Short-term capital gains on shares- computation of tax on STCG
One of the heads under which the taxable income of a ‘taxpayer’ under the Income-tax Act, 1961 (‘I-T Act’) can be categorised as capital gains. Capital gains can further be categorised into long-term capital gains and short-term capital gains.
In this article, we will specifically be discussing various aspects of short-term capital gains arising in the hands of Indian resident taxpayers in relation to shares (such as the nuances around ‘holding period’, computation of capital gains, tax incentives/ benefits, etc.).
What constitutes capital gains?
To put it concisely, under the applicable sections of the I-T Act, capital gains denote the earnings (such as profits or gains) that result from the ‘transfer’ of a ‘capital asset.’ The taxation of capital gains is contingent upon the exemptions prescribed by the I-T Act.
Type of capital assets
The definition of ‘capital asset’ is wide enough to include most movable and immovable assets/ properties. There are two categories of capital assets, depending upon the holding period of shares
- Short-term capital assets: In the case of shares (whether equity or preference), which are listed in a recognised stock exchange in India, the period of holding to be considered is 12 months or less. The resulting capital gains (or loss) will be considered short-term capital gains.
On the other hand, in the case of unlisted shares (whether equity or preference), the period of holding to be considered for categorisation as a short-term capital asset is 24 months or less.
- Long-term capital assets: In relation to listed shares (whether equity or preference), the period of holding is more than 12 months for the resulting capital gains (or loss) to be considered long-term capital gains.
On the other hand, in the case of unlisted shares (whether equity or preference), the period of holding to be considered for categorisation as a long-term capital asset is 24 months.
Taxability of short-term capital gains on listed shares
The applicable income-tax rate is different for listed and unlisted shares.
Section 111A of the I-T Act provides that capital gains arising from the transfer of a short-term capital asset and equity share are taxable at 15%. This concessional rate is subject to the condition that securities transactions tax (‘STT’) is paid on the transfer/ sale of such equity shares. The said rate is required to be enhanced by the applicable surcharge and cess.
It is relevant to note that deductions specified under sections 80C to 80U of the I-T Act cannot be claimed on short-term capital gains referred to in section 111A.
Taxability of short-term capital gains on unlisted shares
STCG on the sale of shares other than those covered u/s 111A of the I-T Act (sale of listed equity shares where STT is not paid on transfer, listed preference shares and unlisted equity/ preference shares) is chargeable to tax at the rate of tax determined based on the total taxable income of the taxpayer.
A summary of tax rates is tabulated below for ease of reference:
|Capital asset transferred||Applicable Tax Rate(s)*|
|Equity shares listed on a recognised stock exchange, where STT is paid on the sale of shares||15%|
|Equity shares listed on a recognised stock exchange, where STT is not paid on the sale of shares||Normal rate of tax applicable to the taxpayer|
|Unlisted equity shares|
|Preference shares (listed/ unlisted)|
*all rates to be enhanced by applicable surcharge and cess
Process of computation
|Full value of the consideration received from the sale of shares||xxx|
|Less: Expenditure incurred in connection with such sale (brokerage)||xxx|
|Net sale consideration (A)||xxx|
|Less: cost of acquisition (B)||xxx|
|Short-term capital gains (A-B)||xxx|
Adjustment of short-term capital gains against the basic exemption limit [proviso to Section 111A(1) of the I-T Act]
A taxpayer, being a resident individual or HUF, can adjust the short-term capital gains against the basic exemption limit. For the purpose of this adjustment, a taxpayer must adjust all other income from the exemption limit. The remaining limit will be utilised to adjust the short-term capital gains.
Illustration 1: Mr. Banke Bihari holds 1000 shares of Vaikunth Private Limited, which he acquired in December 2020 at Rs. 1,00,000. He sold the shares in January 2021 at a price of Rs. 180 per share and incurred a cost of Rs. 12,000 as well as transaction charges paid to the broker. Since it is an unlisted share, the tax applicable is as per the slab rates.
The following table illustrates short-term capital gains on the transaction:
|Full value of the consideration received (1000 shares @ ₹180)||1,80,000|
|Less: expenditure incurred in connection with such sale (brokerage)||12,000|
|Net sales consideration (A)||1,68,000|
|Less: cost of acquisition (1000 shares @ ₹100)(B)||1,00,000|
|Short-term capital gain (A-B)||68,000|
Since the holding period of the shares was less than 24 months, the capital gains calculated would qualify as short-term capital gains. The resulting gains will be included in the total income of Banke Bihari and taxed at the slab rate applicable to him.
Illustration 2: Mr. Harihar (resident; 40 years of age) is a salaried employee working in Saket Ltd. at an annual salary of Rs. 8,40,000. In December 2021 he purchased 10,000 equity shares of Fortune Ltd. at Rs. 100 per share and sold the same in April, 2022 at Rs. 125 per share (brokerage paid – Re. 1 per share). The shares were sold through the Bombay Stock Exchange and securities transaction tax was paid by Mr. Harihar.
In order to compute the tax liability of Mr. Harihar, one will need to determine the taxable income of Mr. Harihar. For the sake of simplicity, let us presume that Mr Harihar has opted for taxation under the old regime and has no deduction under chapter VI-A of the I-T Act.
In such a scenario, the computation of taxable income will be as follows:
|Short-term capital gains*||2,40,000|
|Gross Total Income||10,80,000|
|Less: Standard Deduction on salary income||50,000|
|Less: Deduction under section 80C to 80U||Nil|
|Total Income or Taxable Income#||10,30,000|
|Tax on total income **||1,06,500|
|Add: Health & education cess @ 4%||4,260|
|Total tax liability for the year||1,10,760|
# as per slab rates applicable for FY 2022-23
*Computation of STCG
|Full value of consideration (i.e., sales consideration) |
₹125 x 10,000 shares
|Less: Expenditure incurred wholly and exclusively in condition with transfer of capital asset (brokerage)||(10,000)|
|Net sales consideration||12,40,000|
|less: Cost of acquisition (i.e., purchase price)|
₹100 x 10,000 shares
|Less: cost of improvement (i.e., post purchase capital expenses on improvement of capital assets)||Nil|
|Short-term Capital Gains||2,40,000|
**STCG is covered under section 111A and, hence, will be charged to tax @ 15%. Salary income will be charged to tax at slab rates applicable for the financial year. Health and education cess will apply @ 4% on the amount of tax.
A share qualifies as short-term capital asset or a long-term capital asset depending upon the following factors:
- Period of holding
- Status of underlying share (listed/ unlisted)
The rate of short-term capital gains tax depends upon following factors:
- Nature of shares (equity/ preference)
- STT paid or not on sale of shares
The rate of tax on short-term capital gains is as follows:
- Listed Equity shares where STT is paid on the sale of shares – 15%
- Any other case – Normal rate of tax applicable to the taxpayer
What is the holding period for capital gains to qualify as STCG?
If a taxpayer sells listed shares held by him/her for the period of upto 12 months, short-term capital gains will arise on sale of such shares. In case of unlisted shares, the period of holding is to be considered as upto 24 months. The applicable income tax rate is different for listed and unlisted shares.
Tax rate on STCG of listed equity shares?
Rate of tax for listed equity shares in recognised stock exchange, where STT is paid on sale of such shares, is 15% (plus applicable surcharge and cess).
Tax rate on STCG of sale of other shares?
In any other case, not being covered u/s 111A of the I-T Act, the STCG is included in the total income of the assessee and subjected to tax at the normal tax rate applicable to such assesses.
Can deductions under section 80C to 80U be claimed on STCG?
No deduction under sections 80C to 80U cannot be claimed on short-term capital gains referred to in section 111A of the I-T Act. However, such deductions can be claimed from STCG other than those covered under section 111A of the I-T Act.
Is the benefit of indexation available while computing the capital gains arising on the transfer to short-term capital assets?
The benefit of indexation is allowed only in the case of long-term capital assets and not short-term capital assets. Thus, the seller cannot avail the indexation benefit in the case of short-term capital gains.