Updated on: Mar 28th, 2024
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8 min read
Any profit or gain that arises from the sale of shares is treated as Capital gains under the Income Tax Act. Capital gains are further classified as short-term or long-term based on their holding period. Gains from equity shares listed on a recognised stock exchange having a holding period of less than 12 months are considered short-term capital gains. Short-term capital gains (STCG) from shares are classified into two parts:
Short-term capital gain under Section 111A is taxed at a concessional rate of 15% with applicable cess.
Section 111A is applicable in the case of STCG on the purchase or sale of:
Exception: Transactions undertaken on an International Financial Service Center (IFSC) would be taxable at the concessional rate of 15% even though STT is not leviable.
If you are an Indian resident as per income tax and your total income after all the deductions is lower than the basic exemption limit (i.e. basic exemption limit not exhausted) then you are entitled to set off your short-term capital gains and long-term capital gains, against the shortfall in your basic exemption limit and only the balance amount will be taxed at 15%.
Note: Non-residents, would not be allowed to claim the exemption limit and shall be required to pay a tax of 15% on such STCG under section 111A.
Illustration 1: Ajay has a taxable salary income of only Rs 1 lakh and a short-term capital gain on the sale of equity shares of Rs 4 lakh. He also has Rs 50,000 as Income from Other Sources. Calculate the STCG Tax applicable.
Salary Income | Rs 1 lakhs |
STCG | Rs 4 lakhs |
Income from Other Sources | Rs 0.5 lakhs |
Total income | Rs 5.5 lakhs |
You have to add income from other sources of Rs 50,000 to the total taxable salary thereby making it Rs 1.5 Lakh. As there is a shortfall in the absorption of the basic income tax exemption limit of Ajay by Rs 1 lakh, short-term capital gain on the sale of equity can be adjusted to the extent of Rs 1 lakh.
Tax will be applicable on a short-term capital gain of Rs 3 lakh (Rs 4 lakh – Rs 1 Lakh) at a flat rate of 15%.
Suppose he was a non-resident, then he would not be allowed to claim the exemption limit for such STCG and shall be required to pay a tax of 15% on full value of the STCG.
Illustration 2: Mr. A (resident and 59 years old) earns a monthly pension of INR 5,000. He purchased shares of ABC Ltd. in January 2024 and sold the same in March 2024 (sold on NSE and STT levied). Such a sale gave rise to an STCG of INR 1.5 lacs. Apart from pension income and gain on the sale of shares, he has also made an STCG on property sale amounting to INR 1.3 lac. What is his tax liability for the year 2023-24?
Mr. A has these three incomes:
STCG referred to in 111A- INR 1.5 lacs
Other STCG (sale of the property)- INR 1.3 lac
pension income- INR 60,000
The income calculation and taxes thereon shall be calculated as follows,
Points to be noted-
Income tax law does not allow any deduction under sections 80C to 80U from the short-term capital gains referred to in section 111A. However, the investor can claim such deduction on short-term capital gains other than those covered under section 111A.
Example: Mr A(resident and 59 years old) purchased shares of ABC Ltd. in January 2020 and sold the same in March 2020 (sold on NSE and STT is levied). Such a sale gave rise to an STCG of INR 1.5 lacs. Apart from STCG, he does not have any other income. He has invested INR 1.5 lacs in the Public Provident Fund and wants to claim a deduction of such amount under section 80C. Can he do so?
In the given case, Mr A cannot claim such a deduction under 80C against the STCG as it is a gain referred to in section 111A. Therefore, his taxable income will be INR 1.5 lacs which can be adjusted against the basic exemption limit.
When an individual sells listed equity shares or mutual funds that they have held for up to 12 months at a loss, it is considered a Short-Term Capital Loss (STCL). The Indian Income Tax rules allow taxpayers to set off STCL from one capital asset against Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) from another capital asset. This means that if an individual has incurred an STCL from the sale of one capital asset, they can use it to offset gains from the sale of another capital asset within the same financial year.
In addition, a taxpayer can carry forward any remaining STCL for up to 8 future years and use it to set off against future STCG and LTCG only.
Capital gains from the sale of shares are categorized as short-term or long-term based on their holding period. Short-term capital gains are further divided into two types under Section 111A. Tax rate for short-term gains is 15% with applicable cess. Residents can set off STCG against the basic exemption limit. No deductions allowed under sections 80C-80U from STCG under Section 111A. Losses can be carried forward for up to 8 years for set off. Examples for applicability of different tax rates on short-term capital gains.