What is Short Term Capital Gain? How Income Tax Apply on STCG

Introduction Short-term capital gain refers to the profit earned by a taxpayer from the sale of a capital asset held for not more than 36 mo...

Introduction

Short-term capital gain refers to the profit earned by a taxpayer from the sale of a capital asset held for not more than 36 months before its transfer. On the other hand, a long-term capital asset refers to any capital asset held for more than 36 months before its transfer. 

However, in the case of certain assets such as shares (equity or preference), 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.

It is important to note that in the case of unlisted shares of a company or an immovable property, being land or building or both, the period of holding to be considered is 24 months instead of 36 months. 

Short-term capital gain is taxed at different rates depending on the nature of the asset and whether it is covered under Section 111A or not. Proper understanding and compliance with tax rules and regulations can help taxpayers save on taxes and avoid penalties.

Here are three examples of short-term capital gains based on the time period definition provided above:

Example of Short-Term Capital Gain on Equity Shares:

Mr. A purchased 1000 shares of XYZ Ltd. on January 1, 2022, for Rs. 100 per share. He sold these shares on September 1, 2022, for Rs. 150 per share, earning a profit of Rs. 50 per share. Since the holding period is less than 12 months (which is the applicable time period for equity shares), this gain will be treated as a short-term capital gain.

Example of Short-Term Capital Gain on Land:

Mr. B purchased a plot of land on June 1, 2021, for Rs. 5 lakhs. He sold the land on August 31, 2022, for Rs. 6 lakhs, earning a profit of Rs. 1 lakh. Since the holding period is less than 24 months (which is the applicable time period for unlisted shares or immovable property), this gain will be treated as short-term capital gain.

Example of Short-Term Capital Gain on Debt Mutual Funds:

Ms. C purchased units of an open-ended debt mutual fund on January 1, 2020, for Rs. 10,000. She sold these units on December 31, 2022, for Rs. 12,000, earning a profit of Rs. 2,000. Since the holding period is less than 36 months (which is the applicable time period for all assets other than those covered under section 111A), this gain will be treated as short-term capital gain.

Asset Type	Holding Period for
	Short-Term Capital Gain	Long-Term Capital Gain
Equity shares and equity-oriented mutual funds sold on a recognized stock exchange in India (or in any International Financial Service Centre if consideration is paid or payable in foreign currency)	Not more than 12 months	More than 12 months
Listed securities like debentures and Government securities, Units of UTI, Zero Coupon Bonds	Not more than 12 months	More than 12 months
Unlisted shares of a company or immovable property being land or building or both	Not more than 24 months	More than 24 months
Capital asset other than shares, equity-oriented mutual funds, listed securities like debentures and Government securities, Units of UTI, Zero Coupon Bonds, unlisted shares of a company or immovable property being land or building or both	Not more than 36 months	More than 36 months

 Special/NormalTax Rate 

Section 111A of the Income Tax Act applies to short-term capital gains arising from the sale of equity shares or units of an equity-oriented mutual fund that are subject to securities transaction tax (STT). STT is a tax levied on the purchase and sale of securities, such as shares and derivatives, in India. If the short-term capital gains are covered under section 111A, they are taxed at a concessional rate of 15%.

However, if the short-term capital gains are not covered under section 111A, they are taxed at the normal rate of tax, which is determined based on the total taxable income of the taxpayer. There is no concessional tax rate for these gains.

Resident individuals and resident Hindu Undivided Families (HUFs) can adjust their exemption limit against short-term capital gains covered under section 111A. This means that they can deduct the exempted amount from their taxable income before calculating the tax liability. However, non-resident individuals and non-resident HUFs cannot avail of this benefit.

On the other hand, no deduction under sections 80C to 80U is allowed from short-term capital gains covered under section 111A. However, such deductions can be claimed from other short-term capital gains that are not covered under section 111A.

In addition, short-term capital gains arising from the sale of equity shares outside a recognized stock exchange are treated as short-term capital gains other than those covered under section 111A, and are taxed at the normal rate of tax.

Here are three examples of short-term capital gain calculations:

Example 1:

Mr. Sharma sold 500 equity shares of XYZ Ltd. on a recognized stock exchange for a consideration of Rs. 1,50,000 on 15th March 2022. The purchase cost of the shares was Rs. 1,25,000. STT was paid on the transaction. Assuming his other Income is 10 Lakh.

• Short-term capital gain = Sale consideration - Purchase cost
• Short-term capital gain = Rs. 1,50,000 - Rs. 1,25,000
• Short-term capital gain = Rs. 25,000
• Tax on short-term capital gain (15% concessional rate) = 15% of short-term capital gain
• Tax on short-term capital gain = 15% of Rs. 25,000
• Tax on short-term capital gain = Rs. 3,750

Example 2:

Ms. Gupta sold 1,000 shares of ABC Ltd. on a recognized stock exchange for a consideration of Rs. 2,50,000 on 20th September 2022. The purchase cost of the shares was Rs. 1,50,000. STT was  paid on the transaction. He is falling under the 30% slab due to other income.

• Short-term capital gain = Sale consideration - Purchase cost
• Short-term capital gain = Rs. 2,50,000 - Rs. 1,50,000
• Short-term capital gain = Rs. 1,00,000 
• Tax on short-term capital gain = 15% of Rs. 1,00,000
• Tax on short-term capital gain = Rs. 15,000

Even though it falls under the 30% slab, Tax u/s 111A will be charged at 15%.

Example 3:

Mr. Singh sold a piece of land for a consideration of Rs. 10,00,000 on 30th June 2022. The purchase cost of the land was Rs. 7,00,000. STT was not applicable to the transaction.

• Short-term capital gain = Sale consideration - Purchase cost
• Short-term capital gain = Rs. 10,00,000 - Rs. 7,00,000
• Short-term capital gain = Rs. 3,00,000

Assuming Mr. Singh falls in the 30% tax bracket, the tax on short-term capital gain would be calculated as follows:

• Tax on short-term capital gain (30% normal rate) = 30% of short-term capital gain
• Tax on short-term capital gain = 30% of Rs. 3,00,000
• Tax on short-term capital gain = Rs. 90,000

Conclusion

Short-term capital gains are an important aspect of taxation in India, and the rules and tax rates vary depending on whether the gains are covered under section 111A or not. Taxpayers need to be aware of these rules to accurately calculate their tax liability and to take advantage of the benefits available to them. It is always advisable to consult a tax expert or a chartered accountant for any clarification or assistance with tax-related matters.

Also Read: Whether a Transaction is STCG or Business Income Read Details here

Also Read: Long-term Capital Gain on Shares 

Short-term capital gains other than those covered under section 111A

This refers to the profits made from the sale of assets such as property, gold, and debt mutual funds held for less than 36 months.

Such short-term capital gains are taxed at the normal rate of tax which is determined based on the total taxable income of the taxpayer.

For example, if the taxpayer's total taxable income is below Rs. 2.5 lakh, no tax will be applicable. If the total taxable income is between Rs. 2.5 lakh and Rs. 5 lakh, the tax rate is 5%. The tax rate increases with an increase in the total taxable income.

Adjustment of exemption limit

An exemption limit is the amount of income that is not taxable. The exemption limit for individuals and HUFs is Rs. 2.5 lakh for the financial year 2022-23.

Residents, as well as non-residents, can adjust the exemption limit against short-term capital gains other than those covered under section 111A. However, only a resident individual and resident HUF can adjust the exemption limit against short-term capital gains covered under section 111A.

Deductions

No deduction under sections 80C to 80U is allowed from short-term capital gains referred to in section 111A. 

However, such deductions can be claimed from short-term capital gains other than those covered under section 111A.

It's important to note that taxpayers should keep proper documentation of their transactions and calculate their tax liability accurately to avoid any penalties or legal issues in the future.

Conclusion

In conclusion, short-term capital gains are profits made from the sale of assets held for less than 36 months. The Income Tax Act of India has different tax rates and rules for short-term capital gains covered under section 111A and other short-term capital gains. Short-term capital gains covered under section 111A are applicable only to equity shares and equity-oriented mutual funds sold on a recognized stock exchange. Such short-term capital gains are taxed at a concessional rate of 15% if securities transaction tax (STT) is paid. If STT is not paid, the concessional tax rate of 15% is available only if the transaction is undertaken on a recognized stock exchange located in any International Financial Service Centre, and the consideration is paid or payable in foreign currency. 

On the other hand, short-term capital gains other than covered under section 111A are taxed at the normal rate of tax which is determined on the basis of the total taxable income of the taxpayer. The exemption limit for individuals and HUFs is Rs. 2.5 lakh for the financial year 2022-23. 

Residents, as well as non-residents, can adjust the exemption limit against short-term capital gains other than those covered under section 111A. However, only a resident individual and resident HUF can adjust the exemption limit against short-term capital gains covered under section 111A. No deduction under sections 80C to 80U is allowed from short-term capital gains referred to in section 111A. However, such deductions can be claimed from short-term capital gains other than those covered under section 111A.

Additionally, both resident and non-resident individuals and HUFs can adjust the exemption limit against other short-term capital gains.

The key differences between short-term capital gains covered under section 111A and other cases are as follows:

Applicability: Section 111A applies only to equity shares and equity-oriented mutual funds sold on a recognized stock exchange, while other short-term capital gains apply to all assets other than those covered under section 111A.

Tax rate: The tax rate for short-term capital gains covered under section 111A is a concessional rate of 15% if securities transaction tax (STT) is paid. If STT is not paid, the concessional tax rate of 15% is available only if the transaction is undertaken on a recognized stock exchange located in any International Financial Service Centre, and the consideration is paid or payable in foreign currency. On the other hand, other short-term capital gains are taxable at the normal rate of tax based on the taxpayer's total taxable income.

Exemption limit: Resident individuals and Hindu Undivided Families (HUFs) can adjust the exemption limit against short-term capital gains covered under section 111A. Non-resident individuals and HUFs cannot adjust the exemption limit against short-term capital gains covered under section 111A. However, deductions under sections 80C to 80U can be claimed from other short-term capital gains.

Deductions: No deductions under sections 80C to 80U are allowed from short-term capital gains covered under section 111A. However, deductions under sections 80C to 80U can be claimed from other short-term capital gains.

In summary, section 111A provides a concessional tax rate and certain exemptions for short-term capital gains from equity shares and equity-oriented mutual funds traded on a recognized stock exchange, while other short-term capital gains are taxed at the normal rate with certain deductions available.

Check  example 1:

Let's say that an individual has a total taxable income of Rs. 2,50,000, which includes short-term capital gains of Rs. 50,000 from the sale of equity shares covered under section 111A.

Since the short-term capital gains are covered under section 111A, the individual can adjust the exemption limit of Rs. 2,50,000 against them. This means that the taxable income for the purpose of calculating the tax on short-term capital gains will be Rs. Zero after adjusting in basic exemption Limit.

Check  example 2:

Suppose Mr. Sharma sold equity shares on a recognized stock exchange in India and made a short-term capital gain of Rs. 1,50,000. He had 500000 other taxable income during the year. The total taxable income after adjusting the basic exemption limit is Rs. 650000-150000=500000.

As the short-term capital gains were made on equity shares sold on a recognized stock exchange in India, Mr. Sharma can avail of the concessional tax rate of 15% under section 111A, provided STT has been paid on the transaction.

Therefore, the tax liability on the short-term capital gains would be Rs. 22,500 (15% of Rs. 1,50,000).

After deducting the tax liability from the short-term capital gains, Mr. Sharma's net gain would be Rs. 1,27,500 (Rs. 1,50,000 - Rs. 22,500).

Check  example 3

Suppose Mr. X sold equity shares worth Rs. 2,50,000 in August 2022, which were acquired in January 2022 at Rs 2,00,000. Let's assume that Mr. X has a total taxable income of Rs. 8,00,000 for the financial year 2022-23.

Calculation of short-term capital gain tax:

• Sale value of equity shares = Rs. 2,50,000
• Cost of acquisition = Rs. 2,00,000
• Short-term capital gain = Rs. 50,000

As the shares were sold on a recognized stock exchange and STT was paid, the short-term capital gains tax rate is 15%. On Balance Taxable Income of Normal SLab will be applicable.

• Tax at special rate STCG (50000*15%)=7500
• Balance Amount 800000-50000=750000
• Basic exemption:250000
• 250000-500000=250000@5%=12500
• 500000-750000=250000@20%=50000

Total Tax=7500+12500+50000=70000

In conclusion, short-term capital gains are taxed differently based on whether they are covered under section 111A or not. Taxpayers must understand the rules and rates applicable to short-term capital gains to accurately calculate their tax liability.

Here are the key points to know about the adjustment of short-term capital gains (STCG) in the basic exemption limit:

1. The basic exemption limit is the maximum amount of income that is not taxable under the Income Tax Act of India.
2. Resident individuals and Hindu Undivided Families (HUFs) can adjust the basic exemption limit against short-term capital gains covered under section 111A.
3. Non-resident individuals and HUFs cannot adjust the basic exemption limit against short-term capital gains covered under section 111A.
4. For other short-term capital gains, the basic exemption limit can be adjusted by all taxpayers.

FAQ on STCG

Sure, here are 10 frequently asked questions about Short-Term Capital Gains (STCG):

1.What is Short-Term Capital Gain?

Short-term capital gain is the profit earned from the sale of an asset held for less than 36 months.(Few exception also there read chart above)

2.What is the difference between STCG and LTCG?

Short-term capital gain is the profit earned from the sale of an asset held for less than 36 months, while long-term capital gain is the profit earned from the sale of an asset held for more than 36 months.

3.What are the tax rates for STCG?

The tax rate for STCG depends on whether the gains are covered under section 111A or not. STCG covered under section 111A is taxed at a concessional rate of 15%, while other STCG is taxed at the normal rate of tax based on the taxpayer's total taxable income.

4.What is STT?

STT or Securities Transaction Tax is a tax levied on the sale and purchase of securities such as shares, derivatives, and equity-oriented mutual funds.

5.Do I need to pay STT on all securities transactions?

No, STT is applicable only on securities transactions executed on a recognized stock exchange in India.

6.Can I claim deductions on STCG?

No, deductions under sections 80C to 80U are not allowed from STCG covered under section 111A. However, deductions can be claimed from other STCG.

7.Can I adjust the basic exemption limit against STCG?

Resident individuals and HUFs can adjust the basic exemption limit against STCG covered under section 111A, while non-resident individuals and HUFs cannot.

8.How is STCG calculated?

STCG is calculated by subtracting the cost of acquisition and any other relevant expenses from the sale price of the asset.

9.What is the time period for STCG calculation?

The time period for STCG calculation is 36 months, except for certain assets such as equity shares, units of equity-oriented mutual funds, listed securities, Units of UTI and Zero Coupon Bonds, where the time period is 12 months. For unlisted shares and immovable property, the time period is 24 months.

Conclusion

It is important for taxpayers to understand the tax rates and rules applicable to short-term capital gains under section 111A and other short-term capital gains. Taxpayers should ensure that they pay the required STT, and if they trade on an International Financial Service Centre, that the transaction is in foreign currency to avail the concessional tax rate of 15%. Additionally, taxpayers should be aware of the exemption limit adjustments that can be made for different types of short-term capital gains and the deductions that can be claimed from them. By understanding these rules and regulations, taxpayers can plan their investments and manage their tax liabilities more effectively.