What are Short-term Capital Gains (STCG)?

A capital asset can either be a property or security and as per Indian laws, it is mandatory to pay taxes on such assets. Capital gain refers to the profit that you’d make by transferring the ownership of any capital asset. Capital gains are further classified into short-term capital gains and long term capital gains. The tax applicable to these gains is called capital gains tax. There are also a number of income tax exemptions that you can take advantage of to minimise your tax liability. 

A short-term capital gain refers to any profit that you make on selling short-term capital assets. This would also include any gains made on depreciable assets. Here’s an example to help you understand the concept of capital gains a little bit better - let’s assume that you buy a villa for ₹40 Lakhs, within a year, you end up selling this villa for ₹45 Lakhs. This would be considered as a capital gain of ₹5 Lakhs. It is required of you to pay short-term capital gain taxes on this capital gain. 

Any asset that you own for under 36 months from the date of initial transfer would be classified as a short-term capital asset. To help you understand short-term capital assets better, here’s an illustration - let’s assume that you buy a building, which you sell within one and a half years or 18 months. Since you’ve owned this asset for less that 36 months, the gains you make on this sale would be considered as a short-term capital gain. This means that you’d need to pay short-term capital gain taxes on your gain. 

Units of mutual funds that are equity-linked and equity gains from listed companies will be considered short-term capital and will attract short-term capital gains tax as per Section 111A. The mentioned units that are transferred after October 1, 2004, come under securities transaction tax given that they are transferred through a recognised stock exchange. 

 

For example, let’s suppose that you have invested ₹10 Lakhs in a mutual fund that is linked to a recognised stock exchange. You sell all of your mutual fund units for ₹20 Lakhs 16 months later. Here, your short-term capital gain is ₹10 Lakhs and you would be required by law to pay your short-term capital gains tax on the same. 

Any profits made from sale of property that held for a period of 36 months or lesser will attract short-term capital gains tax. This holds true for inherited property as well. If you sell your inherited property within a span of 36 months, you will be required to pay short-term capital gains tax on the same. However, you can claim relevant rebate concessions if you’ve partaken in any redevelopment or fixing up activities for the property. 

 

For the purpose of illustration, let’s assume that you purchase a house which you sell within a year and end up making a capital gain of ₹4 Lakhs. In this case, you’d have to pay short-term capital gains tax on your gains. On the other hand, if you’re a property dealer doing the same, your gains would be filed under business income and not capital gains.

There are a few tax exemptions under the short-term capital gains taxation framework, they are as follows: 

• Short-term capital gains that have been made through an unregistered or unrecognised stock exchange/stock market 

• Short-term capital gains that are made as a result of selling of shares that are not equity shares

• Short-term capital gains that are made as a result of selling immovable assets like precious metals, property, etc. 

• Short-term capital gains that are made as a result of selling government securities, bonds and debentures

• Short-term capital gains that are made as a result of selling mutual fund units that are not invested in equities

For the determination of short-term capital gain tax rate, STCG are divided into two categories:

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

• Short-term capital gains covered under section 111A.

The short-term capital gains tax rate or STCG tax rate is determined by the government. The short-term capital gains tax comes under Section 111A of the Income Tax Act. Short-term capital gains on specified financial assets shall be taxed at a rate of 20% instead of the previous rate of 15%. This short-term capital gains tax rate does not include the surcharge and cess that may be applicable. In case your short-term capital gains do not fall within the Section 111A of the I-T Act, you can file your short-term capital gains under the Normal Short-Term Capital Gains, wherein you’ll be taxed as per your tax bracket.

 

Normal tax rates for the financial years 2021-22 for resident individuals under the age of 60 years are as follows:

Apart from applicable tax slabs, health and education cess of 4% will be levied on the tax amount. 

You can claim tax deductions on STCG to reduce your tax liabilities. You can file for short-term capital gain tax exemptions under Section 80U and Section 80C, you can claim tax deductions in line with your investments under these sections of the IT Act. These deductions or exemptions can be claimed only under Section 111A. 

 

Other than these exemptions, there are also basic exemption limits. Basic exemption limits refer to the upper income limit up to which individuals and eligible entities will not be required to pay any taxes. These basic exemption limits are dependent on the individual’s age and of course, income levels. Here’s basic exemption limits applicable for the financial year 2021-22:

Here’s an example to help you understand tax treatment of short-term capital gains that are not included under 111A: 

 

Sheetal had bought a plot in Karnataka for ₹15 Lakhs in March 2020. She sold the same in March 2021 for ₹20 Lakhs. She has also invested ₹1.5 Lakhs in PPF and ₹50,000 more in NSC. Let’s have a look at Sheetal’s total taxable income and her short-term gains tax.

 

Since property is not included under Section 111A of the I-T Act, Sheetal can claim deductions available under Section 80C and 80U. A total deduction of ₹2 Lakhs can be claimed including PPF (Public Provident Fund) and NSC (National Stock Exchange). Here’s the calculation for the same:

Therefore, Sheetal will have to pay ₹60,000 as her short-term capital gains tax.

It’s important to know the tax treatment of short-term capital gains and the exemptions that you can take advantage of in order to reduce your tax liabilities before realising your short-term capital gains. Depending on the asset that you transfer to make a short-term capital gain, your short-term capital gain tax treatment may vary, which is why it’s important that you understand the taxes associated with short-term capital gains.