Short Term Capital Gains Tax

What are Short-Term Capital Gains (STCG)?

Short-term capital gains (STCG) are the gains realised from the sale of a capital asset that has been held for under a defined period. This time period is usually less than a year. To calculate your STCG, you subtract the purchase price from the selling price of the asset.

Governments often tax STCG at a higher rate than long-term capital gains because STCG can lead to quick income growth. Common assets that can be subject to STCG include stocks, bonds, real estate, and other investments that you sell within a short holding period.

Union Budget 2024: Higher Taxes on Short-Term Capital Gains from Listed Equities

In the 2024 Union Budget, Finance Minister Nirmala Sitharaman announced changes to how capital gains are taxed. Eligible assets now face a 20% short-term capital gains (STCG) tax rate following the government's increase.

Other assets will keep their current tax rate of 15%. If you sell a capital asset after holding it for a long period, you'll now pay a 12.5% long-term capital gains (LTCG) tax, up from 10%.

The government also changed the rules for classifying listed financial assets. If you own these assets for a year or more, they’ll be classified as long-term. Experts believe these changes will simplify the tax system and make it fairer for investors.

By treating different asset classes more equally, the government aims to create a more level playing field for investors.

How do the Current Tax Rules Apply to Short-Term Capital Gains?

Selling a capital asset, whether it’s property or shares, results in either making money or losing money. The tax rules distinguish between two types of gains and losses: short-term and long-term. The classification depends on how long you've owned the asset.

Listed Assets:

• Long-Term: After holding a listed asset for more than a year, it is considered a long-term asset.
• Short-Term: If you sell a listed asset within one year of buying it, the gain is considered short-term.

Unlisted Assets:

• Long-Term: For unlisted financial and non-financial assets, a holding period of two years is required to classify them as long-term.
• Short-Term: If you sell an unlisted asset before the two-year mark, it's considered a short-term asset.

Short-Term Capital Gains Tax Rates: A Breakdown

The tax you pay on short-term capital gains (STCG) depends on the type of asset you sell. Different assets have different tax rates.

Listed Equity Shares and Equity-Oriented Mutual Funds:

• Before July 23, 2024: If you sold these assets before this date, you paid a 15% tax on your short-term capital gains.
• After July 23, 2024: Starting from this date, the tax rate increased to 20%. This means you'll pay more tax on the profits from selling these investments.

Other Assets (Like Real Estate, Land, Unlisted Shares, etc.):

If you sell other assets, the tax on your short-term capital gains is based on your regular income tax rate. This means your gains are added to your total income for the year, and you pay tax on that total income. The higher your total income, the higher the tax rate you'll pay on these gains.

Short-Term Capital Gain Tax on Shares

Short-Term Capital Gain Tax on Property

If a property is sold within 24 months of acquisition, the resulting profit is considered a short-term capital gain. This gain is taxed as regular income, meaning it is subject to the standard income tax rate.

Short-Term Capital Gain Tax on Mutual Funds

Before the 2024 budget, mutual fund units were taxed as short-term or long-term capital gains based on a 36-month holding period. However, a recent change in the tax laws has simplified this. Now, all gains from specified mutual funds, regardless of the holding period, are treated as short-term capital gains and taxed at your regular income tax rate.

What are Specified Mutual Funds?

Specified mutual funds are those that invest more than 65% of their assets in debt and money market instruments or in other mutual funds.

Remember:

• Short-term capital gains are treated as regular income and taxed at the same rate.
• The length of time you hold an asset determines its capital gain tax treatment.
• Recent changes in tax laws have impacted the taxation of mutual fund units.

How to Calculate Your Short-Term Capital Gains (STCG)

The government increased the tax rate on short-term capital gains (STCG) from equity investments in the 2024 Union Budget. To figure out how much tax you owe on your STCG, follow these steps:

1. Record the Total Amount You Received from the Sale: Write down the full amount of money you got from selling the asset.
2. Subtract the Costs of Selling: Take away any expenses related to the sale, such as broker fees or legal costs.
3. Subtract the Original Purchase Price: Subtract the original price you paid for the asset.
4. Subtract Any Improvement Costs: If you spent money to improve the asset, subtract those costs as well.
5. Consider Any Exemptions or Deductions: Check if there are any exemptions or deductions that apply to your specific situation.
6. Calculate Your Short-Term Capital Gain: The remaining amount is your short-term capital gain.

Exemptions on Short-Term Capital Gains

You can reduce the tax you pay on short-term capital gains (STCG) using two sections of the Income Tax Act: Section 54B and Section 54D.

Section 54B:

• Applies to: Gains from selling agricultural land that you used for farming.
• How it works: If you reinvest the money from the sale into buying another piece of agricultural land, you can reduce your tax liability.

Section 54D:

• Applies to: Gains from selling industrial land or buildings that you used for business purposes.
• How it works: If you reinvest the money from the sale into buying another industrial property, you can reduce your tax liability.

These sections encourage people to reinvest their money in specific asset categories, like agriculture and industry. This helps to minimise the tax impact of capital gains.

Example of Short-Term Capital Gain Calculation

Suppose Mr Verma bought 100 shares of XYZ Ltd. for INR 1,000 each in January 2024, spending a total of INR 1,00,000. He sold these shares in June 2024 for INR 1,500 each, making a total of INR 1,50,000.

1. Total Sale Amount: INR 1,50,000
2. Purchase Price: INR 1,00,000
3. Short-Term Capital Gain: INR 1,50,000 - INR 1,00,000 = INR 50,000

Since Mr Verma sold the shares within a year, this gain qualifies as a short-term capital gain (STCG). As per the revised tax rate post-July 2024, the STCG tax rate on listed shares is 20%.

Short-Term Capital Gains Tax:

50000 X 20/100 = 10,000

So, Mr Verma would owe INR 10,000 in short-term capital gains tax.

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