What is Short Term Capital Gain Tax?

• 16 April 2017 | 1193 Views | By Mint2Save

In our previous post about Long Term Capital Gain Tax, we have thoroughly explained about what capital gains and capital assets. In this article, we will explore about Short Term Capital Gain Tax.

Short term capital gain is Capital gain or profit that is earned by an individual in lieu of the sale or exchange of a short term capital asset. Usually short term capital assets are those which are held for for a duration of less than 36 months.

Short term capital gain is taxed at the same rate as your usual income. Suppose, Miss Riya purchased a house for Rs 15 lakhs and sold after a year or later for Rs 25 lakhs, the gain of Rs 10 lakh. In such a case a short term capital gain is Rs 5 lakh. The clock starts on ticking from the day after you obtain the asset up to and including the day you sell it.

The gains arise from the assets within three years of ownership in case of gold or property, etc., and 1 year of ownership, in the case of the equity stocks. For example, if you sell gold or real estate less than 3 years, then this gain would be short term capital gain not include under section 111A.  The tax on these gains will be calculated as per nominal tax rates. Similarly, in case of debts or bonds sold under 1 year.

Tax on Short Term Capital Gain:

Tax charged on short term capital gain is referred to as short term capital gain tax. From the above example, Miss Riya will have to pay a tax on her profit, i.e. Rs 10 lakh. Any expenses acquire to recover the asset or paid towards the asset is deducted before calculating the short term capital gain and its tax. So, if Miss Riya paid a brokerage of Rs 60,000, then her total capital gain becomes Rs 10.6 lakh and than tax will be computed on this.

Determination of tax rate on short-term capital gains is as follows:

• Short-term capital gains that are covered under section (111A).

• Short-term capital gains that are not covered under section (111A).

Short term capital gains covered under section 111A are:

1) Short term capital gains on sale of equity shares listed through a recognised stock exchange and which is chargeable to STT.

2) Short term capital gain on sale of units of equity oriented mutual fund sold through a recognised stock exchange.

3) Short term capital gain/ profit arising on sale of units of a business trust

4) Short term capital gain on units of equity oriented mutual fund or sale of equity shares, or units of a business trust in a recognised stock exchange located in any International Financial Services Centre and is to be payable in foreign currency even if transaction of sale is not chargeable to securities transaction tax.

Exemptions made to Short Term Capital Gains under Section 111A are:

1) Short term capital gains arising on sale of non equity oriented mutual funds.

2) Short term capital gains on sale of immovable property such as silver, gold, etc.

3) Short term capital gains arising on sale of equity shares in a unrecognised stock exchange.

4) Short term capital gains on sale of debentures, bonds and government securities.

5) Short term capital gain arising due to sale of any shares separately from equity shares.

Calculation of Short Term Capital Gain:

As per the Income Tax Department, following table can be used to calculate short term capital gains. Over this calculation, tax can be simply calculated.

Tax Rates of STCG:

The current rate of tax that STCG covered under section 111A is charged @15% plus surcharge and cess as applicable and now the government is planning to increase to 20%. The tax applicable on STCG is fixed by the government and comes under section 111A of the Income Tax Act. Normal STCG and charged to taxes determined on the basis of the total taxable income of the individual. For example, you buy shares of a certain company for ₹ 200,000 and sold them after 10 months for ₹ 250,000. As you sold the shares within a year so this gain will arise as a short-term capital gain under section 111A. Thus, in such a case the short term gain is ₹ 50,000 i.e. ₹ 250,000 minus ₹ 200,000, and the short-term capital gain tax arise as  ₹ 7,500 (15% of ₹ 50,000).

All transactions related to property attract short term capital gains tax and provided property transfer happens within 3 years of purchase. By selling inherited property is also bound to attract Short term capital gains and has to pay the tax on it. However, this tax has repayment concessions which do cover any additional cost incurred on fixing a property.

Capital Gains Tax Exemption

A lot financial websites tend to market capital gains exemption via investing into some government specified bonds or further purchasing another property.

The recommended bonds for capital gains allowance are low yielding ones and lock in money for a long period of time. In the case of the latter, the property bought should be of the same amount at which the previous property has been sold. But, not all short term and long term capital gains are related to sale of property and is a very critical point to observe.

If not, then tax is charged n the remaining amount.

As per expert tax consultants, it is however recommended that tax should be considered prior to realisation of such gains.