Short Term Capital Gains (STCG) is the profit you make when you sell an asset, such as stocks, real estate, or mutual funds, within a short period, typically less than one year. This gain is taxed at a higher rate than long-term capital gains (LTCG).
For example, if you buy a property for Rs. 10 lakh and sell it for Rs. 15 lakh within a year, your short-term capital gain is Rs. 5 lakh (Rs. 15 lakh – Rs. 10 lakh).
Recent Changes to Short Term Capital Gains Tax in India
In the Union Budget 2024, the STCG tax rate on certain assets, such as listed equities, has been increased from 15% to 20%. These changes are important for investors in mutual funds, and stocks.
How to Calculate Short Term Capital Gains
To calculate your short-term capital gains, subtract the purchase price from the selling price. Don’t forget to deduct any sale-related expenses (like brokerage fees).
STCG = Sale Price – Purchase Price – Sale Expenses
Why Should You Understand Short Term Capital Gains Tax?
- Impact on Returns: Knowing how STCG affects your profits helps you better assess your investment returns.
- Tax Implications: Since STCG is taxed at a higher rate, it affects how much you can keep from your gains.
- Informed Decisions: Knowing STCG can help you decide whether to sell an asset quickly or hold it longer to qualify for lower taxes.
- Financial Planning: Understanding STCG helps you plan for taxes and ensure you are prepared for any liabilities.
Changes to Short Term Capital Gains Tax in Union Budget 2024
Here are the key updates to short term capital gains tax in the 2024 budget:
- Tax Rate Increase: The STCG tax rate for listed equities has increased from 15% to 20%.
- Holding Period Change: To qualify as long-term, listed assets must now be held for more than one year, while non-listed assets must be held for over two years.
Current Tax Rules for Short Term Capital Gains
For Listed Assets:
- If you hold stocks or equity-oriented mutual funds for less than 12 months, any profit is considered short-term capital gains and taxed at 20%.
- If you hold them for more than 12 months, they are considered long-term capital gains.
For Unlisted Assets (like private company shares):
- If held for less than 2 years, the profit is short-term capital gains.
- If held for more than 2 years, it is long-term capital gains.
Short Term Capital Gains Tax Rates for Different Assets
| Type of Asset | STCG Tax Rate | Holding Period for STCG |
| Listed Equity Shares | 20% | 12 months or less |
| Equity-Oriented Mutual Funds | 20% | 12 months or less |
How to Calculate Short Term Capital Gains on Shares
To calculate STCG on shares, use this formula:
STCG = Sale Price – Purchase Price – Sale Expenses
For example, if you buy 100 shares of a company for Rs. 500 each and sell them for Rs. 600 each, your short-term capital gain would be:
- Sale Price = 100 × Rs. 600 = Rs. 60,000
- Purchase Price = 100 × Rs. 500 = Rs. 50,000
- STCG = Rs. 60,000 – Rs. 50,000 = Rs. 10,000
This STCG would be taxed at 20%.
Strategies to Reduce Short Term Capital Gains Tax
If you want to reduce your short term capital gains tax, here are some strategies you can follow:
- Offset Capital Losses: If you have any investments that are at a loss, you can sell them to offset your STCG.
- Hold Investments Longer: By holding an asset for over 12 months, you can qualify for long-term capital gains tax, which is taxed at a lower rate.
- Tax-Loss Harvesting: You can sell investments that are losing value to reduce your overall taxable gains.
- Choose Tax-Efficient Investments: Look for mutual funds or other investment options that are designed to minimize taxes over time.
Short Term Capital Gains Tax on Property
When you sell property, such as real estate, and make a profit within 24 months, that profit is considered short-term capital gains. The STCG is taxed as part of your income. To calculate STCG on property:
STCG = Sale Price – Purchase Price – Improvement Costs – Sale Expenses
If you sell within 24 months of purchasing the property, your gain will be taxed as STCG.
Exemptions on Short Term Capital Gains
There are a few exemptions available to reduce short term capital gains tax, particularly when selling specific types of property.
- Section 54: Exempts STCG from the sale of a residential house if you reinvest the profits into another residential property.
- Section 54B: Exempts STCG from the sale of agricultural land used for farming if the proceeds are reinvested in another agricultural property.
- Section 54D: Exempts STCG from selling industrial land or buildings if the profits are reinvested in another industrial property.
Capital Gains in Mutual Funds
Mutual funds can generate two types of income: capital gains and dividends.
- Capital Gains: If you sell your mutual fund units within 12 months, the profit is taxed as short-term capital gains (STCG). If you hold them for more than 12 months, the tax is lower, classified as long-term capital gains (LTCG).
- Dividends: These are earnings from stocks or bonds held by the mutual fund, which are paid out to you.
Example of Short Term Capital Gains Tax on Mutual Funds
If you purchase 200 units of a mutual fund at Rs. 110 each and sell them for Rs. 130 each after 6 months, here’s how to calculate your STCG:
- Sale Price = 200 × Rs. 130 = Rs. 26,000
- Purchase Price = 200 × Rs. 110 = Rs. 22,000
- STCG = Rs. 26,000 – Rs. 22,000 = Rs. 4,000
This STCG of Rs. 4,000 would be taxed at 20%.
Short-term capital gains tax is an important factor for investors to consider.
By understanding the tax rules and using strategies like holding investments longer or offsetting losses, you can minimize your tax liabilities and keep more of your profits.
Always stay updated with the latest tax laws, especially with changes like those announced in the Union Budget 2024.
Consulting a tax professional is a smart move to ensure you’re optimizing your investments and taxes.
