Today's world is a tumultuous palace. Under such circumstances, financial robustness and progress act as security and stability factors for both an individual and society. Investment in shares, if done wisely, can be a boon for your finances. You can invest in shares for the long or short term. Here in this article, we will focus mainly on short-term investment, to be precise, the capital gains you may obtain from your short-term investment in shares.
Short Term Capital gain
In layman's terms, short-term capital gain implies the profit you would receive by selling personal properties held for a maximum period of one year. These profits are not taxed as ordinary income per your personal income rate, but at a fixed rate of 15% on the profit you have made during the transaction.
The profit or loss you make from selling equity shares that you have held for one year or less is called short-term capital gain on shares.
How to Calculate Short-Term Capital Gain on Shares?
Here is the formula to calculate the short-term capital gain on shares-
Short-term capital gain = Sale value of shares - (purchase cost + brokerage charges + securities transaction tax)
As a wise investor, you must be familiar with the following essential terms, used in the formula-
- Sale Value - In simple words, the sale value is the amount you would receive upon selling your shares (assets).
- Purchase Cost - Purchase cost is the price you must pay to acquire the assets (shares).
- Brokerage Charges - These are the charges you must bear to transact (buy or sell) on stock exchanges.
- Securities Transaction Tax - The securities transaction tax is the tax you must pay while transacting in securities (like shares) through any of the authorized stock exchanges in India. It ranges from 0.025% for intraday to 0.1% for delivery-based share transactions.
Example of How to Calculate Short-Term Capital Gain on Shares
Let's take a look at an example of how to calculate short-term capital gain on shares-
Sonia bought 1600 shares in May 2022 at Rs. 200 per share. She paid ₹3,20,000 for the transaction. Afterwards, she sold her shares in Nov 2022 for 300 per share, totalling ₹4,80,000. Thus, she secured a profit of ₹1,60,000. Assuming that the brokerage is charged at 1%, the brokerage charges would be ₹1,600. Plus, security transaction taxes charged at a 0.1% rate would be ₹160.
| Particulars | Amount (₹) |
| Sale Value | 4,80,000 |
| Purchase Cost | -3,20,000 |
| Brokerage Charges | -1,600 |
| Securities Transaction Tax | -160 |
| Short Term Capital Gains | 1,58,240 |
Short-Term Capital Gain Tax on Shares
In India, short-term capital gains on shares are subjected to taxes under Section 111A. This rule has been implemented since October 1, 2004. Such transactions completed via regulated stock exchanges in India are liable for a securities transaction tax.
Some salient features of short-term capital gain tax on shares-
- Tax applicability - The short-term capital gain tax on shares is applicable only when you sell your shares. Hence, if that suits you, you may hold on to your shares. In fact, you would save on taxes (less tax rate is applicable) if you hold on to your shares for the long term.
- Only gains are taxable - You do not have to pay short-term capital gain taxes on your entire investment. You pay taxes only on your profits. Hence, you do not have to pay taxes if you do not gain or incur losses.
- Tax rate - The tax rate on your short-term capital gain on shares is 15%. This rate is fixed and does not get influenced by your existing tax slab.
- Taxation period - The taxation period on short-term capital gain on shares ranges from the very first day you bought the shares to 11 months and 29 days.
- Tax exemption - You do not have to pay taxes on your short-term capital gains under the following circumstances.
- You are an Indian citizen with an annual income (including the gains) that is less than ₹2.5 lakh
- You are a 60-year-old or older Indian citizen with an annual income that is less than ₹3 lakh
- You are an 80-year-old or older Indian citizen with an annual income that is less than ₹5 lakh
Conclusion
Investment in shares can be your way to financial freedom and success. You may invest with a broad scope, and short-term investment in shares can be profitable if executed wisely. Hence, you should be flexible. Most importantly, you should be well-versed in all the regulations surrounding short-term capital gain on shares, including the tax laws and exemptions to secure the maximum advantages. Under some special circumstances, you may get a complete exemption from your short-term capital gain tax on shares.
FAQs
How much short-term capital gain is tax-free?
Usually, all short-term capital gains are taxable. However, some individuals may be exempt from this tax under special circumstances.
a) Indian citizens with a total income of less than ₹2.5 lakh may get the exemption
b) Indian nationals who are 60 years old or above, with annual income totalling less than ₹3 lakh
c) Similarly, Indian nationals who are 80 years old or above, with annual income totalling less than ₹5 lakh
What is the period of short-term capital gain?
The holding period should be twelve months or less to classify as a short-term capital gain.
How to claim an exemption on short-term capital gains?
You may apply for exemptions on your short-term capital gains under Sections 80C-80U of income tax legislation. However, you must ensure first that your short-term capital gains do not fall under Section 111A.
How to calculate short-term capital gains on shares?
You can calculate your short-term capital gains on shares using the formula below.
Short-term capital gain = Sale value of shares - (purchase cost + brokerage charges + securities transaction tax)
Is short-term capital gains tax applicable only on the profit?
Yes, short-term capital gains tax is only applicable to the profit. And these gains are taxed at 15%, irrespective of your tax slab.