We all invest our hard-earned money into capital assets because we expect our money will grow over time.
When you sell or transfer these capital assets, you either experience losses or gains. In the event of gains, taxes enter into the game.
Now capital assets is an umbrella term. It includes a wide variety of assets such as house property, land, gold, shares, debentures, bonds, and much more. The list is huge. Hence, capital gains are the payoffs you enjoy from selling your capital assets for a profit.
Capital gains can be broadly categorised into short-term capital gains and long-term capital gains.
In this blog, we're going to cover the following:
- What are short-term capital gains?
- How are short-term capital gains calculated?
- What is the short-term capital gains tax rate in India?
What are short-term capital gains?
Short-term capital gains are the gains you enjoy on selling short-term capital assets. Gains are considered short-term when an asset is held for a period not exceeding 36 months.
However, there are special cases where the holding period may reduce to less than 12 months (capital gains under section 111A)
The gains covered under the section 111A are:
- STCG enjoyed due to the selling of listed shares subject to STT charges
- Sale of equity-oriented MF units via recognised stock exchange subject to STT
- Sale of business trusts' units
- Sale of above-mentioned assets located in International Financial Services Centres(IFSC) (even if STT isn't applicable)
Short-term capital gains other than the ones covered in 111A:
- STCG on sale of equity shares not through recognised stock exchange
- Sale of shares except for equity shares
- Sale of debt-oriented mutual fund units
- STCGs on debentures, government securities and bonds
- Short-term capital gains on the sale of immovable properties, silver, gold, etc.
It is crucial to note that in the case of unlisted shares and immovable property (land and/or building), the period of holding must be less than 24 months to be considered STCGs.
Calculation
Full consideration of sale value - acquisition cost - expenditures incurred in connection with the sale or transfer of assets (eg: brokerage, commission, etc.) - improvement cost (if any)
How are short-term capital gains taxed?
Taxation on STCGs in India depends upon the nature of capital assets. Short-term capital gains tax rates in different circumstances, such as:
- STCGs included in the section 111A of the ITA are subject to taxation of @15% (plus surcharges and cess)
- STCGs other than the ones mentioned in section 111A is subject to taxation at a normal tax rate, i.e. depending upon the taxpayer's taxable income.
Example 1:
Mr Khan is a salaried employee with an annual salary of Rs 8,00,000. Mr Khan purchased a piece of land worth Rs 10,00,000 in June 2022 and sold the same for Rs 12,20,000 in August 2022. He paid a total brokerage was Rs 20,000. What would be his tax liability?
Since the STCGs Khan enjoyed are normal (not falling under section 111A), these will be taxed as per his total taxable income.
Short-term capital gains: Rs 12,20,000 (Sale value) - 20,000 (Expenses connected with the sale) - 10,00,000 (cost of acquisition)
= Rs 2,00,000
Total taxable income: Rs 8,00,000 (salary) + Rs 2,00,000 (STCGs) - 0 (deductions, if any)= 10,00,000
His tax liability would be Rs 1,17,000. ( including 4% health and education cess)
Example 2:
Mr Binay bought 10,000 equity shares of LYZ ltd in November 2021 for Rs 100 per share. He sold those shares in February 2022 for Rs 160 per share. The brokerage expenses were Rs 0.5 per share. He paid STT. The shares were sold through the BSE.
His tax liability would be;
Sales consideration : 16,00,000 (10,000 x Rs 160)
Less: brokerage : 5,000 (10,000 x 0.5 rs)
Less: purchase value: 10,00,000 (10,000 x Rs 100)
Short-term capital gains= Rs 5,95,000
Tax on STCGs = 15% x Rs 5,95,000
= Rs 89,250
Short-term capital gain exemptions
Certain exemptions are given by the income tax department while calculating short-term tax liabilities. These are:
- For resident individuals of India, who are above 80 years of age, the exemption limit is Rs 5,00,000.
- For resident individuals of India, who are above 60 years but below 80 years of age, the exemption limit is Rs 3,00,000.
- The exemption amount for non-resident individuals (NRIs) is Rs 2,50,000 (age doesn't matter).
- The exemption limit is Rs 2,50,000 for Hindu Undivided Families.
Note that: Only individual residents and resident HUFs are allowed to adjust their limits of exemption against short-term capital gains (under section 111A). And that's only allowed after making all other adjustments (of other incomes).
Deductions
Unfortunately, no deductions are available under sections 80C to 80U on STCGs falling under section 111A of the ITA. However, you can claim deductions for STCGs other than the ones mentioned in 111A.
Example:
Mr Vinay is a 55-year-old resident of India. He bought land for Rs 19,50,000 in December 2021 and sold the same for Rs 25,50,000 in April 2022. He doesn't have any other income source. He deposited 1,00,000 in a PPF account and another 50,000 in NSC. Can he claim deductions under sections 80C to 80U?
Vinay's short-term capital gains will be: Rs 25,50,000 (-) 19,50,000 = Rs 6,00,000.
Since the asset does not fall under section 111A of the act, Vinay can claim a deduction of Rs 1,50,000 he deposited towards PPF and NSC.
Hence his taxable income would be: Rs 6,00,000 (-) Rs 1,50,000 = 4,50,000.
Final words
Short-term capital gains are subject to different tax rates depending on the type or nature of assets you sell. Moreover, the holding period also changes as the type of assets changes.
You need to be updated with the act's provisions to calculate your tax liabilities accurately. Alternatively, you may seek the assistance of a financial expert to manage your investments in a better way.