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Short Term Capital Gains Tax

Short-term capital gains tax (STCG) is levied on profits earned from selling capital assets held for a duration shorter than the prescribed holding limit. In India, the holding period defining short-term capital gains varies based on the type of asset. STCG is taxed at different rates depending on whether the asset falls under Section 111A (equity-oriented assets) or general capital assets. Understanding STCG tax implications is essential for investors and traders looking to optimize their tax liability.

Definition of Short Term Capital Assets

Short-term capital assets are those held for a period less than the prescribed duration before being sold. The classification varies depending on the asset type:

  • Listed Assets: Equity shares and equity-oriented mutual funds held for less than 12 months are considered short-term.

  • Unlisted Assets: Unlisted shares and immovable property held for less than 24 months fall under short-term assets.

  • Debt Assets: Debt mutual funds do not have any long-term or short classifications. They are taxed the same way irrespective of the holding period.

  • Other Assets: Assets like gold, property, and other investments held for less than 24 months are deemed short-term.

If the holding period exceeds these durations, the asset is classified as a long-term capital asset and taxed accordingly.

Holding Periods for Various Asset Classes

Asset Type

Short-Term Holding Period

Equity shares & equity MF

Less than 12 months

Debt mutual funds

Holding period doesn’t matter

Real estate & immovable property

Less than 24 months

Unlisted shares

Less than 24 months

Gold & other assets

Less than 24 months

Short Term Capital Gains Tax Rates for FY 2024-2025

The tax rates for short-term capital gains have been revised in the Union Budget 2024-25:

For equity shares & equity-oriented mutual funds (under Section 111A), the STCG tax rate has increased from 15% to 20%. For debt related assets, the short-term capital gains are added to the total income and taxed at the specific income tax slab rate of the individual.

Type of Asset

STCG Tax Rate

Equity shares & equity-oriented mutual funds (under Section 111A)

20% (plus cess & surcharge)

Other capital assets (debt funds, real estate, gold, etc.)

Taxed as per income slab

Calculation of Short Term Capital Gains

To compute STCG, follow these steps:

  1. Determine the Full Sale Value: Total consideration received from selling the asset.

  2. Deduct Expenses: Any expenses incurred on sale, such as brokerage, commission, and transfer fees.

  3. Subtract the Purchase Cost: The cost of acquiring the asset. Expenses incurred for enhancing the asset's value can also be considered here.

  4. Calculate the Net Gain:
    STCG = Sale Value - (Purchase Cost + Expenses on Sale)

Example:

If you buy 100 shares at ₹ 200 each (₹ 20,000 total) and sells them within one year, at ₹ 250 each (₹ 25,000 total) with a brokerage fee of ₹200, the STCG is:

STCG = ₹ 25,000 - (₹ 20,000 + ₹ 200) = ₹ 4,800

If this is an equity transaction under Section 111A, a 20% tax applies:

Tax Payable = ₹ 4,800 × 20% = ₹ 960

Exemptions and Deductions Applicable to STCG

  • Basic Exemption Limit: Individuals with taxable income below ₹2.5 lakh (₹3 lakh for senior citizens) do not need to pay STCG tax.

  • Tax Deductions: STCG is not eligible for deductions under Section 80C, but capital gains can be offset with capital losses.

  • Set-off Against Losses: Short-term capital losses can be adjusted against short-term or long-term capital gains in the same year.

Impact of Recent Tax Changes on Investors

  • Debt Mutual Fund Taxation: Post-April 1, 2023, capital gains from debt mutual funds are taxed as per income slabs, eliminating the benefit of indexation.

  • Changes in Tax Regime: The new tax regime does not offer deductions on capital gains, making tax-efficient investment planning essential.

  • Increased STCG Tax Rate: The tax rate on short-term capital gains under Section 111A has been raised from 15% to 20%.

  • LTCG Tax Adjustments: Long-term capital gains tax has been set at 12.5%, with the exemption limit increased from ₹ 1 lakh to ₹ 1.25 lakh.

These changes require a reevaluation of investment strategies to optimize tax efficiency.

Strategies to Minimize Short Term Capital Gains Tax Liability

  • Holding Investments Longer: Converting STCG into LTCG (by holding assets longer) can lower tax liability.

  • Offsetting Capital Losses: Use capital loss harvesting to set off gains against losses, reducing taxable income.

  • Utilizing Tax-Free Income Limits: Ensure total income, including STCG, remains within the basic exemption limit to avoid tax.

  • Tax-Saving Investment Vehicles: Opting for tax-exempt instruments like ELSS or PPF can help reduce overall tax burden.

Differences Between Short Term and Long Term Capital Gains

Here’s a summary of the key differences between short-term and long-term capital gain and how they are taxed:

Aspect

Short-Term Capital Gains

Long-Term Capital Gains

Holding Period

Less than specified duration (varies by asset)

More than specified duration (varies by asset)

Tax Rate

20% for equity assets; others as per slab rate

12.5% (above ₹1.25 lakh exemption)

Indexation Benefit

Not available

Available for certain assets based on the date of purchase

Set-off Provisions

Can be set off against both STCG and LTCG

Can be set off only against LTCG

Additional Read - How to Calculate STCG Tax on Debt Funds in India

Reporting and Compliance Requirements

  • Income Tax Return (ITR) Filing: Report STCG in the 'Capital Gains' section of the ITR form.

  • Advance Tax: If tax liability exceeds ₹10,000 in a financial year, advance tax payments are mandatory.

  • Documentation: Maintain records of purchase and sale transactions, along with related expenses, to substantiate claims during assessments.

Summary

Short-term capital gains tax in India applies to profits from selling assets held for a duration shorter than the prescribed holding limit. STCG tax rates differ for equity (20%) and other assets (income slab rates). As an investor, you can lower your STCG tax burden through loss set-off, long-term holding, and tax-exempt investment strategies. With recent tax changes, understanding and planning for STCG is crucial to optimize overall returns.

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Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://www.bajajbroking.in/disclaimer

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Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

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