Investing in financial and physical assets can generate significant returns. However, if these assets are sold within a short period, they attract short-term capital gains tax (STCG). This tax applies to profits earned from assets such as equities, real estate, and mutual funds when sold within their specified short-term holding period.
Understanding STCG is essential for taxpayers to manage their financial planning efficiently. This article will explain the concept of short-term capital gain tax, applicable rates, calculation methods, exemptions, and strategies to minimise tax liability.
Definition of short-term capital gains tax
Short-term capital gains tax (STCG) applies to profits earned from selling capital assets within a short duration. The holding period criteria vary based on asset types:
- Listed equity shares and equity-oriented mutual funds: Less than 12 months.
- Unlisted shares and real estate: Less than 24 months.
- Other capital assets: Holding period defined based on category.
STCG is calculated as the difference between the selling price and purchase price, excluding brokerage fees or transaction costs. Taxpayers must pay this tax based on their applicable income tax slabs, except for specific asset classes where a fixed rate applies.
Tax rates for short-term capital gains tax
| Asset class | Tax rate |
| Listed equity shares & equity-oriented mutual funds (until July 22, 2024) | 15% |
| Listed equity shares & equity-oriented mutual funds (from July 23, 2024) | 20% |
| Unlisted shares, real estate, and other assets | Taxpayer's applicable income tax slab rate (0% to 30%+) |
The Union Budget 2024 revised the STCG rate for financial assets, increasing it from 15% to 20% for transactions occurring on or after July 23, 2024.
Calculating short-term capital gains tax
To determine STCG, follow these steps:
- Determine selling price: Price at which the asset is sold.
- Determine purchase price: Cost incurred to acquire the asset.
- Subtract transaction costs: Deduct brokerage fees, commissions, or other associated costs.
- Apply tax formula:
- ShortTermCapitalGain = SellingPrice−PurchasePrice−AssociatedCosts
For instance, if an investor buys an asset for Rs. 1,000 and sells it for Rs. 1,500, incurring Rs. 50 in costs, the STCG is Rs. 450.
Exemptions and deductions applicable to STCG
Unlike long-term capital gains, STCG does not qualify for exemptions under Sections 54B or 54D of the Income Tax Act. Every rupee earned as short-term capital gains is taxable without any deductions. However, investors can adjust short-term capital losses against short-term or long-term capital gains to reduce taxable income.
Impact of recent tax reforms on short-term capital gains tax
The 2024 Union Budget introduced an increase in STCG rates for equity-based investments. This change is expected to:
- Discourage short-term trading and speculation
- Encourage long-term investments
- Generate higher tax revenues for the government
Investors now have a greater incentive to hold investments for longer periods to avail themselves of lower long-term capital gains tax rates.
Short-term capital gains tax on various asset classes
| Asset class | Holding period | Tax rate |
| Listed equity shares | < 12 months | 20% (from July 23, 2024) |
| Equity-oriented mutual funds | < 12 months | 20% (from July 23, 2024) |
| Unlisted shares | < 24 months | Taxpayer's slab rate |
| Real estate | < 24 months | Taxpayer's slab rate |
Strategies to minimise short-term capital gains tax liability
- Hold investments longer: Avoid STCG tax by transitioning to long-term holdings.
- Offset gains with losses: Reduce taxable gains using short-term capital losses.
- Invest in tax-advantaged accounts: Use investment vehicles offering tax benefits.
- Plan sales strategically: Sell assets in financial years with lower overall income.
Applying these strategies helps investors lower tax burdens while optimising investment returns.
Filing short-term capital gains tax in India
- Maintain accurate records: Track purchase and sale details.
- Calculate total gains/losses: Sum all short-term gains and adjust for losses.
- Include in income tax return: Report STCG under capital gains section.
- Use appropriate forms: Select the correct ITR form based on income sources.
Filing taxes accurately ensures compliance with tax laws and prevents unnecessary penalties.
Short-term capital gains tax is a crucial component of financial planning for investors. With recent tax reforms increasing STCG rates, individuals must strategically manage their investments to optimise returns and reduce tax liabilities.
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