What is Short-Term Capital Gains Tax? A Comprehensive Guide

Click Here – Get Free Investment Predictions

Short-term capital gains (STCG) arise when assets are transferred within the specified holding period: 12 months for listed equity shares and units of equity-oriented mutual funds, and 24 months for other assets. Under Section 111A, short-term capital gains on listed equity shares and equity-oriented mutual funds are taxed at 20%. All other assets, such as real estate, unlisted shares, gold, etc., are taxed at applicable income tax slab rates. 

The exact duration can vary depending on the asset type and jurisdiction. Still, generally, a sale of assets within a short time frame after acquisition will be subject to STCG tax on shares. In this article, we will focus on short-term capital gains tax (STCG), exploring what it is, how it is calculated and key factors you need to consider.

What is Short-Term Capital Gains Tax?

Short-Term Capital Gains (STCG) refers to the profit earned from selling capital assets held for a period less than 24 months (or 12 months for listed equity shares and equity-oriented mutual funds). These assets include shares, gold, debt mutual funds, and other movable properties. 

As per the Income Tax Act, STCG is taxable under the head ‘Capital Gains’ and the applicable tax rate depends on the asset type. For listed equity shares and equity mutual funds, STCG is taxed at 20% under Section 111A, while other short-term gains are taxed as per the individual’s income tax slab. 

Short-Term Capital Gains on Shares

When you sell equity shares listed on a stock exchange within 12 months of purchasing them, you may incur a short-term capital gain (STCG) or a short-term capital loss (STCL). Furthermore, if you sell shares you have held for more than 12 months, you incur long-term capital gains (LTCG).

A short-term capital gain occurs when you sell shares at a higher price than their purchase price. Currently, short-term capital gains on shares are taxed at 20% under Section 111A, effective from 23rd July 2024.

What are Short-Term Capital Assets?

Click for Our Big Prediction

Capital Assets are classified as short-term or long-term based on holding period. The table below shows the holding period for different types of capital assets, which determines whether they are categorised as short-term or long-term. 

Difference Between Short-Term Capital Gains & Long-Term Capital Gains

Here is the key difference between short-term and long-term capital gains.  

Budget 2024 new tax rates – Short-term Vs. Long-Term Capital Gains

How to Calculate Short-Term Capital Gain?

The Short-Term Capital Gain can be calculated as follows.

Calculation of Short-Term Capital Gain Tax on Shares

Suppose you purchased 1000 shares of a particular company at ₹200 per share in July 2024. Now you sell the same shares at a profit of ₹80 per share, i.e., at a price of ₹280 per share in October 2024. Furthermore, you paid a brokerage of ₹2,000.

Initial investment amount = ₹200*1000 = ₹2,00,000

Full value of consideration = ₹280*1000 = ₹2,80,000

Here’s how you can calculate your short-term capital gains and tax liability-

Sign up on Univest to get more investment predictions and access to exclusive screeners! Click here.

Short-Term Capital Gains Tax Rate

The short-term capital gains tax rate varies depending on the type of asset being sold. The tax rates applicable to different types of assets are as follows:

How much short-term capital gain is tax-free?

Tap to Access Best Research Pieces

In Budget 2014, the tax rate on short-term capital gains (STCG) on specific financial assets was increased from 15% to 20%. Short-term gains on all other financial assets, as well as non-financial assets, will continue to be taxed at the applicable tax rates. 

Here are the key factors determining how much of your short-term capital gain might be tax-free:

• Set off short-term capital losses against any capital gains, whether short-term or long-term, during the same financial year.
• If Short-term capital loss exceeds your capital gains, then it will carry forward the unabsorbed loss for up to eight years.
• This can significantly reduce or nullify the tax liability on capital gains. 

Budget 2024 Updates on STCG Tax on Shares 

The Union Budget 2024-25 has made significant changes to the classification of assets, short-term capital gains tax and their holding periods.

• Assets will be classified into two holding periods: 12 months and 24 months, eliminating the 36-month holding period. Shares held for less than 12 months are classified as short-term.
• The tax rate for STCG on listed equity shares, units of equity-oriented funds and units of business trusts has increased from 15% to 20%.
• Other financial and non-financial assets held short-term will continue to be taxed at the applicable income tax slab rates. Unlisted bonds and debentures, market-linked debentures, debt mutual funds and debt ETFs are not classified as short-term capital gains, regardless of their holding periods.

Short-Term Capital Gains Tax on Mutual Funds

Taxation on short-term capital gain is required to be paid from two ends-investor’s end and the fund house’s end. Fund houses are organisations that act as fund managers for entities and have professionals with an understanding of cyclical market fluctuations.  

The following table represents the holding period for Mutual Funds:

These mutual funds with short-term capital gains are a healthy investment option, as individuals can exploit the high-yield factor of equity funds and the lower risk of debt funds. 

• Debt-oriented Balanced Funds: Like equity-oriented hybrid funds, these funds are also composed of a mix of equity shares and debentures. However, unlike it, debt-oriented balanced funds comprise 60% or more of debt instruments.
• Unlisted Equity Funds: These equity funds are directed towards the purchase of stocks or shares that are not listed on any recognised stock market. Gains from these funds are considered short-term capital gains in mutual funds. 

Short-Term Capital Gains Tax on Property

Before dividing into the specifics of the budget changes, it is essential to understand what constitutes short-term capital gains on property:

• Short-term capital gains refer to the profit you earn from selling a property within a short holding period. Currently, it is now less than 24 months as per the latest amendments in the Union Budget 2024.
• These gains are calculated by subtracting the purchase price and any associated costs, such as brokerage and improvement expenses, from the property’s sale price. 

Exemption on Short-term Capital Gain

• STCG exemptions are provided under Section 54B and Section 54D of the Income Tax Act,
• Section 54B applies to gains from the sale of agricultural land used for agricultural purposes, provided the proceeds are reinvested in another agricultural land.
• Similarly, Section 54D applies to gains from the sale of industrial land or buildings used for industrial purposes, allowing reinvestment in another industrial property to avail of tax exemptions.
• These provisions are designed to encourage reinvestment in specific asset categories, thereby minimising the tax impact on capital gains. 

Download the Univest iOS App or the Univest Android App to get daily stock recommendations and insightful research pieces!

Short-term capital Gain rate on the Mutual Fund

Below are the rates for different types of mutual funds:

• Equity-oriented hybrid funds: As the maximum allocation to equity is 65%, they are taxed under Section 111A at 15% on short-term capital gains in Mutual Funds.
• Debt-oriented balanced funds: These funds comprise mainly debt instruments; therefore, they do not attract Section 111A for taxation purposes. Short-term capital gain on Mutual Funds of this nature is added to an individual’s income.  
• Balanced funds: Balanced funds comprise more than 65% of equity shares, stocks, and equity-oriented schemes. Therefore, these funds are subject to a 15% tax under Section 111A.
• Unlisted equity funds: STCG on Mutual funds from this source is not compliant with Section 111A. An individual needs to include the gain amount from unlisted equity funds in his/her income to pay tax on it at the applicable tax rate.

The following table represents the applicable tax rate of short-term capital gain on Mutual Funds.

Short-term Capital Gains on Gold ETF

Taxes on gold ETFs are similar to those on buying or selling physical gold. If you trade these funds and make a profit, you will be required to pay capital gains tax, regardless of whether your investment is short-term or long-term. For gold ETFs, the long-term capital gains (LTCG) period is 12 months, and these gains are taxed at 12.5% without indexation.

Additionally, your short-term capital gains (STCG) tax on specified financial assets has risen from 15% to 20%. 

Gold ETFs are subject to capital gains tax, just like other market investments. However, if you are looking for tax-efficient investment options, an ELSS mutual funds offer tax benefits under Section 80C while providing equity exposure for long-term growth. 

Does Securities Transaction Tax affect STCG Rate?

While the term ‘securities’ is not defined under the STT Act, the STT Act specifically allows borrowing of the definition of such terms not defined in the STT Act but defined in the Securities Contracts (Regulation) Act and includes the following:

• Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a similar nature or of any incorporated company or other body corporate.
• Derivatives
• Units or any other instrument issued by any collective investment scheme to the investors in such schemes.
• Government securities of equity nature.
• Equity-oriented units of mutual funds.
• Rights or interest in securities.
• Securitised debt instruments.

While STT is not the same as capital gains tax, it plays a significant role in how capital gains are taxed. STT applies to both short-term and long-term capital gains, but the rates differ. For short-term capital gains (STCG), if securities are sold within 12 months, the profits are taxed at 15% plus STT. For long-term capital gains (LTCG), the tax rate is 10% if the gains exceed ₹1 lakh per year.

Conclusion 

In conclusion, short-term capital gains tax (STCG) is an essential tax consideration for investors when making financial decisions. Understanding the holding period of assets and the applicable tax rates can help investors optimise their tax liabilities and plan their investments more efficiently. Additionally, exploring the exemptions available on short-term capital gains can further enhance the tax efficiency for your investment portfolio. As with any tax-related matters, it is advisable to seek professional advice and stay updated with the latest tax regulations to make the most of your investments and achieve your financial goals effectively. 

FAQs

What is the Short-term capital gains tax?

Ans.  Short-Term Capital Gains (STCG) refers to the profit earned from selling capital assets held for a period less than 24 months (or 12 months for listed equity shares and equity-oriented mutual funds). These assets include shares, gold, debt mutual funds, and other movable properties. 

How to avoid short-term capital gains tax?

Ans. Investing for over a year qualifies you for the lower long-term capital gains tax rate, helping you avoid the higher short-term capital gains tax. Alternatively, balancing gains with losses from other investments in the same tax year can also mitigate your tax liability.

Are capital gains from a debt mutual fund classified into long-term and short-term?

Ans. No, capital gains from debt mutual fund purchased on or after 1st April, 2023, will be classified as short-term capital irrespective of the holding period. However, capital gains from debt mutual funds purchased before 1st April, 2023, will be classified as short-term or long-term depending on their holding period.

What are short-term capital gain assets?

Ans. Capital Assets are classified as short-term or long-term based on holding period. Equity-oriented funds, Units of business trust, and Zero-coupon bonds have rates of up to 12 Months and, STCG, More than 12 Months = LTCG.

What is the short-term capital gain on mutual funds?

Ans. Taxation on short-term capital gain is required to be paid from two ends-investor’s end and the fund house’s end. Fund houses are organisations that act as fund managers for entities and have professionals with an understanding of cyclical market fluctuations.  

Also Explore

Univest Screeners