

    Any asset in your possession for 36 months or more is a long-term capital asset. However, there are exceptions to the rule for the following. They come under the category of short-term capital assets if held for 12 months or less, provided the transfer date is after 10 July 2014.

    • Equity or preference shares listed in established Indian stock exchanges

    • Securities like debentures and bonds listed in recognized Indian stock exchanges

    • UTI units

    • Equity oriented mutual fund units

    • Zero-coupon bonds

    The cardinal point is the above assets are long-term if you own them for more than 12 months. Moreover, the holding of the previous owner counts if the asset transfer is through gift or succession.

Short Term Capital Gain

You can now understand what short-term capital gain (STCG) is after understanding the concept of asset classification based on its holding and disposal pattern. Accordingly, STCG is the generation of profit or gain through a short-term capital asset sale. Moreover, it includes a gain on depreciable assets also. A suitable example will clear the concept further. A person purchases a building for Rs.50 Lakhs in February 2019 and sells it in February 2020 for Rs.60 Lakhs. The STCG for the seller is Rs.10 Lac, the difference between the purchase and sale price.

Short-Term Capital Gain on Securities

Section 111A defines the short-term capital gains as profits relating to equity, units of equity-oriented mutual funds, and business trusts listed on recognized Indian stock exchanges. It applies uniformly to the assets mentioned above under the securities transaction tax subject to trading in Indian stock exchanges. However, the cut-off date for its application is 1 October 2004. Therefore, you can summarise the STCG application under Section 111A related to the following:

  • Equity shares or equity-oriented mutual fund units where at least 65% of the portfolio assets are equity shares of domestic companies.

  • Transfer through a recognized Indian stock exchange.

  • Transaction covered under securities transaction tax (STT).

Short Term Capital Gain Tax Rate on Shares

STCG tax applies to equity share sales proceeds and is considered short-term capital assets. Accordingly, they belong to two categories.

  1. STCG under Section 111A

  2. STCG is not under Section 111A

  • The STCG Tax Rate Under Section 111A:

    The applicable tax rate under this category is 15%. In addition, you pay surcharge and cess wherever applicable. Some examples under the class are:

    • Profit on sale of shares enlisted in recognized stock exchanges.

    • Gain from the sale of equity-oriented mutual fund units sold through recognized stock exchanges.

    • Profit on sale of equity-oriented mutual fund units of a recognized business trust.

  • STCG Tax Rate Not Under Section 111A:

    The applicable STCG tax rate is the individual taxpayer’s income tax slab rate. Some of the examples under the category are:

    • Gain on sale of shares not enlisted in recognized stock exchanges.

    • Profit on sale of shares but not equity.

    • Profit on sale of debt-oriented mutual fund units.

    • Profit on sale of bonds, debentures, and government securities.

    • Gain on sales of non-equity assets.

Computation of STCG Tax on Shares

The first step for the computation of STCG tax on shares is to determine the capital gains amount on their sale. If the sale price exceeds the share’s purchase price, the difference is the profit or capital gains earned on the sale of shares. The grid below depicts the calculation of capital gains which you can use to compute the payable STCG Tax on shares.

Step 1 Total sale value of shares
Step 2 Less Acquisition cost
Less Expenses incurred during the sale
Less Cost of improvement
Step 3 The outcome is your short term capital gain

Exemptions Under STCG Tax on Shares

As a thumb rule, you must pay STCG tax on shares. However, there are a few exceptions to the rule listed below.

  • Resident individuals over 80 years with income below Rs.5 Lakhs during a financial year

  • Resident individuals over 60 but below 80 years with an annual income below Rs.3 Lakhs

  • Resident individual below 60 years and annual income below Rs.2.5 Lakhs

The cardinal point is the exemptions are in tune with the standard income tax threshold defining the different slab rates. However, only resident individuals can adjust the STCG tax under Section 111A with the typical IT exemptions, subject to the final adjustments of other income. Therefore, it essentially translates to setting off the STCG tax against the IT exemption shortfall.

In addition, no individual can claim a deduction under Section 80C of the IT Act for STCG tax for shares covered under Section 111A. On the contrary, it does not apply to shares not covered by Section 111A. The following illustration lends greater clarity to the concept.

  • Miss “A” purchases a property for Rs. 15 Lakhs in May 2020.

  • She sold the property for Rs. 20 Lakhs in March 2021.

  • Accordingly, her short-term capital gain is Rs. 5 Lac (Rs.20 Lac – Rs. 15 Lac). It is also her gross income.

  • Miss “A” has invested Rs.1.5 Lakhs in a PPF account during the financial year and paid Rs. 50000 towards a health insurance premium.

  • So, she benefits from Rs.2 Lakhs under Section 80C and 80D.

  • So, her SCTG tax is Rs. Nil (Rs.5 Lakhs – Rs.2 Lakhs = Rs.3 Lakhs. With IT exemption limit of Rs.2.5 Lac and standard deduction of Rs.50000) as the property STCG is not under the purview of Section 111A.

Tips To Reduce STCG Burden On Shares

Here are a few tips by which individuals can reduce their STCG burden on shares.

  • You can offset your short-term capital loss against STCG and LTCG, but you should not go overboard with this tax-saving strategy.

  • You can carry forward the short-term losses as tax adjustments. The law allows the carry forward facility for losses for eight financial years.

Despite the above tips, the scope of reducing the STCG tax burden on shares is limited. In contrast, you can always explore investments in tax-savings mutual funds to increase your earnings and lower your tax burden.

In Conclusion

Before buying or selling shares under the short-term asset category, you should know the STCG provisions and tax thereon. The aspects discussed cover the entire gamut of issues related to STCG tax on shares, its application, and ways to reduce the burden through sensible investments. On the flip side, equity share investments generate higher yields in the long term, which is beyond the purview of short-term capital gains.

FAQ's

  • Q: Is the benefit of indexation applicable to STCG computation?

    Ans: Indexation covers the effect of inflation on the difference between the purchase and sale price of shares. However, indexing applies to long-term capital gains only.
  • Q: Are all asset classifications based on holding for more than or less than 36 months?

    Ans: As a thumb rule, assets with a holding of over 36 months are long-term capital assets, and the rest are short-term for lesser holding periods. However, most assets have different holding periods as short or long-term capital assets.
  • Q: What are the deductible items for calculating capital gains on jewelry sales?

    Ans: You can deduct brokerage charges from the sale price for computing capital gains if they have secured a buyer.
  • Q: What is the tax impact on investments in Equity-Linked Savings Scheme (ELSS)?

    Ans: ELSS investments have a lock-in of three years, and the investments in the scheme qualify for tax deduction under Section 80C of the IT Act. However, LTCG tax applies after the lock-in period at 10% for gains over Rs.1 Lakhs per financial year without indexation.
  • Q: Is there any benefit to reinvesting the capital gain in another capital asset?

    Ans: Yes, benefits are available for reinvestment of capital assets covered under Section 54 and its variants.
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