Understanding the world of share trading requires knowing about a variety of financial concepts, one of which is capital gains. Capital gains are primarily divided into two categories: long-term and short-term. Short-term capital gains occur when shares are sold within 12 months after their acquisition. Short-term capital gain (STCG) on shares is taxed differently from long-term capital gains, which are generated by the sale of shares held for more than a year.
In this article, we will go deeper into short-term capital gain on shares, explaining what it is and how it is taxed under income tax regulations.
What is the short-term capital gain on shares
Short-term capital gains on shares are the profits generated by selling shares that have been held for up to 12 months. It is the difference between the selling and purchasing prices of the shares over this period. This gain differs from long-term capital gains, which occur when shares are held for more than a year.
STCG under section 111A
Short-term capital gains falling under Section 111A are subject to specific tax treatment. Under this section, the income tax rate on short-term capital gains on shares is fixed at 15%. Surcharges and cesses may also apply, depending on the individual's total taxable income. It is crucial to highlight that this rate only applies to specific types of profits, principally those resulting from the sale of equity shares listed on recognised stock exchanges or equities-oriented mutual funds. These benefits are evaluated separately because of their nature and market involvement.
STCGs covered under Section 111A include
- Profits from selling equity shares that are traded on established stock exchanges.
- Profits from selling mutual funds with an emphasis on equities that are listed on an established stock market and are sold via them.
- Profits from selling mutual funds that are equity-oriented, equity shares, or units in business trusts.
STCG not under section 111A
Short-term capital gains that do not fall under Section 111A have a separate tax treatment. In such circumstances, the income tax on short-term capital gains on shares is computed using the individual's income tax bracket. This implies that the tax rate fluctuates based on the taxpayer's total taxable income, with higher-earning persons often paying a higher tax rate.
This category includes profits from the selling of equity shares that are not listed on recognised stock exchanges. Similarly, profits from other investments or assets that do not fulfil the standards outlined in Section 111A are treated differently for taxation purposes. Taxpayers must comprehend these differences to appropriately calculate their tax responsibilities and comply with the law.
Additional read: What are Capital Gain Bonds
Calculation of short-term capital gain on shares
The formula for calculating short-term capital gains on shares is rather straightforward. The calculation includes numerous components that help to determine the taxable gain:
Short-Term Capital Gain = Sale Value − (Cost of Asset Acquisition + Expenses Incurred + Cost of Asset Improvement)
How to calculate short-term capital gain on assets
Sale value
The selling value of an item is critical in calculating capital gains. For equity shares, it is the entire amount received from the sale after deducting brokerage costs and the securities transaction tax.
Cost of asset acquisition
Identifying the cost of asset acquisition is an important stage in the calculation process. This involves taking into account the asset's purchase price, as well as any brokerage fees spent during the transaction. The calculation involves figuring out the fair market worth of the investment, comparing it to its initial value, and selecting the higher figure as the acquisition cost.
Cost of asset improvement
Notably, unlike other assets, the idea of asset improvement has no bearing on computing short-term capital gains on shares. This means that additional costs for increasing shares do not need to be considered in the computation.
Expenses incurred due to sale or transfer
Capital gains are calculated using expenses incurred during the sale or transfer of assets. These expenses may include registry fees, brokerage fees, and other related expenses. Equity shares that incur Securities Transaction Tax (STT) charges during the selling transaction are included in the capital gain computation.
Holding period
The holding period of an asset relates to how long investors retain it. In the context of short-term capital gains, this time is expressed in months or days. It begins on the asset's acquisition date and lasts until the day before transfer.
Conclusion
Understanding STCG on shares is critical for any investor new to the stock market. Whether your gains are subject to Section 111A or not, knowing the tax implications and calculation methods is critical for sound financial planning. Understanding these concepts allows investors to make informed choices and improve their investing strategies, potentially lowering their liability for income tax on STCG on shares.
