Short Term Capital Gain Tax

TAX ON SHORT-TERM CAPITAL GAINS

Introduction
`Gain arising on transfer of capital asset is charged to tax under the head “Capital Gains”. Income from capital gains is classified as “Short Term Capital Gains” and “Long Term Capital Gains”. In this part you can gain knowledge about the provisions relating to tax on Short Term Capital Gains.

Meaning of Capital Gains

Profits or gains arising from transfer of a capital asset are called “Capital Gains” and are charged to tax under the head “Capital Gains”.

Short Term Capital Assets :-

• Any capital asset held by the taxpayer for a period of not more than 36 months immediately preceding the date of its transfer will be treated as short-term capital asset.
• However, in respect of certain assets like shares (equity or preference) which are listed in a recognised stock exchange in India (listing of shares is not mandatory if transfer of such shares took place on or before July 10, 2014), units of equity oriented mutual funds, listed securities like debentures and Government securities, Units of UTI and Zero-Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months.
• Period of holding to be considered as 24 months instead of 36 months in case of unlisted shares of a company or an immovable property being land or building or both.

Illustration
(1) Mr. Kumar is a salaried employee. In the month of April, 2023 he purchased gold and sold the same in December, 2024. In this case gold is capital asset for Mr. Kumar. He purchased gold in April, 2023 and sold it in December, 2024, i.e., after holding it for a period of less than 36 months. Hence, gold will be treated as Short Term Capital Asset.

Illustration
(2) Mr. Raj is a salaried employee. In the month of April, 2020 he purchased gold and sold the same in August, 2023. In this case gold is capital asset for Mr. Raj. He purchased gold in April, 2020 and sold it in August, 2023, i.e., after holding it for a period of more than 36 months. Hence, gold will be treated as Long Term Capital Asset.

Illustration
Mr. Kumar is a salaried employee. In the month of April, 2023 he purchased equity shares of SBI Ltd. (listed in BSE) and sold the same in January, 2024. In this case shares are capital assets for Mr. Kumar. He purchased shares in April, 2023 and sold them in January, 2024, i.e., after holding them for a period of less than 12 months. Hence, shares
will be treated as Short Term Capital Assets.

Illustration
(3) Mr. Raj is a salaried employee. In the month of April, 2022 he purchased equity shares of SBI Ltd. (listed in BSE) and sold the same in December, 2023. In this case shares are capital assets for Mr. Raj. He purchased shares in April, 2021 and sold them in December 2023, i.e., after holding them for a period of more than 12 months. Hence, shares will be treated as Long Term Capital Assets.

Illustration
Mr. Vikas is a salaried employee. In the month September, 2021 he purchased unlisted shares of ABC ltd. and sold the same in May 2022.
(4) Mr. Vikas purchased shares in September 2021 and sold them May 2022, i.e. after holding them for a period of less than 24 months. Hence, shares will be treated as Short Term Capital Assets.
Mr. Kumar is a salaried employee. In the month September, 2020 he purchased a house and sold the same in May 2022.
(5) Mr. Vikas sold house after holding them for a period of less than 24 months. Hence, house will be treated as Short Term Capital Assets.

Tax on short-term capital gain

For the purpose of determination of tax rate, short-term capital gains are classified as follows :

• Short-term capital gains covered under section 111A.
• Short-term capital gains other than covered under section 111A.

Illustration : STCG covered under section 111A
Examples of STCG covered under section 111A :

• STCG arising on sale of equity shares listed in a recognised stock exchange, which is chargeable to STT.
• STCG arising on sale of units of equity oriented mutual fund sold through a recognised stock exchange which is chargeable to STT.
• STCG arising on sale of units of a business trust.
• STCG arising on sale of equity shares, units of equity oriented mutual fund or units of a business trust through are recognised stock exchange located in any International Financial Services Centre and consideration is paid or payable in foreign currency even if transaction of sale is not chargeable to securities transaction tax (STT).

Illustration : STCG other than covered under section 111A
Examples of STCG not covered under section 111A :

• STCG arising on sale of equity shares other than through a recognised stock.
• STCG arising on sale of shares other than equity shares.
• STCG arising on sale of units of non-equity oriented mutual fund (debt oriented mutual funds).
• STCG on debentures, bonds and Government securities.
• STCG on sale of assets other than shares/units like STCG on sale of immovable property, gold, silver, etc.

 

Tax rates of STCG

• STCG covered under section 111A is charged to tax @ 15% (plus surcharge and cess as applicable).
• Normal STCG, i.e., STCG other than covered under section 111A is charged to tax at normal rate of tax which is determined on the basis of the total taxable income of the taxpayer.

Illustration : Tax rate of STCG covered under section 111A
Mr. Kumar sold equity shares of SBI Ltd. Through Bombay Stock Exchange afterholding them for a period of 8 months. What will be the tax rate applicable on the STCG?

The STCG in this case is covered under section 111A and, hence, will be charged to tax @ 15% (plus surcharge and cess as applicable).

Illustration : Tax rate of STCG covered under section 111A
Mr. Kumar sold units of an equity oriented mutual fund in Bombay Stock Exchange after holding them for a period of 8 months. What will be the tax rate applicable on the STCG?
The STCG in this case is covered under section 111A and, hence, will be charged to tax @ 15% (plus surcharge and cess as applicable).

Illustration : Tax rate of STCG other than STCG covered under section 111A
Mr. Kumar sold units of debt fund after holding them for a period of 8 months. What will be the tax rate applicable on the STCG?
The gain in this case is not covered under section 111A and is normal STCG and, hence, will be charged to tax at normal rate applicable to Mr. Kumar. The normal rate applicable to Mr. Kumar will be determined on the basis of his total income.

Illustration : Tax rate of STCG other than STCG covered under section 111A
Mr. Kamal sold his residential house after holding it for a period of 18 months. What will be the tax rate applicable on the STCG?

The gain in this case is not covered under section 111A and, hence, will be charged to tax at normal rate applicable to Mr. Kamal. The normal rate applicable to Mr. Kamal will be determined on the basis of his total income.

Deductions under section 80C to 80U and STCG

• No deduction under sections 80C to 80U is allowed on short-term capital gains referred to in section 111A.
• However, such deductions can be claimed from STCG other than covered under section 111A.

STCG covered under section 111A :-

Only a resident individual and resident HUF can adjust the exemption limit against STCG covered under section 111A. Thus, a non-resident individual/HUF cannot adjust the exemption limit against STCG covered under section 111A. A resident individual/HUF can adjust the STCG covered under section 111A against the basic exemption limit but such adjustment is possible only after making adjustment of other income. In other words, first income other than STCG covered under section 111A is to be adjusted against the exemption limit and then the remaining limit (if any) can be adjusted against STCG covered under section 111A