People invest capital for a certain period of time with the probability of earning profit. This period can be short term or long term, depending on the holding tenure. Land, for example, is a long term asset, typically held for many years before sale. However, shares bought and sold in under a year is a short term asset.
Taxes on the gains accrued from these transactions are also classified as long term capital gains (on transactions held for a longer duration) and short term capital gains (on transactions held for a shorter duration).
This article explores the meaning of short term capital gains on shares, its components calculation, and its denotation.
This article covers:
Short term capital gain tax on shares
A share is a unit of a company’s capital. You can buy these shares as a part of the company’s IPO or afterwards in the open market. If you then sell these shares within 12 mth of purchase at a profit, you attract a short term capital gains tax at the rate of 15%.
Components of short term capital gain tax on shares
Short term capital gain tax on shares is governed by Section 111A of the Income Tax Act. As per the Section 111A of the Income Tax Act, short term capital gain tax on shares is attracted when the following conditions are fulfilled.
Gains from shares, both equity and preference, of companies that are listed on stock exchanges such as BSE or NSE
Usually a company issues either preference shares or equity shares. The equity shares are paid at the end, in the list of expenses. Those shares which are not equity shares are preference shares, they are preferred over equity. Short term capital gains tax applies to both types of shares. Usually, the companies which go public, require to be listed on the stock exchange.
Thus, the shareholders of those companies which are listed on either National Stock Exchange or Bombay Stock Exchange, have gained a profit from selling those shares within a year of holding, they are required to pay tax.
Equity oriented mutual funds
A mutual fund is a pool of money invested in multiple securities such as bonds, shares, debentures, and so on. An equity-oriented mutual fund, for example, is a mutual fund where 65% of the portfolio consists of equity shares. The sale of such mutual funds within a year and the profit earned on such sales attract tax under the short term capital gain tax on shares.
In the case of shares that are not listed, the gain is considered short term if they are held for less than two years.
Calculation of short term capital gain tax on shares
The method for calculating short term capital gain tax on shares is as follows:
STCG = Final value of sale of an asset – (Original value of the asset bought + expenses incurred in the process of transfer/sale value). A tax rate of 15% is applicable on short term capital gains on shares.
Consider the following additional points relating to short term capital gains tax on shares.
Example 1: If a person does not fall under the basic exemption limit of Income Tax (Rs 2.5 lakh, in most cases), they are entitled to set off short term capital gain. This set-off can be used to offset the amount of the basic exemption limit shortfall.
Example 2: If the total income exceeds Rs 2.5 lakh, the tax is liable to be paid. For example, assume, Mr. ABC, a 35 year old Indian investor, is a salaried individual employed at XYZ Ltd and has an annual salary of Rs 6,00,000.
In Jan 2021, he invested in 1,000 equity shares. Mr. ABC paid Rs 10 on every share he bought. He decided to sell the shares off in Jul 2021, after 7 mth, at the rate of Rs 15 per share (at Rs 1 brokerage charge per share).
The broker sold all of the shares on the Bombay Stock Exchange, and STT costs were imposed. The tax liability would be the salary of Mr. ABC plus the short term capital gain tax. Here the short term capital gain is:
1,000 equity shares x Rs 15 per share = Rs 15,000 – (10,000 +1,000) = Rs 4,000
Thus, 4,000 is the short term capital gain, so 15% of Rs 4,000 and the tax liability on the salary of income will be the total tax liability of Mr. XYZ.
The denotation of short term capital gain on shares
According to the Income Tax, capital can be short term and long term, depending on its tenure. Usually, short term capital assets are referred to those shares that are held for 12 mth or less. This short term capital gain on shares creates a liability of tax on the seller. There is also a provision of short term capital loss on shares, in case the shares are sold at a loss. In this scenario, the shareholder can set off the loss while computing their total tax liability.
Before investing in shares, a person should grasp the knowledge of all tax formalities. It is especially helpful in planning for taxation and balancing the return worth of an investment in line with the taxation aspects. While some short term investments might seem to give high returns, it’s only in line with short term capital gains tax can one know if they are really worth investing in.