What is short-term capital gains tax (STCG)?

Short-term capital gains tax (STCG) is the tax levied on the profits earned from the sale of assets that have been held for a short period. In India, this period varies depending on the type of asset. Let’s dive deeper into what STCG is, how it works, and how it impacts your investments.

1. What Is Short-Term Capital Gains (STCG)?

Short-term capital gains refer to the profit made from selling an asset, such as stocks, bonds, mutual funds, or real estate, before holding it for the prescribed minimum holding period. In India, this period is different for various types of assets:

• For equity shares and equity mutual funds: Less than 1 year.
• For real estate (property): Less than 2 years.
• For debt mutual funds and bonds: Less than 3 years.

If you sell any asset before the specified period, the profit from that sale is considered short-term capital gain and will be taxed at a certain rate depending on the type of asset.

2. STCG Tax Rates in India

In India, short-term capital gains are taxed differently depending on the type of asset:

• For **equity shares** and **equity mutual funds**: The tax rate is 15% on the profit made from the sale of these assets if the holding period is less than 1 year. This tax rate is fixed and applies to both residents and non-residents.
• For **debt mutual funds**: The tax is charged according to your income tax slab (i.e., based on your overall income). Debt mutual funds are treated as short-term if held for less than 3 years.
• For **real estate (property)**: Short-term capital gains are taxed according to the applicable income tax slab rate if the property is sold within 2 years of purchase.

The 15% tax on equity-related assets is considered favorable and is designed to encourage trading in the stock market, whereas the tax on other assets like real estate and debt instruments follows the general tax structure based on income.

3. How Is STCG Calculated?

To calculate short-term capital gains, you need to subtract the purchase price of the asset (including any transaction costs) from the sale price. The difference is your capital gain. If the asset was sold within the specified short-term period, the gain is considered short-term capital gain and taxed accordingly.

For example:

• You bought 100 shares of a company at ₹500 each, totaling ₹50,000.
• After 8 months, you sold the shares for ₹600 each, totaling ₹60,000.
• Your short-term capital gain is ₹60,000 (sale) - ₹50,000 (purchase) = ₹10,000.

Since the holding period is less than 1 year, the gain is a short-term capital gain, and you will be taxed at 15% of ₹10,000, which is ₹1,500.

4. Exemptions and Deductions

In India, there are limited exemptions for short-term capital gains tax. For example:

• If you sell shares or equity mutual funds, the 15% tax is applied only on gains above ₹1 lakh in a financial year. If your STCG is below ₹1 lakh, it is tax-free.
• For **real estate**, you may be able to claim deductions under Section 80C for certain expenses related to the property.

However, there are no significant exemptions for short-term capital gains on other assets, such as bonds or debt mutual funds. In these cases, the gain is taxed at your regular income tax slab rate.

5. Conclusion

In summary, short-term capital gains (STCG) tax applies to the profits made from assets that are held for a short period. The tax rates are relatively low for equity-related assets at 15%, while other assets like real estate or debt mutual funds are taxed according to your income tax slab. It’s important to understand these tax implications while making investment decisions to maximize your returns and manage your tax liabilities effectively.