Short-Term Capital Gains Tax

India taxes its citizens on capital gains, which are created by selling an asset for more than was paid for it. Capital assets may include shares, mutual funds, or real estate, but each of these categories is taxed differently. Due to the difference in taxability, it becomes crucial to differentiate between short-term and long-term capital gains. This article provides clarity on the short-term capital gain (STCG) taxation in India, its calculation, who it affects, and how to manage it.

What Are Short-Term Capital Gains in India?

According to the Income Tax Act in India, short-term capital gains (STCG) are profits from selling a capital asset that you have held for a comparatively shorter period. By definition, a “short period” is different for different asset types:

• Equity Shares (listed on a recognized stock exchange in India), Equity-oriented Mutual Funds, and Units of Business Trusts: Any holding of 12 months or less is short-term.
• Immovable Property (land, building, or both) and Unlisted Shares: Any holding of 24 months or less is short-term.
• Other Capital Assets (e.g., debt mutual funds acquired before April 1, 2023, jewellery, debentures): Any holding of 36 months or less is short-term capital gains.
• Specified Mutual Funds (acquired on or after April 1, 2023, regardless of holding period): Gains shall always be STCG at slab rates.

What are Short Term Capital Assets?

As the capital gains are defined short term and long term based on the holding period, in the same manner, the capital assets are determined. The longer an asset is held, it becomes a long term asset for the holder. Assets transferred before or after 24th of July 2024 determines the type

Type of Asset	Transfer before 23rd of July 2024	Transfer Before or After 23rd of July 2024
Equity oriented assets Units of business trust Zero coupon bond	Held up to 12 months = STCG More than 12 months = LTCG	Held up to 12 months = STCG More than 12 months = LTCG
Unlisted shares Land or Building	Up to 24 months = STCG More than 24 months = LTCG	Up to 24 months = STCG More than 24 months = LTCG
Other assets	Up to 36 months = STCG More than 36 months = LTCG	Up to 24 months = STCG More than 24 months = LTCG

How Are Short-Term Capital Gains Taxed in India?

1. From Sale of Listed Equity Shares/Equity-Oriented Mutual Funds/Units of Business Trusts (STT paid):
   • Taxed under Section 111A.
   • For sales before July 23, 2024, the rate was 15%.
   • For sales on or after July 23, 2024, the rate is a flat 20%, plus applicable surcharge and a 4% Health and Education Cess. This rate applies regardless of your income slab.
2. From Sale of Other Assets (e.g., debt mutual funds, unlisted shares, immovable property, gold): The proceeds from such sales shall be treated as part of your income and taxed accordingly, following the applicable income tax slab rates along with surcharge and cess. In other words, if your income, along with the STCG, puts you in the top 30% bracket, then that will be taxed at that rate.

How to Compute Short-Term Capital Gains

Here’s how to find your STCG:

1. Cost of Acquisition: The original price paid for the asset and all expenses directly connected with its purchase (such as brokerage or registration fees).
2. Working out the Full Value of Consideration (Selling Price): This is the amount that is realized on sale less all expenses incurred on that sale.
3. Subtract Cost of Acquisition from Sale Price: STCG = Full Value of Consideration – Cost of Acquisition – Expenses on Transfer (A positive result is a capital gain; a negative result is a capital loss).
4. Check the Holding Period: Verify if the asset was held for the short-term period as defined earlier.

Short Term Capital Tax on Property

Taxpayers receive indexation benefit on sale of short term capital gains but no such benefit is available on the sale of property. If such property is held for less than 24 months, the tax rates are applicable as per the existing slabs.

Short Term Capital Gain Tax on Mutual Funds

On the trasnfer of mutual funds, the tax rates vary based on the date of the transfer. As per the existing laws, the assets transferred before 23rd of July 2024 have different rates than the ones transferred from or after 23rd of July 2024.

If transfer happens on or after 23rd July 2024, specified mutual funds are taxed as STCG (based on the slab rate) irrespective of the holding period. This rule applies to the units owned after 1st of April 2023, if such is not the case, then they will be taxed as short term and long term, based on the period. The specified mutual funds refer to the following

1. Of which more than 65% of assets have gone into debt and money market investments and
2. Of which 65% or more have gone into funds (mentioned in point 1)

Short Term Capital Gain Tax on Shares

If listed securities are held for less than 12 months, they are considered as short term capital assets therefore, short term capital gains apply. For unlisted equity shares are considered short term only if they are held for 24 months.

Why Is Short-Term Capital Gains Taxation Important in India?

Indian taxpayers must understand the STCG taxation, for this knowledge directly impacts their net returns. The STCG tax on most assets (except for listed equities and equity-oriented funds) is charged at slab rates, which may be considerably higher than long-term capital gains tax levels. This therefore becomes extremely relevant in determining their strategies of investment holding periods, and asset allocation.

Strategies to Manage Short-Term Capital Gains Taxes

1. Hold Investments Longer: Convert STCG to LTCG for potentially lower tax rates.
   • Listed Equity/Equity MFs (held >12 months): Taxed at 10% on gains above ₹1 Lakh (Section 112A). For sales on or after July 23, 2024, tax at 12.5% on gains above ₹1.25 Lakh.
   • Other Assets (e.g., immovable property, gold): For sales after July 23, 2024, the LTCG generally is 12.5% without indexation. For property acquired before July 23, 2024, you can choose between 20% with indexation or 12.5% without.
2. Tax-Loss Harvesting: Set off capital losses against gains. STCL can be set off against both STCG and LTCG. Unadjusted losses can be carried forward for eight years.
3. Utilize Tax-Advantaged Avenues (Limited): While India does not have direct capital gains deferral accounts like some countries, ELSS mutual funds provide a Section 80C tax deduction, although their capital gains are taxed as per LTCG rules.
4. Time Your Sales (Carefully): Where possible, consider realizing STCG (especially slab-rate STCG) in a financial year when your overall income is down, placing you in a reduced tax bracket.

Reporting Short-Term Capital Gains on Your Tax Return

Under the Income Tax Act, STCG shall be reported in your Income Tax Return (ITR).

• ITR Form: Typically, ITR-2 is filed by individuals and HUFs with capital gains (not having business/professional income). In the event of having business or professional income along with capital gains, the ITR-3 will typically apply.
• Schedule CG (Capital Gains): You must fill out Schedule CG under your ITR form, where you will give the particulars of each transaction: description of the asset, acquisition and sale dates, sale consideration, cost of acquisition, expenses on transfer, type of gain (short-term), and the relevant section.

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Understanding STCG taxes in India is of paramount importance for all investors. If you understand their implications for you and plan for these taxes, you can manage to retain a larger piece of profits from your investments. If you are a frequent trader in securities or have a complex portfolio of investments, consultation with a tax or financial expert is highly recommended to form tax-effective strategies and comply with Indian tax laws.