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Chapter 13 What are Capital Gains? What is STCG Tax? How is it Calculated?

Even before we get into the concept of capital gains, we need to understand the definition of capital assets and the fact that any capital asset has to be owned. Ownership is the key to an asset being defined as a capital asset. This can be in the form of property, gold, bonds, mutual funds, and/or equity. Shares in your demat account are also an example of capital assets.

Consequently, capital gains arise when a capital asset is sold at a price higher than the purchase price. Therefore, any profits arising on the transfer of capital assets is charged under the tax component ‘capital gains’.

Furthermore, income from capital gains is classified into ‘short-term capital gains’ (STCG) and ‘long-term capital gains (LTCG).

In this chapter, we shall look at capital assets with a specific focus on gains from short-term capital assets.

What is a capital asset?

A capital asset, as per the Income Tax Act, is defined to include:

  • any kind of property held by an assessee, whether or not connected with the business or profession of the assessee.
  • any securities held by an FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.

The following are some of the explicit exclusions from the above-mentioned definition of capital assets:

  • any stock-in-trade (other than securities referred to above), consumable stores, or raw materials held for the purposes of his business or profession. Such assets are also defined as short-term working capital of a business and are essential for the smooth functioning of the business.
  • personal effects, i.e. movable property (including wearing apparel and furniture) held for personal use by the taxpayer or any member of his family dependent on him.
  • however, the following will not be treated as personal effects and will be considered capital assets:
    • jewelry;
    • archaeological collections;
    • drawings;
    • paintings;
    • sculptures; or
    • any work of art.

In the above definition, ‘jewelry’ includes,

  • ornaments made of gold, silver, platinum or any other precious metal or alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stones, and whether or not sewn into any wearing apparel.
  • precious or semi-precious stones, whether or not set in any furniture, utensil, or other articles, or sewn into any wearing apparel.
  • agricultural land in India, not being a land situated:

    a. Within the jurisdiction of a municipality, notified area committee, town area committee, cantonment board, and which have a population of not less than 10,000;

    b. Within the range of the following distance measured aerially from the local limits of any municipality or cantonment board:

    i. not being more than 2 KMs; if the population in such area is more than 10,000 but not more than 1 lakh;

    ii. not being more than 6 KMs; if the population in such area is more than 1 lakh but not more than 10 lakh; or

    iii. not being more than 8 KMs; if the population in such area is more than 10 lakh.

    The population is to be considered according to the figures of the last census, of which, relevant figures have been published before the first day of the year.

  • 61/2% gold bonds, 1977 or 7 % gold bonds, 1980 or National Defence gold bonds, 1980 gold bonds issued by the Central Government.
  • special bearer bonds, 1991.
  • Gold deposit bonds issued under the Gold Deposit Scheme, 1999, or deposit certificates issued under the Gold Monetisation Scheme, 2015.

The following points, however, must be kept in mind:

Being a capital asset, the property may or may not be connected with the business or profession of the taxpayer. For e.g., a bus used by a person engaged in the business of passenger transport will be his capital asset.

Any securities held by a Foreign Institutional Investor (FII), which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India (Sebi) Act, 1992, will always be treated as a capital asset; hence, such securities cannot be treated as stock-in-trade.

Illustration 1:

Mr. Raja purchased a house property in January 2018 for Rs.84,00,000. He sold the house in April 2018 for Rs.90,00,000. Will it classify as a capital asset in the case of Raja?

In this case, the residential house is a capital asset for Mr. Raja, and hence, the gain of Rs.6,00,000 arising from the sale of the residential house will be treated as capital gains and will be taxed under the head ‘Capital Gains’. Of course, this will be a short-term capital gain as the asset was held for less than 24 months.

Illustration 2:

Ms. Jahnvi is a property dealer. She purchased a 1 BHK flat in Andheri for resale. The flat was purchased in January 2018 for Rs.86,00,000 and sold in August 2019 for Rs.98,00,000. Will this be considered as a capital asset for Ms. Jahnvi?

In this case, Ms. Jahnvi is dealing in properties in the course of her ordinary business. Hence, the flat so purchased would necessarily form a part of the stock-in-trade of the business. In other words, Ms. Jahnvi’s flat is not a capital asset, and hence, the gain of Rs.12,00,000 arising from the sale of the flat will be charged to tax as business income and not as capital gains. For Jahnvi, this flat is a stock-in-trade and not a capital asset.

Understanding Short-Term Capital Assets and Long-Term Capital Assets

For the purpose of taxation, capital assets are classified into two categories as given below:

  • Short-term capital asset
  • Long-term capital asset

Any capital asset held for a period of not more than 36 months immediately preceding the date of its transfer will be treated as a short-term capital asset.

However, in respect of certain assets like shares (equity or preference) which are listed on a recognized Indian stock exchange (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), 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. This means that such assets will be short-term capital assets if held for less than 12 months.

There have also been some modifications to the period of holding definition in the last two budgets. Period of holding for short-term capital assets is to be considered at 24 months instead of 36 months in the case of unlisted shares of a company or an immovable property such as land or building or both. Any capital asset held by the taxpayer for a period of more than 36 months (except in case of some exceptions explained above) immediately preceding the date of its transfer will be treated as a long-term capital asset.

Illustration 3:

Mr. Shankar is a salaried employee with a private company. In the month of April 2017, he purchased gold coins and sold the same in December 2018. Will this be a short-term capital asset or a long-term capital asset?

In this case, gold is a capital asset for Mr. Shankar as per the definition of capital asset. He purchased gold in April 2017 and sold it in December 2018, i.e., after holding it for less than 36 months. Hence, gold will be treated as a short-term capital asset.

Illustration 4:

Mr. Raj is a salaried employee in a PSU. In the month of April 2015, he purchased gold bars and sold the same in September 2018. Will this classify as a long-term capital asset?

In this case, gold is a capital asset for Mr. Raj. He purchased gold in April 2015 and sold it in September 2018. However, since the holding period is more than 36 months, the gains will be treated as long-term capital gains. Hence, the sale of gold bars will be treated as long-term capital gains and taxed accordingly.

Illustration 5:

Sandesh Kumar is a retired individual. In the month of April 2018, he purchased equity shares of SBI Ltd. (listed on the NSE and the BSE) and sold the same in January 2019. How will the gain be treated?

In this case, Sandesh purchased the shares in April 2018 and sold them in January 2019, i.e. after holding them for less than 12 months. Since 12 months is the cut-off period for listed equity shares on which STT has been paid, these shares will be treated as short-term capital assets and taxed accordingly.

Illustration 6:

Sandesh had also purchased equity shares of Reliance Industries Ltd. in April 2017 (listed on the NSE and the BSE) and sold the same in December 2018. How will this sale be treated?

In this case, shares are a capital asset for Sandesh. He purchased the shares in April 2017 and sold them in December 2018, i.e., after holding them for more than 12 months. Hence, the shares will be treated as long-term capital assets and taxed accordingly.

Illustration 7:

Manek is a mid-level executive in a software firm. In September 2016, he purchased unlisted shares of ABC Ltd. and sold the same in May 2018. How will this transaction be treated?

In this case, the shares were sold in AY2019-20. As a result, the period of holding for unlisted shares will be considered as 24 months instead of 36 months, i.e. the cut-off for long-term capital gains. However, since Manek purchased the shares in September 2016 and sold them May 2018, i.e. after holding them for less than 24 months, these shares will be treated as short-term capital assets and taxed accordingly.

Illustration 8:

Jhalak is a salaried employee. In the month of September 2015, she purchased a 2BHK apartment in Noida and sold the same in July 2018 at a profit of Rs.7 lakh as she was transferred to Mumbai. How will these gains be taxed?

In this case, the house was sold in FY2018-19 corresponding with AY2019-20. Hence, as per the new definition, the period of holding for an immovable property will be considered as 24 months instead of 36 months to determine LTCG. In this case, the gains will be treated as LTCG and taxed accordingly.

Understanding the Concept of STCG and LTCG in the Case of Capital Assets

Capital gains arising from the sale of short-term capital assets are termed as short-term capital gains, while those arising on transfer of long-term capital assets are termed as long-term capital gains. However, there are a few exceptions to this rule, like gains on depreciable assets are always taxed as short-term capital gains.

Reason for bifurcation of capital gains into long- and short-term

The taxability of capital gains depends on the nature of gain, i.e., whether short-term or long-term. Hence, to determine the taxability, capital gains are to be classified into short-term and long-term. In other words, the tax rates for long-term capital gain and short-term capital gain are different.

Computation of Short-Term Capital Gains

Short-term capital gain is not just the difference between the sale price and the buy price, it also considers some adjustments for the purpose of tax calculation. Let us look at these adjustments. Short-term capital gains arising from the transfer or sale of short-term capital assets are computed as follows:

Particulars Calculation of STCG
Full value of consideration (i.e., Sales value of the asset) Rs.XXXXX
Less: Expenditure incurred wholly and exclusively in connection with the transfer of a capital asset (E.g., brokerage, commission, etc.) Rs.XXX
Net Sale Consideration Rs.XXXXX
Less: Cost of acquisition (i.e. the purchase price of the capital asset) Rs.XXXXX
Less: Cost of improvement (i.e. post-purchase capital expenses on the improvement of a capital asset) Rs.XXX
Short-Term Capital Gains Rs.XXXX

Illustration 9:

Mr. Kaushal is a salaried employee. In the month of December 2017, he purchased gold worth Rs.8,40,000 and sold the same in August 2019 for Rs.9,00,000. At the time of the sale, he paid a brokerage of Rs.10,000 and bank charges of Rs.500. What is the amount of taxable capital gain?

The gold was purchased in December 2017 and sold in August 2019, i.e. after being held for less than 36 months, and hence, the gain will be a short-term capital gain. The tax on the STCG will be computed as follows:

Particulars Calculation of STCG
Full value of consideration (i.e. sale value of the asset) Rs.9,00,000
Less: Expenditure incurred wholly and exclusively in connection with the transfer of a capital asset (i.e. brokerage, commission, etc.) Rs.10,500
Net Sale Consideration Rs.8,89,500
Less: Cost of acquisition (i.e. the purchase price of the capital asset) Rs.8,40,000
Less: Cost of improvement (i.e. post-purchase capital expenses on the improvement of a capital asset) Rs.0
Short-Term Capital Gains Rs.49,500

This STCG of Rs.49,500 will be included in Kaushal’s total income and will be taxed based on his applicable rate of tax. For example, if Kaushal falls in the 30% tax bracket and his taxable income is below Rs.50 lakh, then the tax impact will be Rs.15,444 (49,500*31.2%)

Short-Term Capital Gains on Equities

Short-term capital gains (STCG) arising on account of sale of equity shares listed on a recognized stock exchange, units of equity-oriented mutual fund, and units of business trust are all covered under Section 111A of the Income Tax Act.

Here are the highlights:

  • Section 111A is applicable in the case of STCG arising on transfer of equity shares or units of equity-oriented mutual funds, or units of a business trust which are transferred on or after October 1, 2004, through a recognized stock exchange and such transaction is liable to securities transaction tax (STT). Payment of STT during the purchase part of the transaction is the key criterion to be eligible for Section 111A benefits of the Income Tax Act.
  • Equity-oriented mutual fund means a mutual fund specified under Section 10(23D), 65% of which is invested in equity shares of domestic companies.
  • If the conditions of Section 111A as given above are satisfied, then the STCG is said to be covered under section 111A. Such short-term capital gains are charged to tax at a concessional rate of 15% (plus surcharge and cess as applicable). While the cess of 4% will automatically apply, the surcharge will be applicable on whether the taxable income is above Rs.50 lakh or not.

There is a small exception that has been made to the compulsory payment of STT on the purchase leg of the transaction. With effect from AY2017-18, the benefit of the concessional tax rate of 15% shall be available even where STT is not paid, provided that:

  • The transaction is undertaken on a recognized stock exchange located in any International Financial Service Centre (e.g. GIFT City, Gujarat); and
  • The consideration is paid or payable in foreign currency.

Illustration 10:

Palak Patel is a salaried employee at a firm. In the month of December 2017, he purchased 100 equity shares of Bloom Foods Ltd. @Rs.1,400 per share on the BSE. These shares were sold on the NSE in August 2018 @Rs.2,000 per share (STT was paid at the time of the sale). What will be the nature of capital gains here?

The shares were purchased in December 2017 and were sold in August 2018, i.e. after being held for less than 12 months. Hence, the gain will be short-term. Section 111A is applicable in the case of STCG arising on transfer of equity shares, or units of equity-oriented mutual funds, or units of a business trust which were transferred on or after October 01, 2004, through a recognized stock exchange and such transaction is liable to STT. It does not matter that the shares were bought on the BSE and sold on the NSE. That is immaterial.

In the above case, Palak has made a short-term gain of Rs.60,000 {100 x (2,000-1,400)}. Palak will have to pay a tax of Rs.9,000 or (15% of Rs.60,000 in the above case).

Illustration 11:

Saurabh is a salaried employee at a PSU unit. In the month of December 2017, he purchased 200 units of ABC Mutual fund @Rs.100 per unit. The mutual fund is an equity-oriented mutual fund with 75% exposure to equities. These units were sold on the BSE in August 2018 @Rs.125 per unit (STT was paid at the time of sale). What will be the nature of the capital gain in this case?

The units were purchased in December 2017 and were sold in August 2018, i.e. after being held for less than 12 months, and, hence, the gain will be short-term capital gain. Section 111A is applicable in the case of STCG arising on transfer of equity shares, or units of an equity-oriented mutual fund, or units of a business trust which were transferred on or after October 01, 2004, through a recognized stock exchange and such transaction was liable to STT.

If the conditions of section 111A are satisfied, then the STCG is termed as STCG covered under section 111A. Such a gain is charged to tax @15% (plus surcharge and cess as applicable). In the given case, the mutual fund is equity-oriented and the units are sold after being held for less than 12 months through a recognized stock exchange and with the transaction liable to STT; hence, the STCG can be termed as STCG covered under Section 111A. Such STCG will be charged to tax @15% (plus surcharge and cess as applicable). It needs to be noted here that if the units were redeemed with the fund, it would still qualify as STCG but the STT will be deducted by the fund at the time of redemption of the units of the fund.

Illustration 12:

Jayant Shah is a self-employed consultant. In the month of December 2017, he purchased 100 equity share of Quant Ltd. @$70 per share. These shares were sold in August 2018 @$85 per share. No STT was payable on the transfer of shares as the same were listed on a recognized stock exchange at GIFT City, Gujarat, which is an International Financial Services Centre (IFSC) as per the IT Act classification. What is the liable STCG tax here?

Section 111A is applicable in the case of STCG arising on transfer of equity shares through a recognized stock exchange and such transaction is liable to STT. STCG covered under Section 111A is charged to tax @15% (plus surcharge and cess as applicable).

However, with effect from AY2017-18, the benefit of a concessional tax rate of 15% shall be available even where STT is not paid, provided that the transaction is undertaken on a recognized stock exchange at any IFSC or the consideration is paid or payable in foreign currency.

In the given case, Jayant Shah sold shares of Quant Ltd. which were listed on a recognized stock exchange located in an International Financial Services Centre (IFSC). Further, consideration is paid in foreign currency. Shares were purchased in December 2017 and sold in August 2018, i.e. sold after holding them for less than 12 months. Hence, the gain will be short-term capital gain.

In the case of Jayant Shah, the shares were sold through a recognized stock exchange located at an IFSC and consideration was paid in foreign currency (i.e. USD). Hence, the STCG can be termed as STCG covered under Section 111A even if the sale transaction wasn’t chargeable to STT. Such STCG will be charged to tax @15% (plus surcharge and cess as applicable)

Illustration 13:

Padma Raju is a salaried employee in Hyderabad. In the month of December 2017, he purchased 100 preference shares of Resin Salts Ltd. @Rs.100 per share. These shares were sold in August 2018 @Rs.110 per share. Can the capital gain be termed as STCG covered under Section 111A?

Section 111A is applicable in the case of STCG arising on transfer of equity shares, or units of equity-oriented mutual funds, or units of a business trust which were transferred on or after October 01, 2004, through a recognized stock exchange and such transaction is liable to STT. In the given case, the shares are preference shares (not equity shares), and hence, the provisions of Section 111A are not applicable and such gain will be treated as normal STCG. In other words, STCG on the sale of preference shares cannot be termed as STCG covered under Section 111A.

In this case, the STCG is normal, and thus, will be charged the normal tax depending on the slab Padma Raju falls in. The concessional rate of 15% will not be applicable in this case.

Illustration 14:

Rahul is a salaried employee at a software consultancy firm. In the month of December 2017, he purchased 100 units of Temple Liquid Fund @Rs.100 per unit. These units were sold in August 2018 @Rs.125 per unit. Can the capital gain be termed as STCG covered under Section 111A?

Section 111A is applicable in case of STCG arising on transfer of equity shares, equity-oriented mutual funds, or units of a business trust which were transferred on or after October 01, 2004, through a recognized stock exchange and such transaction is liable to STT.

In the given case, the mutual fund is a liquid fund that predominantly invests in short-term debt instruments like call money, treasury bills, commercial papers (CP), certificate of deposit (CD), etc. This will be classified as a non-equity (debt) fund for the purpose of tax calculation. Hence, the provisions of Section 111A are not applicable and such gain will be treated as normal STCG. In other words, STCG on the sale of units of non-equity-oriented mutual funds cannot be termed as STCG covered under Section 111A. In this case, the STCG is normal, and hence, will be charged to the normal tax rate depending on Rahul’s total taxable income.

Illustration 15

Jaya Kumar is a salaried employee. In the month of August 2017, she purchased 100 shares of Notan Pens Ltd. @Rs.100 per share. These shares were sold in August 2018, @Rs.125 per share to his friend. The shares are not listed on any recognized stock exchange and so the entire deal was structured as a private deal outside the stock exchange. Can the capital gain be termed as STCG covered under Section 111A?

Section 111A is applicable in the case of STCG arising on transfer of equity shares, or units of equity-oriented mutual funds, or units of a business trust which were transferred on or after October 01, 2004 through a recognized stock exchange and such transaction is liable to STT. In the given case, the shares are not listed on a recognized stock exchange, and hence, the provisions of Section 111A are not applicable. Thus, such gain will be treated as normal STCG. In other words, STCG on the sale of unlisted shares cannot be termed as STCG covered under Section 111A. In this case, the STCG is normal, and hence, will be taxed under the slab depending on Jaya Kumar’s total income.

Recapitulating: Short-term capital gains tax

For the purpose of determination of tax rate, short-term capital gains are classified as follows:

Examples of STCG covered under Section 111A

  • STCG covered under Section 111A
  • STCG other than those covered under Section 111A
  • STCG arising on sale of equity shares listed on a recognized stock exchange and which is chargeable to STT
  • STCG arising on sale of units of equity-oriented mutual funds sold through a recognized stock exchange and which is chargeable to STT
  • STCG arising on sale of units of a business trust
  • STCG arising on sale of equity shares, units of an equity-oriented mutual fund, or units of a business trust through are recognized stock exchange located in any International Financial Services Centre and consideration is paid or payable in foreign currency even if the sell transaction is not chargeable to STT.

Examples of STCG that are NOT covered under Section 111A

  • STCG arising on sale of equity shares other than through a recognized stock exchange
  • STCG arising on sale of shares other than equity shares
  • STCG arising on sale of units of non-equity-oriented mutual funds (debt-oriented mutual funds)
  • STCG on debentures, bonds, and government securities
  • STCG on the sale of assets other than shares/units, like STCG on the sale of immovable property, gold, silver, etc.

Applicable tax rates for STCG

STCG covered under Section 111A of the Income Tax Act is taxed @15% (plus surcharge and cess as applicable).

Normal STCG, i.e. STCG other than that covered under Section 111A, is charged at the normal rate of tax which is determined on the basis of the total taxable income of the taxpayer. The gain, in this case, is not covered under Section 111A and is normal STCG. Hence, it will be charged to tax at the normal rate applicable to the assessee. The normal rate applicable to the assessee will be determined on the basis of his/her total income.

Illustration 16:

Mr. Kamal sold his residential house after holding it for a period of 18 months. What will be the tax rate applicable on the STCG?

The gain, in this case, is not covered under Section 111A as property gains are outside the purview of Section 111A. Hence, he will be charged to tax at the normal rate applicable to his total taxable income.

Illustration 17:

Mr. Ashok Khemani (Indian resident aged 40 years) is a salaried employee working in SM Ltd. at an annual salary of Rs.8,40,000. In December 2017, he purchased 10,000 equity shares of Dhana Tech Ltd. @Rs.100 per share and sold the same in April 2018 @Rs.125 per share (brokerage Re1 per share). The shares were sold through the BSE and STT was paid for. What will be his tax liability?

First, we have to compute Mr. Ashok’s taxable income and then we will compute his tax liability. The computation of taxable income will be as under:

Particulars (FY 2018-19) Amount
Salary income Rs.8,40,000
STCG (less brokerage) Rs.2,40,000
Gross Total Income Rs.10,80,000
Less: Deduction under Section 80C to 80U Rs.7,00,000
Total Income or Taxable Income Rs.10,10,000
Income Tax at normal rates on Salary Rs.66,500
Income Tax on STCG U/S 111A Rs.36,000
Tax on total income Rs.1,02,500
Add: Health & education cess Rs.4,100
Total tax liability for the year Rs.1,06,600

As can be seen in the above illustration, the tax liability is calculated separately for STCG under Section 111A and normal salary income since the STCG under Section 111A gets preferential treatment.

If the STCG was not covered under Section 111A, then the normal rates of tax as under will apply:

  • Nil up to income of Rs.2,50,000
  • 5% for income between Rs.2,50,000-Rs.5,00,000
  • 20% for income between Rs.5,00,000-Rs.10,00,000
  • 30% for income above Rs.10,00,000

Apart from the above, the health & education cess @4% will be levied on the amount of tax. Additionally, a surcharge of 10% on incomes above Rs50 lakh and a surcharge of 15% on income above Rs1cr will be also applicable in this case.

Final thoughts on STT and adjustment against gains

There are a few basic things to remember while calculating the STCG tax and clubbing it with the income of the individual. Here are the highlights:

  • In the case the assessee has a salary income and STCG (not covered under Section 111A), then the exemptions under Sections 80C to 80U can be adjusted against the total income, including salary and the STCG
  • In the case the assessee has a salary income and STCG (covered under Section 111A), then the exemptions under Sections 80C to 80U can only be adjusted against the salary income and not against the STCG since it is already a concessional rate of tax
  • In the case the assessee has no other income and only STCG (not covered under Section 111A), then the exemptions under Sections 80C to 80U can be adjusted against the total income consisting of STCG only
  • In the case the assessee has no other income and only STCG (covered under Section 111A), then the exemptions under Sections 80C to 80U cannot be adjusted against the total income consisting of STCG since the STCG is already getting the benefit of concessional tax
  • The default rate of tax on STCG is the peak rate of tax applicable to the individual. However, the only exception is equity as defined under Section 111A, which will attract a concessional STCG tax of only 15%.
  • The default holding period for STCG is up to 36 months. However, there are three exceptions to this. In the case of equities covered under Section 111A, it is 12 months, while for unlisted shares and residential property, it is 24 months.
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