Calculation of Short-Term Capital Gains Tax on Different Assets
When an investor sells a capital asset like equities, real estate, bonds, or precious metals, and the selling price exceeds the purchasing price, the net profit made is called a capital gain. These gains are considered income. However, these incomes incur a tax payable to the state or central entity. Depending on the tenure of holding the asset, the capital gains are classified into two categories – short-term capital gains and long-term capital gains. The corresponding applicable tax on these respective capital gains is called short-term capital gains tax and long-term capital gains tax.
What is Short-term Capital Gain (STCG)?
In order to understand what short-term capital gains are, it is necessary to start from the basics. It has been mentioned that, depending on the period of holding, if there is a profit on the sale of a capital asset, it is called either short-term or long-term capital gains. If there is a loss, i.e., if the final sale price (along with adjustments calculated) is lower than the acquisition price (in simpler terms, if the selling price is lower than the buying price), then it is called a capital loss.
Before we head on to understand what comprises “short-term” in short-term capital gains, let us first understand what capital assets are.
Categories of STCG
For better segregation and easier computation, the Income Tax Act categorises Short-Term Capital Gains Tax in two sets –
- STCG covered under Section 111A
- STCG other than those covered under Section 111A
STCG covered under Section 111A
The following short-term capital gains are covered under Section 111A –
- Gains made on the sale or transfer of such equity shares that are listed in a recognised stock exchange and is subject to Securities Transaction Tax (STT)
- Gains made on the sale of Equity Linked Mutual Funds that are sold by a recognised stock exchange and is subject to STT.
- Gains made on the sale of units of business trust
- Gains made on the sale/transfer of equity shares, or Equity Linked Mutual Funds, or units of business trust, through a recognised stock exchange, located in an International Financial Service Centre where the consideration is paid (or payable) in foreign currency.
The above should be transferred on or after 1-10-2004.
If the conditions given above are satisfied, then the STCG is said to be included within 111A of the Income Tax Act, and such STCGs attract a tax of 15% plus applicable surcharge and cess.
STCG other than those covered in Section 111A
The following instances of short-term capital gains do not fall under Section 111A –
- Gains made on the sale or transfer of such equity shares that are not listed in a recognised stock exchange.
- Gains made on the sale of non-equity shares.
- Gains made on the sale of Non-Equity Linked Mutual Funds (Debt Linked Mutual Funds)
- Gains that are made on bonds, debentures, and Government securities.
- Gains made on the sale of assets other than securities like gold, silver, immovable property, etc.
If the short-term capital gains fall under the specifications given above, then these STCGs are not covered under Section 111A and the tax applicable to these short-term capital gains is based on the taxable income slab rate of the taxpayer. When the ITR is filed, these STCGs are added as taxable income.
Calculation of STCG
The short-term capital gains are calculated using the formula given below:
STCG = Full value consideration – ( Cost of acquisition + Cost of improvement + Cost of transfer) where Full value consideration is the payment that is received by the seller from the buyer for the exchange or transfer of the capital asset.
The cost of acquisition is the amount or the value at which the seller has acquired or bought the asset in the first place.
The cost of the improvement is the capital expenditure that the seller incurs in making improvements or alterations or restorations to the asset.
The cost of transfer is the expenses incurred in transferring the ownership of the asset. This may include brokerage, deeds, handling charges, stamp duty, registration charges, cost of getting the succession certificate, etc.
For a better and easier understanding of the calculation of the short-term capital gain tax, we will explain the same using an example. Suppose Ms. Dua is a 35-year-old salaried person. In September 2020, she purchased a property worth a net value of Rs. 30,00,000. In March 2022, she sold off the property at Rs. 32,00,000.
Since the immovable property was sold in less than 24 months and the selling price was higher than its acquisition price, there is a short-term capital gain. Let us suppose she had to bear the brokerage charges of Rs. 20,000. Now the short-term capital gains amount will be calculated as follows –
|Selling value of the property||32,00,000|
|(-) Expenses incurred in the property’s transfer||20,000|
|Net Sale Value||31,80,000|
|(-) Cost of property acquisition||30,00,000|
|(-) Cost of improvement||xxx|
|Short term capital gains||1,80,000|
On this Rs. 1,80,000 which is the short term capital gains, Ms. Dua will pay the short term capital gains tax.
The short-term capital gains tax in India is determined by Section 111A of the Income Tax Act and the income tax slab rate.
The short-term capital gains (STCG) tax in India for capital gains under Section 111 A is 15% + surcharge and cess as applicable. The normal STCG, which is not covered under 111A, is determined as the normal rate of tax corresponding to the income tax slab rate of the taxpayer.
Tax adjustment against basic exemption
The basic exemption limit indicates the level of income up to which a person does not have to pay any tax. It implies that there will be no tax liability if the income of the taxpayer falls below the basic exemption limit. The basic exemption limit in case of a taxpayer for the financial year 2022-23 has been demonstrated below.
- The basic exemption limit is INR 5,00,000 for a resident individual of age 80 years or above.
- The basic exemption limit is INR 3,00,000 for a resident individual of age more than 60 years but less than 80 years.
- The basic exemption limit is INR 2,50,000 for a resident individual of age below 60 years.
- The basic exemption limit is INR 2,50,000 for a non-resident individual irrespective of his age.
- The basic exemption limit is INR 2,50,000 for a Hindu Undivided Family (HUF).
The exemption limit includes the total income of the taxpayer in the financial year, including short-term capital gains plus income from other sources. STCG adjustments are only possible if and after the required adjustments to the other income sources are made.
If there is a downside even after adjusting the income, the STCG from non-financial assets like movable and immovable properties will be adjusted before the STCG from financial assets. Taxpayers can also take the advantage of basic exemption under sections 80 (C to U), only if they are not covered under section 111A or if they are doing investments like life insurance, health insurance, etc.
STCG Tax on Different Assets
Having understood the meaning, calculation, and tax rates of the short-term capital gain, let us now see how short-term capital gains on different assets are treated. Without knowing how the short-term capital gains are treated for different assets, you cannot move ahead with investing and then disposing of them.
STCG tax on equity shares
If equity shares that are listed on a stock exchange are sold within a period of 12 months from the date of purchase of those shares, and the investor or the seller gets a profit, it will be a STCG, which will be taxable at a rate of 15%. Along with the tax, applicable surcharge and cess will also have to be paid, and this tax is irrespective of the income tax slab one belongs to.
STCG on mutual funds
One can invest in different types of mutual funds, like equity-based mutual funds, debt-based mutual funds, or hybrid mutual funds. If an individual sells or transfers his/her mutual fund investments within 12 months (in some cases, 36 months) at a price higher than the acquisition price, then the gain earned will be a short-term capital gain.
The taxation of short-term capital gains from the sale or transfer of equity mutual funds can be categorised into two sections –
- If the equity mutual fund is listed in a recognised stock exchange and is subject to STT, then the short-term capital gains fall under Section 111A of the Income Tax Act. In this case, the applicable tax rate is 15% plus the applicable surcharge and cess.
- If the equity mutual fund is not listed in a recognised stock exchange, then the short-term capital gains from the sale or transfer of such equity mutual fund are based on the income tax slab rate of the taxpayer.
Debt mutual funds do not come under Section 111A. Thus the tax rate on the short-term capital gains on the transfer of the debt mutual funds is also based on the income tax slab rate. In other words, these gains are taxed along with the investor’s taxable income. For example, an investor in the highest tax bracket will have their gains taxed at 30%.
In the case of hybrid mutual funds, the holding period of the funds varies, for the gains to be considered short-term capital gains. Equity-oriented hybrid funds and balanced hybrid funds are required to be held for less than 12 months whereas the holding period for short-term capital gains for debt-oriented hybrid funds is 36 months or less. Short-term capital gains on equity-oriented and balanced hybrid mutual funds are taxed at 15% and whereas short-term capital gains of that of debt hybrid mutual funds are taxed as per the taxpayer’s income tax slab.
STCG on sale of property
If a hard asset like a property is sold within a period of 24 months from the date of its acquisition, then the proceeds over and above the purchase price will be the short-term capital gain from the asset in question, i.e., the property. The short-term capital gain tax rate in India for the sale of property depends on the income tax slab that one belongs to.
Whether you are at the beginning of your investment journey or you are a pro-investor, it is important to know how the returns on the sale of your investments will be taxed and treated following the outline of the Income Tax Act, 1961. The capital gains that you earn are taxable – depending on their holding period, the tax rate, and the capital gain calculations. Without being aware of these parameters, one cannot possibly make optimal investment decisions.
What is STCG?
Short-term capital gains (STCG) refer to the capital gains or profits that arise from the sale, transfer, or disposition of a movable or immovable asset within 36 months (24 and 12 months in some cases) of the acquisition of the same asset.
What is the STCG tax?
The STCG tax is the tax levied on the capital gains occurring due to the sale, transfer, or disposition of an asset held for a short term.
What kind of STCGs don’t fall under Section 111A?
These are the STCGs where the tax rate is determined on the basis of the income tax slab rate. Some of the examples of such STCGs which are not covered under the Section 111A of the Income Tax Act of India are:
Gains generated from the sale of equity shares that are not listed on a stock exchange
Gains generated from such shares which are not equities
Gains made from the sale of debt-oriented mutual funds
Gains from the sale of bonds, debentures, and government securities
At what limit is STCG tax-free?
STCG tax exemptions are different for different categories of individuals. For a Hindu Undivided Family (HUF), the basic exemption limit for STCG is Rs. 2,50,000. For a non-resident individual, the exemption limit is Rs. 2,50,000 irrespective of their age.
For those resident individuals who are less than 60 years of age, the exemption limit for short-term capital gains is Rs. 2,50,000. The exemption limit for resident individuals who fall in the age group of 60-80 years is Rs. 3,00,000. Similarly, the exemption limit for a resident individual who is in the age group of 80 years and above is Rs. 5,00,000.
How is STCG calculated?
Once you sell your asset, and if the selling price is more than the purchase price, and the asset is held for a period of fewer than 3 years, then you have to pay short-term capital gain tax.
The STCG is calculated as per the following formula:
STCG = The current full value of the asset – (cost of acquisition + cost of transfer + cost of improvement of the asset within the last 3 years).