Grasping how taxes work on short-term capital gains matters a lot if you put money into things like real estate, stocks, or mutual funds. This tax hits the profits you make when you sell stuff you’ve owned for just a short time less than a year.
As an investor, you need to understand STCG Tax, its applicable rates, how to calculate it, and its impact on your financial strategies and tax compliance.
What is Short-Term Capital Gain Tax?
Short-term capital gain tax is the portion of profit the government claims when you sell assets you’ve owned for a brief period. The rules concerning taxation differ depending on the type of asset and the duration of holding, and STCG taxes are, in the majority of cases, more than long-term capital gain or LTCG taxes, which are intended to avoid speculative trading.
Holding Durations for STCG
The designation of “short-term” differs with the type of asset:
- Equity mutual funds and equity shares: Below 12 months
- Real estate, debt mutual funds, gold, and other assets: Under 36 months
The profit arising from the sale of such assets within these durations is classified as short-term capital gains, which are taxable.
Computation of Short-Term Capital Gain Tax
The calculation of STCG involves a series of steps, starting with the computation of gains and culminating in the application of a tax rate.
Step 1: Determine the Selling Price:
The selling price is the net amount realized on the sale of the asset.
Step 2: Transfer Costs to be Deducted:
Transfer costs are legal charges, brokerage, and stamp duty-related costs.
Step 3: Less the Purchase Price:
Deduct the adjusted selling price from the original purchase price of the asset (or the cost of acquisition).
Step 4: Result:
STCG: STCG = Selling Price – (Transfer Costs + Purchase Price)
Calculate the Tax Rate
The STCG tax rate for listed equity shares and equity-based mutual funds grew from 15% to 20% on July 23, 2024.
Short-Term Capital Gains Tax Rate for FY 2024-25
These are the tax rates on STCG for FY 2024-25,
| Asset type | STCG Tax Rate |
| Equity-oriented mutual fund units | 20% |
| Immovable assets (I.e., land, house, buildings and offices) | Taxed at the individual’s prevalent income tax slab rate. |
| Unlisted equity shares (including foreign shares) | Taxed at the individual’s applicable income tax slab rate. |
| Listed equity shares | 20% |
| Movable assets (like gold, paintings, silver, antiques, etc.) | Taxed at the individual’s prevalent income tax slab rate. |
Short-Term Capital Gains Tax on Equity and Non-Equity Assets
Equity-based assets, such as individual stocks and equity mutual funds, are subject to a uniform short-term capital gains (STCG) tax rate of 20% if owned for less than 12 months. Irrespective of your general income bracket, any gains earned from selling these assets within a year will be charged at this fixed rate.
For example, if you sell equity shares after 9 months and profit from Rs 60,000, you will owe an STCG tax of Rs 12,000 (20% of Rs 60,000). On the contrary, non-equity assets, such as bonds, debt-based mutual funds, and gold, have separate tax treatment. The STCG from these assets is included in your total income, and the tax liability is decided based on your prevailing income tax slab. The tax rate will differ based on your overall income level.
Short-Term Capital Gains Tax on Shares
STCG on shares pertains to the profits obtained from the sale of shares owned for a comparatively short period. This duration differs based on whether the shares are unlisted or listed. For listed shares on a stock exchange, any profits from selling within 12 months of purchase are categorized as STCG. Nonetheless, if the shares are not transacted on a stock exchange (unlisted), the holding duration for STCG is 24 months. Any profit accruing from selling shares within these fixed timeframes is regarded as STCG and is liable to taxation.
Short-Term Capital Gains Tax on Hybrid Funds
Hybrid funds, which combine equity and debt instruments to offer diversification, have differing STCG tax implications. If a hybrid fund has an equity exposure of more than 65%, it is considered an equity fund, and the STCG is taxed at a uniform rate of 20% for holdings of less than 12 months. Nevertheless, for hybrid funds with an equity exposure under 65%, it is considered an equity fund, and the STCG is taxed at a uniform rate of 20% for holdings of 12 months or less. However, for hybrid funds with an equity exposure of below 65%, the STCG is taxed as per rules governing debt funds, which typically involves adding the gains to your overall income and taxing based on your relevant income tax slab. Hence, understanding the equity exposure of a hybrid fund is important in correctly calculating the STCG tax liability.
STCG Tax on Property
Short-term capital gains (STCG) on the property are computed by deducting the improvement expenses, cost of acquisition, and transfer costs from the ultimate sale price. The short-term holding duration for real estate properties is less than 24 months. Any profits obtained from selling a property within its timeframe will be categorized as STCG. Consequently, these profits are considered part of an individual’s income and are liable to taxation under the Indian Income Tax Act of 1961. Nonetheless, specific exemptions are in place for STCG from selling exclusive assets, such as residential house properties.
Short-Term Capital Gains Tax on SIP
SIPS, or Systematic Investment Plans, are a common investment strategy that comprises frequent contributions to mutual funds. When extenuating SIP units, the first-in-first-out (FIFO) principle comes into force, implying that the earliest units are extenuated first. So, if you compensate units after holding them for over 12 months, the units bought in the initial months will be regarded as permanent capital gains and taxed accordingly. Nevertheless, any units purchased within the final 12 months will be liable to STCG tax at a flat charge of 20%, irrespective of your general income tax bracket. It’s essential to note that the entire equity mutual fund dealings are also liable to Securities Transaction Tax (STT), a charge of 0.001% on the transaction value.
Short-Term Capital Gain Exemption
Individuals who desire to claim exemptions/deductions on short-term capital gains can assert so under Section 80C to 80U of the Income Tax, provided short-term capital gains do not come under Section 111A. In cases where gains fall within the ambit of Section 111A, individuals cannot claim deductions under Sections 80C to 80U.
Example:
Mr. Verma purchased a plot in Baroda for Rs 15,00,000 in September 2014. He sold it in July 2015 for RS 25,00,000. He invested a sum of Rs 1,50,000 in PPF and another Rs 50,000 in NSC. What is Mr. Verma’s total taxable income and his short-term capital gains tax?
Solution: Property does not come under Section 111A of the Income Tax Act, and as such, Mr. Verma can claim rebates under Section 80C to 80U. He can claim a total deduction of up to Rs 2,00,000 (PPF + NSC). The computations now get like this:
Short-term gains on sale of property – Rs 20,00,000 – Rs 15,00,000 = Rs 5,00,000/-
This constitutes his gross total income.
Deductions under Section 80C to 80U – Rs 2,00,000/-
Taxable Amount = Rs 5,00,000 – Rs 2,00,000 = Rs 3,00,000/-
He is now inclined to pay a 15% short-term capital gains tax towards this sum (without the cess) [this is with regard to his current income slab].
This implies he has to pay Rs 45,000 as short-term capital gains tax.
Value of Short-Term Capital Gains Tax
Short-term capital gains (STCG) tax is one of the important features of the Indian tax system, especially for organizations and individuals dealing with holding assets or undertaking short-term trading.
Here’s why the STCG tax is important:
1. Regulation of Short-Term Speculative Activities
Purpose: STCG tax is a discouragement of excessive short-term speculative activities, especially in financial markets such as equities, where frequent buying and selling cause market volatility.
Impact: By taxing short-term profits at a higher rate, the tax code encourages more durable, long-term investments that contribute to overall financial market stability.
2. Promoting Long-Term Investment
Objective: The higher rate of STCG, compared with Long-Term Capital Gains (LTCG), encourages investors to hold assets for longer periods to benefit from low rates of taxation.
Impact: This supports the long-term creation of capital, which benefits the wealth accumulation of an individual as well as the economy.
3. Revenue Creation for the Government
Objective: The STCG tax has an impact on the government’s income from investors and traders who profit from quick price changes in different types of assets.
Impact: This income helps keep up public spending and infrastructure projects, which boosts the economic growth of the country.
4. Fair Tax Prices
Objective: STCG taxation helps ensure that individuals involved in short-term trading pay their fair share of taxes on gains resulting from such activities, resulting in a fairer allocation of tax burdens.
Impact: This prevents an unfairness in the tax system, where those who gain from quick profits are not paying in proportion to the economy.
Bottom Line
Investors need to be aware of the tax ramifications of short-term capital gains (STCG). The importance of taxes is highlighted by the most recent increase in the STCG tax rate on fixed financial assets when planning investment choices. Through judicious monitoring of asset holding periods and studying tax-efficient investment alternatives, investors can minimize their tax outgo and maximize their overall returns.
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