When you sell shares and make a profit, it is called capital gains under the Income Tax Act. These capital gains can be either short-term or long-term, depending on how long you hold the shares. If you hold equity shares listed on a recognized stock exchange for 12 months or less, the profits are considered short-term capital gains (STCG). STCG on shares is divided into two categories:
- STCG under Section 111A
- STCG other than Section 111A
Budget 2024 Updates
The rules regarding the holding period for classifying assets as short term capital gain or long-term have changed. Now, only two holding periods will apply: 12 months and 24 months. The 36-month period has been removed now onwards. Therefore, shares held for less than 12 months are considered short-term.
Unlisted bonds and debentures will now be taxed at regular income tax rates, similar to debt mutual funds and market-linked debentures. This means they are treated as short-term, regardless of the holding period.
For listed equity shares, units of equity-oriented funds, and units of business trusts, the tax on short term capital gain has increased from 15% to 20%, starting from 23rd July 2024. However, other assets will still be taxed at normal income tax rates based on the individual’s tax slab.
STCG Tax Rate on Shares (Section 111A)
Before 23rd July 2024, Short term capital gain under Section 111A was taxed at a rate of 15%. However, after this date, the tax rate has been increased to 20%.
Short Term Capital Gains (STCG) under Section 111A
1. Assets Covered
Section 111A applies to short-term capital gains from the sale of:
- Equity shares
- Units of equity-oriented mutual funds
- Units of business trusts
2. Conditions for Concessional Tax Rate
For the concessional rate of 15% (or 20% after 23rd July 2024), the following conditions must be met:
- The shares must be sold through a recognized stock exchange.
- The transaction must be subject to Securities Transaction Tax (STT).
Exception: If the transaction takes place in an International Financial Service Centre (IFSC), the concessional rate will still apply, even if STT is not charged.
3. Adjustment of STCG against the Basic Exemption Limit
If you’re an Indian resident and your total income after deductions is less than the basic exemption limit, you can adjust your short term capital gain against the shortfall in this limit. The remaining Short term capital gain will be taxed under Section 111A.
Note: Non-residents cannot adjust short term capital gain against the basic exemption limit and must pay the full tax on their short term capital gain under Section 111A.
Example 1:
Ajay has a taxable salary of Rs 1 lakh, a short-term capital gain of Rs 4 lakh from share sales, and Rs 50,000 as income from other sources. His total income is Rs 5.5 lakh. Since his income is Rs 1 lakh below the basic exemption limit, Ajay can adjust Rs 1 lakh of his short term capital gain. He will then pay 15% tax on Rs 3 lakh (Rs 4 lakh – Rs 1 lakh).
If Ajay were a non-resident, he would have to pay tax on the full Rs 4 lakh of STCG at 15%.
Example 2:
Mr. A, aged 59, earns a pension of Rs 60,000 and makes a profit of Rs 1.60 lakh by selling shares, which creates an short term capital gain. He also has a gain of Rs 1.45 lakh from selling property. After adjusting his pension and property gains against the exemption limit, Mr. A will pay 15% tax + Ed. cess @ 4% on Rs 105,000 (the remaining STCG after deductions).
Important Points:
- If your total income, including STCG, is below Rs 2.5 lakh (or Rs 3 lakh under the new regime), there will be no tax liability.
- If your total income exceeds Rs 2.5 lakh, a flat 15% tax will apply on STCG.
- Section 87A rebate can reduce your tax liability to zero if your total income is less than Rs 5 lakh.
4. No Deductions on STCG (Section 80C-80U)
No tax deductions are allowed from STCG under Section 111A for investments under sections 80C to 80U. However, deductions can be claimed on other types of STCG not covered under Section 111A.
Example:
Mr. A sold shares for an STCG of Rs 1.5 lakh but cannot claim deductions under 80C for his Public Provident Fund (PPF) investment against this gain, as it falls under Section 111A.
5. Set-off and Carry Forward of Losses
Short-term capital losses (STCL) from shares held for less than 12 months can be used to offset other capital gains (STCG or LTCG). Additionally, you can carry forward STCL for up to 8 years to set off future capital gains.
How to Calculate STCG on Shares
To calculate STCG, follow this formula:
STCG = Full Sale Price – (Sale Expenses + Purchase Price)
Example:
Mr. A bought 1,000 shares for Rs 1,00,000 in June 2023 and sold them for Rs 1,40,000 in December 2023. After deducting Rs 1,000 as brokerage, his STCG is Rs 39,000. He will be taxed at 15% on this amount, resulting in a tax of Rs 5,850.
Instances of STCG Covered Under Section 111A
- Sale of equity shares through a recognized stock exchange (STT paid)
- Sale of equity-oriented mutual fund units (STT paid)
- Sale of business trust units (STT paid)
- Sale of shares, mutual fund units, or business trust units through IFSC, even without STT.
Examples of STCG under Section 111A
Ajay sold shares on BSE at a profit after holding them for 8 months. Since the shares were held for less than 12 months and STT was paid, this transaction falls under Section 111A, and the STCG will be taxed at 15% (20% after 23rd July 2024).
Puneet sold mutual fund units after holding them for 11 months. As the fund is equity-oriented, this sale is also covered under Section 111A, and the STCG will be taxed at 15%.
Ram sold debt fund units after holding them for 10 months. Since this is not an equity-oriented fund, the gains will be taxed at regular income tax rates, based on Ram’s total income.
