Short Term Capital Gains Tax (STCG)

Short Term Capital Gains Tax (STCG)

Short-term capital gains refer to the profits earned from the sale or transfer of assets held for a short duration. According to the Union Budget 2024, the “Short term capital gains tax” on specified financial assets has increased from 15% to 20%. This change highlights the importance of understanding the tax implications when investing in mutual funds and other financial instruments. Investors need to be aware of the applicable capital gains tax rates, as they can significantly impact the overall returns on their investments. Learn about short-term capital gains (STCG) in detail through this guide.

Budget 2024 STCG Update: Short Term Capital Gains Tax Increased from 15% to 20%

In the Union Budget 2024-2025 presented on July 23, 2024, Finance Minister Nirmal Sitharaman announced a significant increase in the short-term capital gains tax on certain financial assets. Previously taxed at a rate of 15%, the short-term gains on specified financial assets will now attract a higher tax rate of 20%. However, the tax rate for all other financial and non-financial assets will remain unchanged at their applicable rates. 

What is Short Term Capital Gains (STCG)?

Short term capital gains tax is the tax levied on the profit earned from the sale of a capital asset held for a short period, typically less than one year. The gain is calculated as the difference between the asset’s selling price and purchase price. This gain is usually taxed higher than LTCG, reflecting its potential for rapid income generation. The tax rate for STCG varies depending on the asset and the applicable tax laws. For example, as of July 23, 2024, listed equity shares, units of equity-oriented funds, and units of business trusts are taxed at a concessional rate of 20%. However, any sale of such assets made before this date during FY 24-25 attracts a tax rate of 15%. Other assets are taxed according to the taxpayer’s slab rate.

Short Term Capital Gains Tax Rate for FY 2024-25

Here are the tax rates on STCG for FY 2024-25,

Short Term Capital Gains Tax on Equity & Non-Equity Assets

Equity-oriented assets, such as equity mutual funds and individual stocks, are subject to a flat short-term capital gains (STCG) tax rate of 20% if held for less than 12 months. Regardless of your overall income bracket, any profits earned from selling these assets within a year will be taxed at this fixed rate. For instance, if you sell equity shares after 9 months and profit from Rs. 50,000, you will owe an STCG tax of Rs. 10,000 (20% of Rs. 50,000).

On the other hand, non-equity assets like debt-oriented mutual funds, bonds, and gold have a different tax treatment. The STCG from these assets are added to your total income, and the tax liability is determined based on your applicable income tax slab. The tax rate will vary depending on your overall income level.

Short Term Capital Gains Tax on Shares

STCG on shares refer to the profits realized from the sale of shares held for a relatively short period. This duration varies depending on whether the shares are listed or unlisted. For shares listed on a stock exchange, any gains from selling within 12 months of purchase are classified as STCG. However, if the shares are not traded on a stock exchange (unlisted), the holding period for STCG is 24 months. Any profit made from selling shares within these specified timeframes is considered STCG and is subject to taxation.

STCG Tax on Property

Short-term capital gains (STCG) on property are calculated by subtracting the cost of acquisition, improvement costs, and transfer expenses from the final sale price. The short-term holding period for real estate properties is considered less than 24 months. Any profits realized from selling a property within this period will be classified as STCG. Consequently, these gains are treated as part of an individual’s income and are subject to taxation under the Indian Income Tax Act, 1961.

However, certain exemptions are available for STCG from selling specific assets, such as residential house properties. Section 54 of the Income Tax Act provides a relief mechanism, allowing individuals to claim exemption on the capital gains if the proceeds from the sale of one residential house property are reinvested in another residential house property within a specified timeframe. This exemption can help mitigate the tax burden associated with STCG from property sales.

Short Term Capital Gains Tax on Hybrid Funds

Hybrid funds, which blend equity and debt instruments to provide diversification, have varying STCG tax implications. If a hybrid fund has an equity exposure of over 65%, it is treated as an equity fund, and the STCG is taxed at a flat rate of 20% for holdings of less than 12 months. However, for hybrid funds with an equity exposure below 65%, the STCG is taxed as per the rules applicable to debt funds, which generally involves adding the gains to your total income and paying tax based on your applicable income tax slab. Therefore, understanding the equity exposure of a hybrid fund is crucial for accurately calculating the STCG tax liability.

Short Term Capital Gains Tax on SIP

SIPs, or Systematic Investment Plans, are a popular investment strategy that involves regular contributions to mutual funds. When redeeming SIP units, the first-in-first-out (FIFO) principle applies, meaning that the oldest units are redeemed first. Therefore, if you redeem units after holding them for more than 12 months, the units purchased in the initial months will be considered long-term capital gains and taxed accordingly. However, any units purchased within the last 12 months will be subject to STCG tax at a flat rate of 20%, regardless of your overall income tax bracket. It’s important to note that all equity mutual fund transactions are also subject to Securities Transaction Tax (STT), a levy of 0.001% on the transaction value.

Holding Period Rules for Short Term Capital Gains (STCG)

Know the holding period rules for Short Term Capital Gains in the following table,

How to Calculate Short Term Capital Gains Tax?

To determine your short-term capital gains (STCG), you’ll need to calculate the difference between the sale price and the purchase price of your asset, considering any associated expenses. Here are a basic formulas to help you calculate your STCG:

• Sale Proceeds = Total Sale Value – Expenses (Brokerage, Stamp Duty, etc.)
• Cost of Acquisition = Purchase Price + Expenses (Registration, Stamp Duty, etc.)
• Short Term Capital Gains (STCG) = Net Sale Proceeds – Total Cost of Acquisition

Example of Short Term Capital Gains Tax Calculation

Suppose,

• You purchased “100 shares” of ABC Ltd. on January 1, 2024, at Rs. 100 per share.
• You sold those shares on June 1, 2024, at Rs. 125 per share.
• Brokerage and other transaction costs totalled Rs. 2,000.
• You have no exemptions available under Section 54B or 54D.

Calculation:

1. Sale Proceeds:
   • Total Sale Value: 100 shares * Rs. 125/share = Rs. 12,500
   • Less: Expenses (Brokerage, etc.): Rs. 2,000
   • Net Sale Proceeds: Rs. 10,500
2. Cost of Acquisition:
   • Purchase Price: 100 shares * Rs. 100/share = Rs. 10,000
   • Total Cost of Acquisition: Rs. 10,000 (assuming no additional costs)
3. Short-Term Capital Gains (STCG):
   • STCG = Net Sale Proceeds – Total Cost of Acquisition = Rs. 10,500 – Rs. 10,000 = Rs. 500

In this case, you have a short-term capital gain of Rs. 500. This gain will be taxed at the applicable short-term capital gains tax rate of 20% for equity-oriented assets in India. Therefore, you will owe a tax of Rs. 100 (20% of Rs. 500) on this short-term capital gain.

Exemptions on Short Term Capital Gains Tax Calculation

Under the Income Tax Act and the recent changes proposed in the Union Budget 2024, you can potentially reduce your tax liability on short-term capital gains (STCG) by claiming exemptions under Section 54B and Section 54D. However, these exemptions are subject to specific conditions.

• Section 54B allows you to avoid paying tax on short-term capital gains from selling agricultural land used for farming if you reinvest the proceeds into another agricultural property.
• Section 54D provides a similar exemption for gains from selling industrial land or buildings, allowing you to reduce your tax liability by reinvesting the proceeds in another industrial property.

Tips to reduce Short-Term Capital Gains Tax

While minimizing taxes is desirable, it shouldn’t be the sole factor driving your mutual fund investment decisions. A robust investment strategy that aligns with your financial objectives and risk tolerance is paramount. However, incorporating tax-efficient strategies can enhance your overall returns.

• Lower Tax Rates: Holding mutual fund units for longer, typically over a year, can significantly reduce your tax burden. Long-term capital gains (LTCGs) on equity funds are taxed lower than short-term capital gains (STCGs).
• Tax Benefits: By investing in equity funds for the long term, you can potentially benefit from tax exemptions or concessional tax rates, depending on your specific circumstances.

• Equity-Linked Saving Schemes (ELSS): Consider allocating a portion of your portfolio to ELSS funds. These funds offer a tax deduction on your investment amount under Section 80C of the Income Tax Act. This can reduce your taxable income and provide tax savings benefits.
• Diversification: Investing in ELSS funds can diversify your portfolio and offer better risk-adjusted returns than traditional tax-saving instruments.

Conclusion

Investors must understand short-term capital gains (STCG) and the associated tax implications. The recent increase in the STCG tax rate on specified financial assets highlights the importance of tax planning in investment decisions. By strategically managing asset holding periods and exploring tax-efficient investment options, investors can potentially minimize their tax liabilities and maximize their overall returns.