Short-Term Capital Gains (STCG)

Understanding Short-Term Capital Gains (STCG) is essential if you've recently sold shares, property, or other investments within a short period. Knowing how short-term capital gains tax applies, especially on shares under Section 111A of the Income Tax Act, can significantly reduce your tax burden. By reading further, you'll grasp clearly what STCG means, current short-term capital gains tax rates, exemptions, and practical strategies to save tax legally. This knowledge ensures you're well-informed and confident in managing your finances and investment decisions effectively.

A short-term capital asset is any investment you hold for a short period before selling. Usually, this means owning the asset for less than 36 months. But some assets have shorter periods. For example, shares and equity-oriented funds count as short-term if sold within just 12 months.

 

Similarly, unlisted shares, land, or buildings held for less than 24 months also come under short-term. Knowing these periods helps you clearly understand when an asset qualifies as short-term, influencing your tax rate under short-term capital gains tax rules.

A short-term capital gain is the profit you earn from selling an asset within a short period. For example, when you sell shares or bonds at a higher price than you paid, you earn this gain. In India, selling shares listed on a stock exchange within 12 months triggers STCG.

 

The tax rate for these gains, under Section 111A of the Income Tax Act, is 20% from 23 July 2024. For other assets, short-term capital gains tax depends on your income slab. Clearly understanding STCG helps you manage taxes better and plan your investments wisely.

Calculating your short-term capital gains (STCG) can be simple. First, note the selling price, and subtract your purchase price plus any extra costs like brokerage or transaction fees.

 

Here's an easy formula:

 

STCG = Selling Price – (Purchase Price + Brokerage + Other Costs)

 

Example:

 

Mr. Rahul bought 150 shares of XYZ Ltd. for ₹300 per share, totaling ₹45,000. After 7 months, he sold all these shares for ₹52,000. He paid ₹250 in brokerage fees during the sale.

Calculation of Tax:

 

STCG Tax at 15% (under Section 111A) = ₹6,750 × 15% = ₹1,012.50

 

Thus, Mr. Rahul needs to pay ₹1,012.50 as short-term capital gains tax.

Knowing the short-term capital gains tax rates in India helps you manage your investments better. These rates depend on the asset type and when you sell. The table below clearly shows tax rate changes for listed equity shares and equity mutual funds under Section 111A of the Income Tax Act. It also lists the applicable rates for other assets, such as property, land, and unlisted shares.

Under the Income Tax Act, you cannot claim deductions under Sections 80C to 80U for short-term capital gains taxed under Section 111A. These gains mainly come from listed shares and equity-oriented mutual funds sold within 12 months.

 

However, you can claim deductions under Sections 80C to 80U on short-term capital gains arising from other assets. This includes assets such as unlisted shares, property, or bonds, which are not covered under Section 111A of the Income Tax Act.

The Income Tax Act offers specific STCG exemptions to lower your tax burden. Under Section 54B, you can avoid paying tax on gains from selling agricultural land. To qualify, you must reinvest the money into another agricultural property.

 

Similarly, Section 54D helps you save tax on gains from industrial land or buildings. You must reinvest the amount from the sale into another industrial property. These exemptions encourage reinvestment and help you legally save taxes on your short-term capital gains.

Understanding the STCG tax implications on various assets is essential for managing your investments wisely and minimising your tax burden. Different assets, like shares and equity funds, property, bonds, and ULIPs, each have unique tax rules under Section 111A of the Income Tax Act and other relevant regulations. Knowing how the short-term capital gains tax applies helps you plan better, avoid surprises, and legally reduce your tax liability. Here’s a clear overview of the tax treatment for common investment assets:

Shares and Equity Funds

Short-term capital gains on shares attract special rules under Section 111A of the Income Tax Act. Selling listed shares or equity mutual funds within 12 months triggers a 20% STCG tax from 23 July 2024. This rate excludes surcharge and cess. Short-term gains usually face higher taxes compared to long-term capital gains on shares, increasing your tax liability.

Mutual Funds (Other than Equity)

When you sell non-equity mutual fund units quickly, you incur short-term capital gains tax at your income tax slab rate. This means your gains get taxed the same way as regular income. From 23 July 2024, equity mutual funds sold within one year specifically attract a higher 20% rate, raising your overall tax burden.

Property

Gains from selling a property owned less than 24 months fall under short-term capital gains. Unlike shares, property gains are taxed at your normal income tax slab rate. For instance, if you earn ₹6 lakh as a gain and fall in the 30% slab, your tax is ₹1,87,200. To find your gain, subtract purchase price, improvement costs, and selling expenses from the sale amount.

Debentures and Bonds

Starting 23 July 2024, all capital gains from unlisted debentures, unlisted bonds, and market-linked debentures are treated as short-term capital gains. This classification applies regardless of how long you held these assets. Gains from these assets attract tax at your regular income slab rates, significantly impacting your tax calculations.

ULIPs and Other Specified Assets

ULIPs (Unit Linked Insurance Plans) with annual premiums over ₹2.5 lakh or premiums exceeding 10% of the policy sum assured now qualify as capital assets. Gains from redeeming these ULIPs attract capital gains tax. Also, securities held by investment funds under Section 115UB will count as capital assets, bringing these under short-term capital gains tax rules.

Managing your investments wisely means avoiding common errors in calculating short-term capital gains (STCG). Even small mistakes can lead to extra taxes or penalties. Here's how to spot and avoid these pitfalls clearly:

Confusing Short-Term and Long-Term Gains

One common mistake is wrongly determining if your gains are short-term or long-term. Shares must be held 12 months or less to be short-term. For property, the short-term period is usually 24 months. To avoid errors, carefully track your purchase and sale dates to classify correctly.

Forgetting to Include Brokerage and Fees

Often, investors forget to add brokerage fees, Securities Transaction Tax (STT), stamp duties, and other transaction expenses to their costs. These charges reduce your actual gain, lowering your short-term capital gains tax. Always include these costs clearly in your calculation.

Overlooking Available Tax Exemptions

Many people miss exemptions under Sections 54B and 54D, which offer tax relief for reinvesting gains in agricultural or industrial property. Additionally, remember you can claim deductions under Sections 80C to 80U for STCG not covered by Section 111A of the Income Tax Act.

Not Using Capital Losses to Reduce Taxes

Not using short-term capital losses to offset your gains means paying more tax than required. You can reduce your tax liability by setting off short-term losses against both short-term and long-term gains. Always record and report your losses clearly to benefit from tax savings.

Missing Advance Tax Payments

If your STCG tax liability exceeds ₹10,000 in a financial year, you must pay advance tax. Many taxpayers miss this obligation and end up paying penalties. Regularly check your estimated tax liability during the year and pay advance tax on time to avoid unnecessary charges.

Errors in Reporting Capital Gains

Filing your taxes incorrectly can lead to penalties or tax notices. Clearly separate gains under Section 111A from other short-term capital gains. Use the correct forms and follow guidelines to report gains accurately.

Understanding the differences between short-term and long-term capital gains helps you manage your investments and taxes effectively. Here is a clear comparison between STCG and LTCG to simplify your financial decisions:

Understanding short-term capital gains (STCG) clearly helps you save money and manage investments better. Knowing the right tax rates under Section 111A of the Income Tax Act prevents confusion and mistakes. Using exemptions and deductions correctly reduces your tax legally. Always track your holding period, account for transaction costs, and pay advance tax when required. By carefully planning and calculating your short-term capital gains tax, you can lower your tax burden and invest smarter. Keep these points in mind, and you'll confidently manage your taxes and grow your wealth effectively.