We all look forward to making money from our investments. Depending on the holding period of these assets, capital gains on selling investment options such as shares are categorised into long-term capital gains and short-term capital gains.
And both of these gains are taxed under different Income Act sections.
Capital gains taxes on shares are considered STCG taxes when shares are sold after a holding period of less than 12 months. For other assets, the holding period must be less than 36 months to be considered short-term capital gains.
This blog is for you if you are confused about calculating short-term capital gains and STCG taxes on selling shares.
In this blog, you will understand:
- What are short-term capital gains on shares?
- The tax rate for STCGs on shares
- How do you compute taxes on STCG taxes on shares?
- How can you reduce your burden of tax liability?
What are short-term capital gains on shares?
Short-term capital gains on shares are the profits or gains made on selling shares (listed on the stock exchange) after holding them for a period not exceeding 12 months. These gains attract short-term capital gains taxes as per the Income Tax Act.
Taxes on short-term capital gains are taxed differently:
- Gains falling under section 111A
- Gains other than the ones falling under section 111A
Since we are talking specifically about shares today, we will cover the gains falling under section 111A of the income tax act.
STCG taxes on shares in India
Short-term capital gains falling under Section 111A are taxed at a 15% rate plus surcharges and cess (as applicable).
Here is all that is included under section 111A of the Income Tax Act:
- Profits made on selling listed company's equity shares that are liable for Securities Transaction Tax (STT)
- Profits or gains made on selling equity-oriented mutual fund units
- Profits or gains made on the sale of business trust's units
- STCG made on the sale of the above-mentioned assets located in International Financial Services Centres, IFSC (even if STT isn't applicable)
Short-term capital gains not included under section 111A
- Short-term capital gains made on selling of shares not listed on the stock exchange
- STCGs on selling non-equity shares
- STCGs on selling debt-oriented mutual fund units
- STCGs on selling non-equity assets
If any of these transactions are made, and gains are enjoyed, they will be taxed as per the individual's income tax slab.
Example
Mrs Vijaya is 40 years old is earning an annual income of Rs 8,00,000. She is a salaried employee. She sold her debt funds after holding them for a period of 7 months for a profit of Rs 1,00,000. What will be her tax liability?
Since debt funds do not fall under section 111A of the income tax act, the section's rules won't apply here. In such cases, STCGs will be treated as normal gains and will be taxed at the normal tax rate per Vijaya's income slab.
Calculation of short-term capital gains taxes on shares
To calculate STCG taxes on shares, the process is quite simple and easy. First, you need to compute whether you made gains or not.
Here's what you need to do;
Short-term capital gains = sale value (-) cost of acquisition (-) expenses paid while selling the shares
Example
Mr Ajay bought 10,000 equity shares of X ltd in December 2021 for Rs 100 per share. He sold those shares in March 2022 for Rs 150 per share. The brokerage charges came out to be Rs 1 per share. He paid STT and sold the shares through the Bombay Stock Exchange.
His tax liability would be;
Sales consideration : 15,00,000 Rs (10,000 x Rs 150)
Less: brokerage : 10,000 Rs (10,000 x 1 rs)
Less: purchase value: 10,00,000 = (10,000 x Rs 100)
Short-term capital gains = 4,90,000
Tax on STCGs = 15% x 4,90,000
= 73,500
STCG taxes on shares exemptions or deductions
Sadly, short-term capital gains on shares are not exempted from tax. However, certain exceptions to the rules are given below:
- Resident individuals (80+ years) earning an annual income of amount not exceeding five lakhs
- Resident individuals (60+ years below 80) earning an annual income of Rs 3 lakhs or less
- Resident individuals (below 60 years) and HUFs earning an annual income of Rs 2.5 lakhs or less
Example
Mr Bhatt is a retired person, 65 years old and a resident of India. He bought equity shares in April 2022 and sold them in June 2022 through the Bombay Stock Exchange. His capital gains came out to be Rs 2,00,000. He doesn't have any other source of income.
Now, Bhatt is a resident who falls under 60-80 years old. Hence, he is not liable to pay any tax on the gains. Since his annual income is less than Rs 3 lakhs, the gains would be exempted under section 111A of the act.
Deductions
No deductions are allowed under sections 80C to 80U on short-term capital gains mentioned under section 111A of the Income Tax Act. However, you can claim deductions from short-term capital gains not mentioned under section 111A.
Example
Mr Vijay is a 58-year-old retired person. He bought equity shares of XYZ ltd (listed on the stock exchange) in February 2022 and sold the same in April 2022. The difference between the acquisition and sale price came out to be Rs 2,10,000. He has no other income source. He deposited the gains in a PPF account.
Now, since no deductions are allowed on STCGs mentioned in section 111A, Vijay can not claim a deduction of Rs 1.50,000 even if he wants to. He has to pay a tax of Rs 2,10,000. He is liable to pay Rs 31,500 as STCG taxes on shares.
Reduce your tax liability
Though no deductions are allowed under the act, you can still reduce your tax liability by:
- Inter/Intrahead adjustment: It means that you can adjust your short-term/long-term capital gains against short-term capital losses.
- Increase your holding period: You can reduce your tax liability by holding your capital assets for longer periods. Hence, try to hold them longer and pay fewer taxes.
Final words
Short-term capital gains on shares attract a tax liability of 15% plus surcharges and cess as applicable. It applies to assets falling under section 111A of the Income Tax Act.
There are not many deductions available to you to reduce your tax liability. Also, there are a few strategies to reduce your tax burden. Thus, to reduce your tax liability, either try to hold shares for longer periods or you can consider investing in tax-saving mutual fund schemes.