Short Term Capital Gains Tax
Before we invest in any financial product, we analyze whether those products align with our financial goals and investment horizons. Some may want to stay invested for the long term while others would like to withdraw their investments within a short period of time. What we need to know is that every investment that we make attracts taxes. The amount of tax that we need to pay will depend on how long we stay invested in a certain instrument. So, it is important to know how much tax you need to pay before you invest in any investment instrument.
In this article, we will learn about what short-term capital gains taxes are, how they work, and more.
What Are Capital Gains?
Generally, capital gains refer to the gains or profits an individual makes on the sale of any capital assets. These could either be financial or non-financial assets. Financial assets are those that are non-physical or intangible in nature such as bonds, stocks, deposits, mutual funds, etc., Meanwhile, non-financial assets can be any physical item, which ranges from property, automobiles, etc.,
For example, you bought a house for ₹75 lakhs in October 2014. The full value of consideration in the financial year of 2017-18 was ₹2.1 crores. The house was held for more than 24 months, and hence, it is deemed a long-term capital asset. After considering the cost of improvement, and considering inflation, the cost price was adjusted, and the indexed cost of acquisition was also taken into account. The adjusted cost of the property was then settled at ₹1.4 crores.
This means you have accumulated a net capital gain worth ₹65 lakhs. After a long-term capital gains tax rate of 20% was levied on the net capital gain, the tax liability that was calculated to be paid would be around ₹13 lakhs. But there are also exemptions that are provided by the tax authorities which can offset the gains and the amount of tax to be paid if managed in the right way.
What Are The Types Of Capital Gains Taxation?
Based on the holding period, capital gains can be classified into the below two categories.
Short-Term Capital Gains (STCG)
Any asset that is held for less than 36 months is termed a short-term asset. In the case of immovable properties, the duration is 24 months. The profits generated via the sale of such an asset would be treated as short-term capital gain and it would be taxed accordingly.
Long-Term Capital Gains (LTCG)
Any asset that is held for more than 36 months is termed a long-term asset. The profits generated via the sale of such an asset would be treated as long-term capital gain and it would attract tax accordingly.
What Qualifies As Short-Term Capital Gains?
Short-term capital gains refer to any capital gain or profit that is earned by an individual on the sale of short-term capital assets. But what are short-term capital assets? They are assets that are held by the taxpayer for a period of not more than 36 months immediately preceding the date of its transfer.
On the other hand, in respect of specific assets such as shares (equity or preference) that are listed in a recognized stock exchange in India (listing of shares is not mandatory if the transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and government securities, units of UTI, and zero coupon bonds, the period of holding to be considered is 12 months instead of 36 months.
The other important thing to know here is that for unlisted shares of a company or an immovable property (being land or building or both), the period of holding has to be considered as 24 months.
How Is Short-Term Capital Gains Tax Calculated?
Here is how short-term capital gains are calculated when you sell a short-term capital asset.
Worked Example - Gold
Let us take an example to understand the calculation better. Mr. A purchased gold worth ₹10 lakhs in April 2022 and sold the gold in January 2023 for ₹11.5 lakhs. When he was selling the gold, he paid a brokerage of ₹10,000. Here is how the short-term capital gains will be calculated for this example.
As per the above example, Mr. A earned a short-term capital gain of ₹1,40,000 through his sale of the gold.
How Are Short-Term Capital Gains Taxed?
In order to determine the tax rate, the short-term capital gains are classified as follows:
- Short-term capital gains are covered under Section 111A.
- Short-term capital gains other than those covered under Section 111A.
Short-Term Capital Gains Under Section 111A
Below are some of the examples of short-term capital gains covered under Section 111A:
- Short-term capital gains arising on the sale of equity shares listed in a recognized stock exchange, which is chargeable to Securities Transaction Tax (STT).
- Short-term capital gains arising on the sale of units of equity-oriented mutual fund sold via a recognized stock change which is chargeable to STT.
- Short-term capital gains arising on the sale of units of a business trust.
- Short-term capital gains arising on the sale of equity shares, units of the equity-oriented mutual funds, or units of business trust through are recognized stock exchange located in any International Financial Services Centre and consideration is paid or payable in foreign currency even if the transaction of the sale is not chargeable to STT.
Tax Rates On Short-Term Capital Gains
Covered Under Section 111A
Short-term capital gains covered under Section 111A will be charged a tax of 15% (plus surcharge and cess as applicable). Normal short-term capital gains i.e. short-term capital gains other than those covered under Section 111A are charged to tax at a normal rate of tax, which is determined on the basis of the total taxable income of the taxpayer.
The normal tax rates for FY22 applicable to the resident individual below the age of 60 years are as follows:
- Nil up to an income of ₹2.5 lakhs
- 5% for income above ₹2.5 lakhs but up to ₹5 lakhs
- 20% for income above ₹5 lakhs but up to ₹10 lakhs
- 30% for income above ₹10 lakhs
Apart from above, health and education cess will be levied at 4% on the amount of tax.
For example, Mr. A draws an annual salary of ₹8 lakhs. In August 2021, he bought 10,000 equity shares of a company at ₹100 per share. In January 2022, he sold all of the shares at ₹125 per share. He paid a brokerage of ₹10,000 for the transaction. He sold the shares via BSE and paid STT. Here's how we can calculate his tax liability.
Now, let’s calculate how much tax he needs to pay on his short-term capital gains, which is 15% x ₹2,40,000. Then, we need to add his annual income with the short-term capital gains (₹72,500 + 36,000 = ₹1,08,500). The short-term capital gains tax would be ₹36,000. We have to health and education cess at 4%, which comes to 4,340 (₹1,08,500 x 4%). Hence, the total tax liability for the year comes to ₹1,12,840 (₹1,08,500 + 4,340).
Not Covered Under Section 111A
When the short-term capital gains are normal, i.e. when they are not covered under Section 111A, a short-term capital gain of ₹2 lakhs will be added to the salary income and will be charged to tax at normal rates.
The normal tax rates for FY22 applicable to the resident individual below the age of 60 years are as follows:
Tax-Saving Options Under Section 80G
- Nil up to an income of ₹2.5 lakhs
- 5% for income above ₹2.5 lakhs but up to ₹5 lakhs
- 20% for income above ₹5 lakhs but up to ₹10 lakhs
- 30% for income above ₹10 lakhs
Apart from above, health and education cess will be levied at 4% on the amount of tax.
Mutual Funds
Mutual funds are one of the instruments that attract short-term capital gains tax. If you wish to learn everything about the capital gain taxation of mutual funds, please read our article about it. Meanwhile in this article, we will cover how much tax you will need to pay when you invest in different types of mutual funds for the short term.
What Are The Exemptions On Short-Term Capital Gains Tax?
There are basic exemption limits on short-term capital gains tax and this means an individual will be exempted from paying any tax if their annual income is below a predetermined limit. Below is the basic exemption limit in case of an individual for FY22:
- For a resident individual of the age of 80 years or above, the exemption limit is ₹5 lakhs
- For a resident individual of the age of 60 years or above but below 80 years, the exemption limit is ₹3 lakhs
- For a resident individual of the age below 60 years, the exemption limit is ₹2.5 lakhs
- For non-resident individual irrespective of the age of the individual, the exemption limit is ₹2.5 lakhs
- For Hindu Undivided Family (HUF), the exemption limit is ₹2.5 lakhs
It is important to note that no deductions are allowed from short-term capital gains under Sections 80C to 80U referred to in Section 111A. On the other hand, these deductions can be claimed from short-term capital gains other than those covered under Section 111A.
In The End…
Every year, thousands of Indians buy and sell assets for which they have to pay taxes. It is important that we understand what capital gains are and the amount of taxes we need to pay on them to better utilize our gains. It is important to know how much tax you will be paying and how it is calculated before you spend your short-term capital gains.
If you wish to learn more about other topics such as Equity Mutual Funds, Debt Mutual Funds, Hybrid Mutual Funds, ELSS funds, and other types of investment instruments, such as Fixed Deposits, Digital Gold, and Smart Deposits, head over to our Blogs section. You can also check out our Calculators, where you can learn more about how much wealth you can accrue in certain years.
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| Parameters | ₹ |
|---|---|
| Total sale value of the asset | XXXXX |
| Less - Expenses incurred wholly and exclusively in connection with the sale of a capital asset (eg. brokerage, commission, etc.) | XXXXX |
| Net sale consideration | XXXXX |
| Less - Purchase price of the capital asset | XXXXX |
| Less - Any post purchases capital expenses on the improvement of capital asset | XXXXX |
| Short-Term Capital Gains | XXXXX |
| Parameters | ₹ |
|---|---|
| Total sale value of the asset | 11,50,000 |
| Less - Expenses incurred wholly and exclusively in connection with the sale of a capital asset (eg. brokerage, commission, etc.) | 10,000 |
| Net sale consideration | 11,40,000 |
| Less - Purchase price of the capital asset | 10,00,000 |
| Less - Any post purchases capital expenses on the improvement of capital asset | 0 |
| Short-Term Capital Gains | 1,40,000 |
| Parameters | ₹ |
|---|---|
| Total sale value of the asset | 12,50,000 |
| Less - Expenses incurred wholly and exclusively in connection with the sale of a capital asset (eg. brokerage, commission, etc.) | 10,000 |
| Net sale consideration | 12,40,000 |
| Less - Purchase price of the capital asset | 10,00,000 |
| Less - Any post purchases capital expenses on the improvement of capital asset | 0 |
| Short-Term Capital Gains | 2,40,000 |
| Type Of Mutual Fund | Definition | Tax Rate |
|---|---|---|
| Equity Mutual Funds | When you redeem your investments from equity mutual funds within one year, the gains you receive are called short-term capital gains | They are taxed at a flat rate of 15%, irrespective of your income tax bracket |
| Debt Mutual Funds | When you withdraw your investments from debt mutual funds within a holding period of three years, the gains you receive are called short-term capital gains. | These gains are added to your taxable income and taxed at your income tax slab rate. |
| Hybrid Mutual Funds | If the hybrid mutual fund is equity-oriented, it is taxed like equity mutual funds | |
| Hybrid Mutual Funds | If the hybrid mutual fund is debt-oriented, it is taxed like debt mutual funds |