The Income Tax Act, 1961 governs various heads of income including capital gain. Capital gains arise from the transfer of capital assets which include shares and securities. These gains are classified into Short Term capital gains (STCG) and long-term capital gains (LTCG) based on the holding period of the asset. This difference is crucial because it affects the tax treatment, rates and available exemptions. Understanding Short Term Capital Gain on shares is essential in an era of volatile stock markets and increasing retail investor participation. With the Finance Act, 2024 introducing changes effective from July 23, 2024, taxpayers must stay updated to comply and optimize their liabilities. Let's break it down step by step.
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Definition of Short Term Capital Gains on Shares
Under Section 45 of Income Tax Act, 1961 any profit or gain arising from the transfer of a capital asset is chargeable to tax under the head "Capital Gains." A capital asset, as defined in Section 2(14), includes shares in a company, whether equity or preference, listed or unlisted, as well as securities like debentures and bonds.
STCG specifically applies when the capital asset is a "Short Term capital asset" as per Section 2(42A). This occurs if the asset is held for not more than the prescribed period before transfer. For shares, the focus is on the duration of ownership from acquisition to sale. The profit is computed as the difference between the sale consideration and the cost of acquisition, minus incidental expenses.
It is important to note that not all transfers qualify as capital gains, for instance, shares held as stock-in-trade by traders fall under business income, taxed differently. However, for investors, shares are typically capital assets, making STCG relevant. This classification ensures that Short Term speculative gains are taxed more stringently to discourage frequent trading and promote long-term investment.
Learn about more Income Tax Rules.
Holding Periods for Shares
The holding period is the pivotal factor distinguishing Short Term Capital Gain on shares from LTCG. Section 2(42A) outlines these thresholds, which have evolved with budgetary amendments.
For equity shares listed on a recognized stock exchange in India and equity-oriented mutual funds (where Securities Transaction Tax or STT is paid), the holding period for STCG is up to 12 months. If held beyond 12 months, it qualifies as LTCG.
For unlisted shares, the threshold is higher: up to 24 months constitutes STCG, and beyond that, LTCG. This applies similarly to debt-oriented mutual funds and other securities not covered under the 12-month rule.
Notably, changes introduced by the Finance Act, 2024, effective from July 23, 2024, standardized the holding period for most assets (excluding equity shares) to 24 months for LTCG eligibility, reducing it from 36 months for certain categories. However, for shares, the core rules remain which is 12 months for listed equity and 24 months for unlisted.
Legal practitioners should advise clients to meticulously document acquisition dates, as even a day's difference can alter tax implications. For example, shares bought on January 1, 2024, and sold on December 31, 2024, would be STCG for listed equity, but the same for unlisted would still be STCG if sold before January 1, 2026.
Read about Transfer of Shares in Companies Act, 2013.
Tax Rates Applicable to Short Term Capital Gain on Shares
Tax rates for Short Term Capital Gain on shares vary based on the type of shares and the status of a taxpayer, which is governed primarily by Section 111A for certain securities. For STCG on listed equity shares and equity-oriented mutual funds where STT has been paid, a special flat rate applies under Section 111A. Prior to July 23, 2024, this was 15% (plus applicable surcharge and cess). Post the 2024 amendments, it increased to 20% to align with fiscal policy aims of broadening the tax base.
For other shares, such as unlisted equity shares, preference shares, or debt securities, STCG is added to the taxpayer's total income and taxed at the applicable slab rates under the normal provisions of the Act. Slab rates for individuals range from 0% to 30% (plus surcharge and 4% health and education cess), depending on income levels. For the financial year 2024-25 (assessment year 2025-26), the new tax regime offers slabs like 5% for Rs. 3-7 lakh, up to 30% above Rs. 15 lakh, but taxpayers can opt for the old regime with deductions.
Non-resident Indians (NRIs) face similar treatment: 20% (post-2024) on STT-paid equity shares under Section 111A, and slab rates for others, without the benefit of basic exemption limits for such gains.
It's worth highlighting that no indexation benefit (adjustment for inflation) is available for STCG, unlike LTCG. This makes STCG taxation more burdensome, emphasizing the Act's intent to favor long-term holdings.
Calculation of Short Term Capital Gain on Shares
Computing Short Term Capital Gain on shares follows a straightforward formula as per Section 48 of Income Tax Act and without indexation. Following are the steps for calculating STGC on shares:
Start with the full value of consideration or sale price.
Deduct expenses wholly and exclusively incurred for the transfer (e.g., brokerage fees, legal costs).
From the net consideration, subtract the cost of acquisition (purchase price, including stamp duty).
Subtract any cost of improvement (though rare for shares).
The result is the STCG.
For illustration, consider Ravi, an individual taxpayer, who purchases 100 listed equity shares for Rs. 1,00,000 (Rs. 1,000 per share) on April 1, 2024. He sells them on March 15, 2025, for Rs. 1,50,000 (Rs. 1,500 per share), incurring Rs. 2,000 in brokerage. STCG = Rs. 1,50,000 - Rs. 2,000 - Rs. 1,00,000 = Rs. 48,000. Taxed at 20% (post-2024), his liability is Rs. 9,600 plus cess.
If the shares were unlisted, and Ravi's total income places him in the 30% slab, the tax would be Rs. 14,400 plus cess, added to his other income.
Practitioners should note that in case of bonus or rights shares, the cost of acquisition is nil or the amount paid, respectively, potentially inflating gains. Accurate record-keeping is vital to avoid disputes during assessments.
Exemptions and Deductions for Short Term Capital Gain on Shares
Exemptions for Short Term Capital Gain on shares are limited compared to LTCG. The Act provides no blanket exemptions like the erstwhile Section 10(38) for LTCG on equity shares (abolished in 2018). However, certain targeted reliefs exist, though not exclusively for shares.
Under Section 54B, gains from agricultural land can be exempted if reinvested in similar land, but this doesn't apply to shares. Section 54D offers exemption for industrial property gains reinvested in industrial assets—again, irrelevant for shares.
For shares specifically, no direct exemptions are available for STCG. However, deductions under Chapter VI-A (e.g., Section 80C for investments) can reduce overall taxable income, indirectly benefiting if STCG is taxed at slab rates.
Legal advisors recommend exploring set-off provisions before claiming exemptions, as STCG lacks the reinvestment options abundant for LTCG (e.g., Section 54EC for bonds or Section 54F for residential property).
Set-Off and Carry Forward of Losses
Section 70 and 71 allow set-off of Short Term capital losses (STCL) against STCG or LTCG in the same year. Unabsorbed STCL can be carried forward for up to 8 assessment years under Section 74, but only set off against future capital gains (not other income heads).
For instance, if a taxpayer incurs Rs. 20,000 STCL from one share sale and Rs. 50,000 STCG from another, the net taxable STCG is Rs. 30,000. Excess losses carry forward.
This mechanism provides relief in volatile markets, but losses must be reported in the ITR to be eligible for carry forward.
Reporting Requirements
Short Term Capital Gain on shares must be disclosed in the Income Tax Return (ITR) under Schedule CG (Capital Gains). Forms like ITR-2 or ITR-3 are typically used for individuals with capital gains. Details include scrip-wise breakdown, sale value, cost, and tax computation.
Failure to report invites scrutiny under Section 139 or penalties under Section 271. With e-filing and pre-filled data from stock exchanges, compliance is easier but demands accuracy.
Differences from Long-Term Capital Gains
While STCG and LTCG both stem from asset transfers, key differences include the following where these variances underscore the Act's policy to incentivize patient investing.:
Holding Period: As discussed, shorter for STCG.
Tax Rates: STCG at slab or 20% flat; LTCG at 12.5% (post-2024 for most assets) or 20% with indexation for pre-2024 property.
Indexation: Available for LTCG (except post-2024 financial assets), reducing effective tax.
Exemptions: More for LTCG (e.g., Section 54, 54F).
Summary
Short Term Capital Gain on shares, as governed by the Income Tax Act, 1961, arise from the transfer of shares held for up to 12 months (listed equity) or 24 months (unlisted shares), per Section 2(42A). Taxed under Section 45, STCG on STT-paid listed shares is charged at 20% (post-July 23, 2024, Finance Act amendment), while others follow slab rates. Calculated as sale price minus acquisition cost and expenses, STCG lacks indexation benefits. No specific exemptions apply, but losses can be set off or carried forward. Reporting in ITR’s Schedule CG is mandatory, ensuring compliance amidst evolving tax rules.
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Short Term Capital Gain on Shares: FAQs
Q1. How much Short Term capital gain is tax-free on shares?
No specific tax-free limit exists for STCG on shares; all gains are taxable, either at 20% (STT-paid listed shares) or slab rates (others).
Q2. How to avoid Short Term capital gains tax on sale of shares?
STCG tax can't be fully avoided, but you can offset losses from other share sales or carry forward losses for up to 8 years.
Q3. What is the tax rate on Short Term stock capital gains?
STCG on STT-paid listed shares is taxed at 20% (post-July 2024); unlisted shares are taxed at the individual’s slab rates.
Q4. How to calculate Short Term capital gain on shares with an example?
Subtract acquisition cost and expenses from sale price; e.g., sell 100 shares for ₹1,50,000 (bought at ₹1,00,000, ₹2,000 brokerage), STCG = ₹48,000.
