Short-Term Capital Gains (STCG) occur when you sell capital assets within the specified holding period. Unlike long-term capital gains, STCG are generally taxed at higher rates and don't offer indexation benefits. Understanding STCG tax rates, calculation methods, and planning strategies is crucial for traders and investors to optimize their tax liability and maximize returns.
[IMAGE::Short-Term Capital Gains Tax Guide]
What are Short-Term Capital Gains?
Short-Term Capital Gains are profits earned from the sale of capital assets that have been held for a period less than or equal to the specified holding period. The holding period to qualify as short-term varies depending on the type of asset. STCG are typically taxed at higher rates compared to long-term capital gains, making them less tax-efficient for investors.
Holding Period for Short-Term Capital Assets
Assets are considered short-term if held for:
Listed Equity Shares & Equity-Oriented Mutual Funds: 12 months or less
Unlisted Shares: 24 months or less
Debt Mutual Funds: 36 months or less
Real Estate/Property: 24 months or less
Gold, Bonds, Other Assets: 36 months or less
STCG Tax Rates for FY 2025-26
The tax rates for short-term capital gains vary significantly based on the asset type:
Listed Equity Shares and Equity-Oriented Mutual Funds
STCG on listed equity shares and equity-oriented mutual funds:
Taxed at 15% flat rate (irrespective of income tax slab)
No surcharge applicable
Health and education cess @ 4% applies
This is a special rate under Section 111A
Unlisted Shares and Other Assets
STCG on unlisted shares and other capital assets:
Taxed as per normal income tax slab rates
Added to total income and taxed accordingly
Surcharge and cess apply as per income tax slab
No indexation benefit available
Debt Mutual Funds and Bonds
STCG on debt mutual funds and bonds (held for 36 months or less):
Taxed as per normal income tax slab rates
Added to total income
Surcharge and cess apply as per income tax slab
No indexation benefit available
How to Calculate Short-Term Capital Gains
The formula for calculating STCG is simpler than LTCG:
STCG = Sale Price - (Cost of Acquisition + Cost of Improvement + Transfer Expenses)
Important: Indexation benefit is NOT available for short-term capital gains. You use the actual cost of acquisition without any inflation adjustment.
Calculation Example
Example: You purchased equity shares for Rs. 1,00,000 and sold them after 6 months for Rs. 1,30,000:
Sale Price: Rs. 1,30,000
Less: Purchase Price: Rs. 1,00,000
Less: Brokerage/Expenses: Rs. 1,000
STCG: Rs. 29,000
Tax @ 15%: Rs. 4,350
STCG vs Business Income
It's important to distinguish between STCG and business income:
STCG: Occasional trading, investment intent, held as capital asset
Business Income: Regular trading, profit motive, held as stock-in-trade
Business income is taxed as per normal slab rates and allows business expenses deduction
STCG from equity shares is taxed at flat 15% under Section 111A
Exemptions and Deductions for STCG
Unlike LTCG, STCG have limited exemptions:
No Section 54 exemption: STCG from property sale cannot be exempted by purchasing another property
No Section 54EC benefit: Investment in specified bonds is not available for STCG
No indexation: Cost of acquisition cannot be indexed for inflation
Set-off against capital losses: STCG can be set off against both STCG and LTCG losses
Set-Off and Carry Forward of Capital Losses
Short-term capital losses can be utilized as follows:
Set-off against STCG: Short-term capital losses can be set off against short-term capital gains in the same year
Set-off against LTCG: Short-term capital losses can also be set off against long-term capital gains
Carry forward: Unabsorbed short-term capital losses can be carried forward for 8 assessment years
Carry forward condition: Losses can only be set off against capital gains (not other income)
Tax Planning Strategies for STCG
Hold for long-term: Convert STCG to LTCG by holding assets beyond the holding period
Offset with losses: Set off STCG against capital losses to reduce tax liability
Time your sales: Plan sales to utilize basic exemption limit and lower tax slabs
Consider tax slabs: For non-equity assets, STCG is added to income - plan to stay in lower tax brackets
Equity advantage: STCG from equity shares at 15% may be better than adding to income in higher tax brackets
Avoid frequent trading: Frequent buying and selling may be treated as business income
TDS on Short-Term Capital Gains
TDS may be applicable on STCG in certain cases:
Sale of property: Buyer must deduct TDS at 1% if consideration exceeds Rs. 50 lakh
Sale of unlisted shares: TDS at 10% if sale consideration exceeds Rs. 1 lakh
Mutual fund redemptions: No TDS on redemption of mutual funds
Stock market transactions: No TDS on sale of listed equity shares through stock exchange
Filing STCG in Income Tax Return
While filing ITR, you need to:
Report STCG in Schedule CG (Capital Gains)
Mention date of purchase and sale
Calculate actual cost (no indexation)
Set off capital losses (if any)
For equity shares, report under Section 111A
Pay advance tax if STCG tax liability exceeds Rs. 10,000
Key Differences: STCG vs LTCG
Tax Rate: STCG from equity taxed at 15%, LTCG above Rs. 1 lakh at 10%
Indexation: Not available for STCG, available for LTCG on non-equity assets
Exemptions: Limited exemptions for STCG, multiple exemptions available for LTCG
Holding Period: Shorter holding period for STCG, longer for LTCG
Tax Efficiency: LTCG generally more tax-efficient than STCG
Key Points to Remember
STCG on equity shares/equity funds is taxed at flat 15% under Section 111A
STCG on other assets is taxed as per normal income tax slab rates
Indexation benefit is NOT available for short-term capital gains
STCG can be set off against both short-term and long-term capital losses
Unabsorbed losses can be carried forward for 8 years
TDS may be applicable on sale of property and unlisted shares
Advance tax is required if STCG tax exceeds Rs. 10,000
Frequent trading may be treated as business income instead of capital gains
Conclusion
Short-term capital gains are generally less tax-efficient compared to long-term capital gains. However, understanding the tax implications, utilizing loss set-offs, and planning sales strategically can help minimize your tax liability. For equity investments, the 15% flat rate on STCG may sometimes be more favorable than adding gains to income in higher tax brackets. Consulting with a tax advisor can help you optimize your capital gains tax strategy.