What Is Short Term Capital Gains Tax?

What is Short-Term Capital Gains Tax on Shares?

Short-term capital gains tax on shares applies when you sell equity shares within a specified holding period and earn a profit. In India, the classification of short-term capital gains on equity shares is based on the duration for which the shares were held before selling.

If you sell equity shares listed on a recognised stock exchange within 12 months of purchase and make a profit, the profit is categorised as short-term capital gains (STCG) and is subject to taxation under the STCG tax rate.

This taxation mechanism plays a crucial role in income tax on share trading, affecting the net returns of retail and institutional investors alike. Understanding tax on stock market profits is essential to making informed financial decisions while trading or investing in equities.
 

Understanding the STCG Tax Rate in India

If you sell listed equity shares on recognised stock exchanges, the short-term capital gains tax rate is 20% (plus applicable surcharge and cess). This rate is fixed, irrespective of the individual’s tax slab.

Calculation of Short-Term Capital Gains Tax

Accurately computing short-term capital gains tax is vital for investors and businesses to ensure proper tax filing and compliance. The calculation formula is as follows,

STCG=Sale Price−(Purchase Price+Expenses on Sale+Expenses on Purchase/Improvement)

Example Calculation:

You buy 1,000 shares of a listed company at ₹100 per share (Total Investment = ₹1,00,000)

After 6 months, you sell them at ₹150 per share (Total Sale Value = ₹1,50,000)

Brokerage and other transactional expenses = ₹1,000

STCG = ₹1,50,000 – (₹1,00,000 + ₹1,000) = ₹49,000

Tax at 20% = ₹9,800 (excluding cess and surcharge)

This is how tax on share trading income is computed and applied to short-term capital gains on equity shares in India. It is important to maintain proper transaction records to ensure correct tax filing and compliance with capital gains tax filing requirements.

Investors engaged in frequent stock trading, including short-term capital gains tax on intraday trading, need to factor in these calculations while estimating their net investment returns and tax liabilities.

By understanding the nuances of capital gains tax on the sale of shares, investors can make informed decisions that align with their financial goals while ensuring tax efficiency.

STCG Tax on Different Types of Investments

Short-term capital gains tax is not limited to shares alone. It applies to various investment instruments, each with its own taxation rules. Understanding these nuances helps investors and businesses optimise their tax planning and avoid unnecessary liabilities. 
Below is a detailed breakdown of how short-term capital gains tax in India is applied across different asset classes.

1. Short-Term Capital Gains Tax on Mutual Funds
Mutual fund investments can be categorised into equity mutual funds and debt mutual funds, each having distinct STCG tax rates.

• Short-Term Capital Gains Tax on Equity Mutual Funds: If you redeem units of an equity-oriented mutual fund within 12 months, the STCG tax rate is 20% (plus surcharge and cess).
• Short-Term Capital Gains Tax on Debt Mutual Funds: Debt-oriented mutual funds are levied based on the investor’s income tax slab rate.

2. Short-Term Capital Gains Tax on Property
Unlike stocks and mutual funds, real estate transactions have a different holding period for classification as short-term gains.

• If you sell the property within 2 years of purchase, the profit is treated as short-term capital gains and is taxed according to the individual’s income tax slab.
• If the holding period exceeds 24 months, the gains qualify as long-term capital gains (LTCG), which enjoy indexation benefits and lower tax rates. The LTCG rate is 12.5% without indexation.

3. Short-Term Capital Gains Tax on Shares for NRIs
Non-Resident Indians (NRIs) investing in the Indian stock market are also subject to short-term capital gains tax on shares for NRIs.

• Listed Equity Shares: When NRIs sell listed shares on a recognised stock exchange, the STCG tax rate is 20%. 
• Unlisted Shares: If NRIs sell unlisted shares, the gains are taxed at slab rates based on their total taxable income.
• NRIs must pay Tax Deducted at Source (TDS) on short-term capital gains on shares, unlike resident investors who pay taxes at the time of filing ITR.

4. Short-Term Capital Gains Tax on Intraday Trading
Intraday trading, in essence, means buying and selling shares within the same trading day. Unlike short-term capital gains on equity shares, intraday trading profits are not classified as capital gains.

• Intraday profits are considered business income and taxed based on the investor’s income slab rate.
• Traders engaged in high-frequency intraday trading may be required to file ITR-3 instead of ITR-2, as income from intraday trades falls under speculative business income.

5. Short-Term Capital Gains Tax on SIP Investments
A Systematic Investment Plan (SIP) is a popular way to invest in mutual funds, but investors must be mindful of the STCG tax on SIP investments.

• Each SIP instalment is treated as a separate investment with its purchase date.
• The FIFO (First-In-First-Out) method is used to determine the applicable STCG tax rate when selling units.
• If SIP units are redeemed within 12 months, they attract an STCG tax of 20% (for equity funds).

6. Short-Term Capital Gains Tax on Dividends
Before April 2020, dividends were tax-free for investors as companies paid Dividend Distribution Tax (DDT). However, under the new tax regime,

• Dividends are now taxed as regular income and are added to the investor’s taxable income.
• There is no specific short-term capital gains tax on dividends, but investors need to include dividends in their total taxable income and pay tax as per their applicable slab rates.

7. Short-Term Capital Gains Tax on Bonus Shares
Bonus shares are additional shares that are issued to existing shareholders without any cost. The short-term capital gains tax on bonus shares applies as follows,

• The purchase price of bonus shares is considered ₹0, meaning the entire sale value is subject to STCG tax if sold within 12 months of allotment.
• The STCG rate is 20% if the shares are listed on a recognised stock exchange and the LTCG rate is 12.5% if sold after one year and income exceeds ₹1.25 lakh

8. Short-Term Capital Gains Tax on ESOPs and ULIPs
Employee Stock Option Plans (ESOPs) and Unit Linked Insurance Plans (ULIPs) are two investment vehicles where STCG tax may apply.

• ESOPs: If an employee exercises stock options and sells the shares within one year, the profit is taxed as short-term capital gains at 20%.
• ULIPs: If the annual premium exceeds ₹2.5 lakh, ULIP gains are taxed as capital gains, making STCG tax on ULIPs applicable for short-term holdings.
   

How to Save Tax on Short-Term Capital Gains?

While short-term capital gains tax exemption is limited, investors and businesses can use various strategies to reduce their tax burden.

1. Offset STCG Against Capital Losses

• Investors can set off short-term capital gains against short-term capital losses, lowering their taxable income.
• Unadjusted capital losses can be carried forward for 8 assessment years and adjusted against future gains.

2. Tax-Loss Harvesting Strategy

• By selling loss-making stocks before the end of the financial year, investors can offset gains from profitable trades and reduce STCG tax liability.
• This is particularly beneficial for frequent traders in equity markets.

3. Holding Investments for More Than 1 Year

• Converting short-term investments into long-term holdings helps in reducing tax liability since LTCG is taxed at 12.5% for gains above ₹1.25 lakh.
• This strategy is useful for equity investors looking to benefit from lower capital gains tax rates.

4. Investing in Tax-Efficient Instruments

• Investors can choose tax-efficient options like Equity Linked Savings Schemes (ELSS), which offer tax benefits under Section 80C and help in wealth accumulation.
• Other tax-saving investments like PPF, tax-saving bonds, and NPS provide additional tax advantages.
   

Compliance and Filing of STCG Tax

Ensuring compliance with short-term capital gains tax rules is crucial for smooth tax filing.

1. Reporting STCG in ITR

• Salaried individuals with STCG from shares must file ITR-2.
• Businesses and traders engaged in frequent transactions must file ITR-3 (for business income).

2. Advance Tax Payment

• If STCG tax liability exceeds ₹10,000, taxpayers must pay advance tax quarterly to avoid penalties.
• Missing advance tax payments attract interest under Sections 234B and 234C of the Income Tax Act.
   

Final Thoughts

Understanding short-term capital gains tax on shares in India is crucial for investors, traders, and businesses to plan their finances efficiently. With STCG tax rates varying based on transaction type, staying informed helps minimise tax liabilities and ensures smooth tax compliance.

By maintaining accurate records, using tax-saving strategies, and adhering to capital gains tax filing requirements, investors can optimise their returns. If unsure about tax implications, consulting a tax professional is recommended to ensure compliance with the latest tax laws in India.