Short Term Capital Gain Tax on Shares (STCG on Shares)

Timing is everything in the stock market – buying low and selling high is the incantation of every investor. But what happens when you sell too soon? The gains fall under Short Term Capital Gains (STCG) and attract specific tax rates. While many investors focus on maximising their returns, they fail to account for the tax implications that can eat up their profits.

Whether you are a beginner or a professional, understanding short-term capital gain tax on shares, its exemptions, and its carry-forward rules can help you optimize your investment strategy. 

What are Capital Gains? 

According to the Income Tax Act, any profit or gain resulting from the selling of assets is considered a capital gain. Depending on how long they are held, capital gains are further divided into Short-Term Capital Gains and Long-Term Capital Gains.

What are Short Term Capital Gains on Shares?

Short term capital gains refers to any gains arising from the capital assets sold within a specified holding period. Here, the holding period for any gains to be defined as a Short-term varies on the basis of the types of asset.

"STCG on shares" refers to the Short-Term Capital Gains arising from the sale of equity shares listed on a recognized stock exchange within 12 months of acquisition. Furthermore, any gains arising from equity-oriented Mutual funds sold within duration of 12 months also come under the classification of ‘STCG on shares”. 

STCG Tax Rate on Shares

Under Section 111A of the Income Tax Act, 1961, short term capital gains (STCG) on listed equity shares, equity-oriented mutual funds, and units of business trusts (subject to Securities Transaction Tax (STT)) were previously taxed at a concessional rate of 15% plus applicable cess.

However, as per the Union Budget 2024-25, the STCG tax rate has been increased from 15% to 20% for certain financial assets if the transfer is made on or after 23rd July 2024. This means that any sale of equity shares or equity-oriented mutual funds within 12 months of acquisition will now attract a 20% tax rate instead of 15%.

With the help of a table, let us understand the tax rates under STCG in a simplified manner.

How to Calculate Tax on Short Term Capital Gain on Shares

Below we have a proforma that will help the taxpayers to calculate their Short Term Capital Gain on the shares that they sell.

Example to Calculate STCG on Shares

Let us consider that Raj purchased 100 shares of a company at Rs 1,000 per share. His total purchase cost amounted to Rs 1,00,000. Suppose he sells these 100 shares within the span of 12 months at Rs 2,000 each; his full value of consideration becomes Rs 2,00,000, and he also incurs brokerage fees of Rs 2,000.

So, let us understand how this capital gain will be taxed according to the amendments made in the Union Budget 2024-25.

Scenario 1 (Transfer before 23rd July 2024): Here, Rs 9,500 will be taxed at 15%. This means Rs 1,425 needs to be paid as tax if the transfer was made before 23rd July 2024. 

Scenario 2 (Transfer after 23rd July 2024): Here, Rs 9,500 will be taxed at 20%. This means Rs 1,900 needs to be paid as tax if the transfer was made before 23rd July 2024. 

Deductions and Exemptions for STCG on Shares

Deductions

Short Term Capital Gains which are taxed under section 111A (i.e. listed stocks, Equity Mutual Funds, Business Trust Units) are not eligible for any deductions under section Sections 80C to 80U. These deductions include: investments in PPF, ELSS, life insurance, or medical expenses.

However, if your STCG comes from other assets (such as unlisted shares, real estate, or debt mutual funds), you can claim deductions under Sections 80C to 80U to reduce your taxable income.

Exemptions

Unlike the long-term capital gains having an exemption of Rs 1,25,000 per year, there is no such exemption available for short term capital gains arising from the sale of shares. However, if your total gross income including your STCG falls under the tax-free bracket, then it shall be exempt from tax.

Set Off and Carry Forward of Short-Term Capital Losses

Set Off of Short-Term Capital Losses

Set off of losses refers to adjusting a loss incurred from one source of income against income from another source in the same financial year.

A short-term capital losses incurred during a particular financial year can be set off against both long-term and short-term capital gains. However, long term capital losses cannot be used to set off short term capital gains. 

Carry Forward of Short Term Capital Losses

Any remaining short-term capital loss that cannot be set off in the same year can be carried forward for up to 8 assessment years from the assessment year in which the loss was incurred, to be offset against future capital gains. However, the set-off and carry-forward of a short-term capital loss will be applicable only if the income tax is filed before the due date.

Common Mistakes to Avoid While Filing an STCG

1. Incorrect holding period calculation: Investors sometimes miscalculate the holding period and unknowingly categorize gains as short or long-term.

2. Failing to report STCL: Some taxpayers do not report short-term capital losses on their tax returns because losses are not taxed. However, failing to report these losses makes them ineligible for any offsets against their overall gains. As a result, they end up paying more in taxes than necessary.

3. Misreporting intra-day trading gains: Intraday gains will be classified as speculative income and taxed differently. However, investors sometimes classify them as STCG and misreport them. 

Tips to Legally Reduce STCG Burden on Shares

1. Utilize the Basic Exemption Limit: If your total taxable income (including STCG) is under the tax-free slab, you can adjust the exemption limit against your STCG, reducing or eliminating the tax burden.

2. Set Off Against Capital Losses: STCL from shares can be set off against STCG or LTCG, and any unadjusted loss can be carried forward for 8 years.

3. Time Your Transactions Smartly: If you’re close to completing 12 months of holding, consider waiting until it qualifies as LTCG, which is taxed at 10% for gains above Rs 1 lakh instead of 20% (after July 23, 2024) for STCG.

4. Tax-Loss Harvesting: Sell loss-making stocks before the financial year ends to offset them against STCG or LTCG, reducing taxable gains. You can reinvest later if needed.

Conclusion

Tax on short term capital gain tax on shares can significantly impact an investor’s net returns due to the flat 20% tax rate which has increased after the Union Budget 2024-25. However, with strategic planning, investors can legally minimize their tax burden and optimize tax efficiency. Additionally, setting off and carrying forward your capital losses and staying informed about tax regulations ensures compliance while maximizing after-tax profits.

By adopting smart investment and tax planning strategies, investors can make the most of their stock market gains without unnecessary tax liabilities. Start your investment journey with Rupeezy today!

FAQs 

Q. How to save STCG on shares?

In order to save tax on STCG on shares, you can set off short-term capital losses, practice tax-loss harvesting, and consider holding shares for more than 12 months to qualify for lower long-term capital gains tax.

Q. How much is the STCG tax on shares? 

The STCG on listed shares under Section 111A is taxed at 20% which is in effect from July 23, 2024. However, previously it was charged at a 15% tax rate, plus applicable cess and surcharge.

Q. Do I pay tax when I sell shares?

Yes, you pay tax when you sell your shares. Short-term gains whose holding period is less than 12 months are taxed at 20%, while long-term gains whose holding period is more than 12 months, exceeding Rs 1,25,000 are taxed at 12.5%.

Q. How do you avoid short-term capital gains on stocks?

You can avoid short-term capital gains on stocks by holding shares for more than 12 months to qualify for long-term capital gains tax, by using set-off provisions, or by applying tax-loss harvesting strategies.

Q. How to calculate capital gain on shares?

Capital gain is calculated by deducting the purchase price as well as all the permissible expenses from the selling price of the shares.