What is short-term capital gain on shares and is there a tax on it?

Short-term capital gains (STCG) tax on shares is charged at the rate of 15%, if the gains fall under Section 111A. Outside this section, STCG on shares depends on your income tax slab. So, what is Section 111A? And when does STCG on stocks fall in and out of this section?  

Read on to find out.  

First, let’s understand what is short-term capital gain.  

What is STCG tax on shares? 

When you sell equity shares, you either clock a gain or a loss; a gain falls under the head capital gains. Capital gains are of two types — long-term capital gains, or short-term capital gains. As is evident, the time duration you hold the shares for, makes the difference here.  

Stocks sold within 12 months of the purchase date are short-term stocks. When you make a capital gain on selling such shares, you are liable to pay an STCG tax. If you make a loss, you incur a short-term capital loss (STCL).  

Calculation of STCG on shares 

The formula for the calculation of short-term capital gains tax on shares is as follows:  

STCG = Sale price - expenses on sale - purchase price 

To calculate short-term capital gains on stocks, figure out your capital gains. The net profit will be your capital gain, if the sale price exceeds the purchase price. While computing this number, consider the cost of acquisition of shares, cost of improvement, and expenditure you had incurred while selling the assets. 

While the short-term capital gains are taxed at 15%, a lot also depends on your income tax slab. Here’s how this calculation works:  

Some short-term capital gains fall under Section 111A, whereas some do not.  

Short-term capital gains under Section 111A invite a tax rate of 15%. These can be gains on the following:  

- Sale of shares listed on a recognised stock exchange 

- Sale of equity mutual funds listed on a stock exchange and sold via it 

- Sale of equity shares or mutual funds of a recognized business trust.  

Along with STCG, you may also have to pay a surcharge and cess. For example, any sale or purchase made via a stock exchange is subject to Securities Transaction Tax (STT). 

However, if your stocks or equity units fall under one of the following categories, then you’ll be liable to pay a tax on the gains on the following as per the income tax slab you fall under:  

- Sale of equity shares not listed on a recognized stock exchange 

- Sale of shares that are not equity 

- Sale of debt mutual funds 

- Sale of debentures, bonds, or government securities 

- Sale of assets that are not equity shares.  

Tips to reduce STCG on shares    

You can set off the losses you incur on shares against other short- or long-term capital gains. Try not to go overboard with this strategy, though. You can carry forward your losses for up to eight financial years as a tax adjustment.  

Exemptions under STCG 

STCG is not exempted from tax unless you belong to a specific income level. You can claim the following exemptions you are a resident Indian, and you meet the following requirements:  

- Above 80 of age with annual income of up to Rs 5 lakh 

- Between 60–80 years of age, and your annual income is less than Rs 3 lakh  

- You’re less than 60, and your annual income is less than Rs 2.5 lakh 

- If you are a Hindu Undivided Family (HUF) and your annual income is less than Rs 2.5 lakh 

Deductions under STCG 

Section 80C allows you to deduct a certain amount from your taxes if you invest it in certain securities like mutual funds or life insurance. But, if your capital gains arise from selling shares covered under Section 111A, you can’t use Section 80C for deductions from your taxes. 

However, if you made that money by selling shares not covered under Section 111A, you can still use Section 80C for deductions from your taxes. 

Benefits of short-term capital gains tax 

You can also offset capital gains by claiming exemptions and deductions, such as those offered by Section 80C for certain investments 

The government collects STT to raise revenue and discourage speculative trading on stock exchanges 

Individuals may claim such deductions on short-term capital gains tax on shares not covered under Section 111A 

STT is paid at the time of the transaction. This means when you buy or sell shares on a stock exchange, the stockbroker will deduct the STT from the transaction amount and pay it to the government on behalf of the trader. 

Conclusion 

Short-term capital gains tax on shares is a tax that is imposed when an individual sells shares that have been held for less than 12 months. The tax rate for short-term capital gains on shares can vary depending on whether or not the gains fall under Section 111A.  

However, it’s always advisable to consult a financial advisor to understand the tax implications and how to minimize the tax bill when dealing with real estate and other investments. 

FAQs 

Q. How is the sale of unlisted shares treated from a tax point of view?  

The sale or transfer of unlisted shares is taxed as capital gains.  

Q. How are your capital gains taxed if you are a day trader? 

Your capital gains can be considered income from a business if you’re a professional day trader. In that case, you don’t have to pay STCG; you have to fill out the ITR-3 form and show your income as income from business and profession. However, you also have the option of filing these as STCG. But whichever option you choose, you must consistently follow it till a major change takes place.