What is Short-term Capital Gains Tax (STCG)

Read more to understand STCG and how it will help you make informed decisions and optimise your tax planning strategy.
3 mins
02 January 2024

When it comes to investing in mutual funds and other financial instruments, it is essential to be aware of the tax implications, especially regarding capital gains. Capital gains are the profits earned from the sale or transfer of an asset, and they can be categorized as short-term or long-term based on the holding period of the asset.

In this article, we will delve into the world of Short-term Capital Gains Tax (STCG), exploring what it is, how it is calculated, and the exemptions available to investors. Whether you are a seasoned investor or a newcomer to the financial world, understanding STCG will help you make informed decisions, and optimise your tax planning strategy.

What are the gains of mutual funds?

Mutual funds yield returns in two primary forms: capital gains and dividends. Capital gains represent the profit realised by an individual upon selling or transferring mutual fund assets, whereas dividends denote the income received when the underlying assets generate interest or earnings.

For tax purposes, capital gains from mutual funds are taxed at the investors' hands, while dividends on mutual funds are subject to the Dividend Distribution Tax (DDT), which is levied on fund companies on behalf of investors.

Capital gains from different types of mutual funds are categorised into long-term and short-term gains based on the duration of fund holding. Funds held for less than 12 months (or 36 months in some cases) are subject to short-term capital gain tax.

Understanding the various types of mutual funds and the capital gains they generate is crucial for comprehending the tax implications associated with mutual fund investments.

What is short term capital gain (STCG) tax on mutual funds?

Capital assets can include stocks, mutual fund, real estate properties, bonds, gold, and other investments.

  • Short-term capital gains (STCG) refer to the profits earned from the sale or transfer of capital assets held for a short period,
  • For immovable assets like land, house or building this criterion is 24 months.
  • For equity-oriented assets like unit of equity oriented mutual funds and shares of companies listed on Indian stock exchanges, the holding period is considered short-term if the asset is held for less than 12 months.

Tax on short-term capital gains

The tax rate on short-term capital gains depends on the type of asset and the individual's income tax slab.

Short-term capital gain on equity and non-equity assets:

  • Equity-oriented assets such as equity mutual funds are subject to STCG tax at a flat rate of 15% if held for less than 12 months. For example, if an investor sells equity shares after holding them for 9 months and earns a profit of Rs. 50,000, the STCG tax of 15% would apply to this gain.
  • For non-equity assets like units of debt oriented mutual funds, bonds, and gold, the short-term capital gains tax is added to the individual's total income and taxed as per their applicable income tax slab.

Short-term capital gain on property:

  • Calculation: Short-term capital gain on property = Final sale price - cost of acquisition - improvement cost of assets – Transfer expenses.
  • For real estate properties, the short-term holding period is less than 24 months. If a property is sold within this period, any gains made from the sale would be classified as short-term capital gains. Hence, profit earned from selling such capital asset is categorized as an individual’s income and is liable to taxation according to Indian Income Tax Act, 1961.
  • Certain exemptions are available on short-term capital gains from the sale of specific assets, like residential house properties under Section 54, which states, if the gains from the sale of a residential house property are reinvested in another residential house property within the specified time, the investor can claim exemption on the capital gains.

Taxation of short-term capital gains on Hybrid funds:

  • Hybrid funds combine both debt and equity instruments, offering investors portfolio diversification. Tax rates for STCG on these funds vary based on holding periods and equity exposure. Funds with over 65% equity exposure are taxed like equity funds; otherwise, debt fund tax rules apply. It's essential for investors to know the equity exposure of chosen hybrid funds.

Taxation of short-term capital gains on SIP:

  • SIPs allow investors to regularly invest in mutual funds. Redemption of SIP units follows the first-in-first-out principle. For instance, if you redeem units after 13 months, units bought in the first month incur long-term capital gains, while those bought later incur STCG taxed at 15%, regardless of income tax slab. Additionally, equity mutual fund transactions incur Securities Transaction Tax (STT) at 0.001%.

How to calculate capital gains tax on shares?

Calculating short-term capital gain for a share is straightforward. Just subtract the original cost of the share from its final selling price. For example, consider the purchase of 100 shares of ABC Ltd. at Rs. 100 each, sold at Rs. 120 each after six months:
Sale Price = Rs. 110 x 100 shares = Rs. 11,000
Purchase Price = Rs. 100 x 100 shares = Rs. 10,000
Short-Term Capital Gain = Rs. 11,000 - Rs. 10,000 = Rs. 1,000

Conclusion

In conclusion, short-term capital gains tax (STCG) is an important aspect of taxation that investors must consider while making financial decisions. Understanding the holding period of assets and the applicable tax rates can help investors optimise their tax liabilities and plan their investments more efficiently.

Additionally, exploring the exemptions available on short-term capital gains can further enhance the tax efficiency of your investment portfolio. As with any tax-related matters, it is advisable to seek professional advice and stay updated with the latest tax regulations to make the most of your investments and achieve your financial goals effectively.

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Frequently Asked Questions

Does capital gain arising from equity shares qualify for short-term capital gains tax?

Yes, capital gains from the sale of equity shares held for less than one year qualify as short-term capital gains, and they are subject to tax at the applicable slab rates.

What are the types of short-term capital gains?

Short-term capital gains can arise from the sale of various assets, including stocks, mutual funds, real estate, etc., if the holding period is less than the specified duration for each asset class.

What is the tax rate for short-term Capital Gains?

Short-term capital gains from the sale of equity shares and equity-oriented mutual funds are taxed at a flat rate of 15%.

What is a basic exemption limit?

The basic exemption limit is the threshold income below which an individual is not liable to pay income tax. For the assessment year 2022-23, the basic exemption limit for individuals below 60 years is Rs. 2.5 lakh.

What are the provisions related to the adjustment of short-term capital gains against the basic exemption limit?

Short-term capital gains are added to the total income of an individual and are subject to tax at the applicable slab rates. They can be adjusted against the basic exemption limit.

How does the exemption limit different for residents below 60 years and residents above 60 years?

For residents below 60 years, the basic exemption limit is Rs. 2.5 lakh, while for residents above 60 years (senior citizens), the limit is Rs. 3 lakh.

Is there any deduction under section 80C to 80U on short-term Capital Gain?

No, deductions under sections 80C to 80U are not applicable to short-term capital gains. These deductions are primarily related to specific investments, expenses, and disabilities, and they apply to the computation of total income.

Which mutual fund returns are tax-free?

Returns from tax-saving mutual funds like ELSS (Equity Linked Savings Scheme) are tax-free up to a limit of Rs. 1.5 lakh under Section 80C of the Income Tax Act.

Is short term capital gain taxable?

Yes, short term capital gains (STCG) from mutual funds are taxable as per the individual's income tax slab rate.

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