Short-Term Capital Gains Tax Explained: Rates, Rules & Exemptions

When you invest in assets like stocks, bonds, real estate, or mutual funds, the value of those assets can increase. When you sell these assets for a profit, you need to pay a tax on the earnings, and this tax is known as capital gains tax. In particular, short-term capital gains tax (STCG) applies when you sell an asset that you have owned for a short time. Generally, if you hold an asset for less than a year (for stocks) or less than three years (for other assets like real estate), the tax you pay on any profit is classified as STCG. In this article, we will explore the short-term capital gains tax in detail, including how it works, how it’s calculated, and the tax rates you need to be aware of.

Open Demat account -  Start investing with a quick setup

What is Short-Term Capital Gains Tax?

Short-term capital gains tax is the tax that applies to the profit made from selling an asset that has been held for a short period of time. For stocks and equities, this period is typically one year or less. For real estate and other types of assets, this period is usually three years or less.

For example, if you buy 100 shares of a company for ₹1,000 each and sell them for ₹1,200 each after six months, the profit of ₹200 per share is considered a short-term capital gain. The tax you pay on that profit is called STCG tax.

The rate at which you are taxed depends on the type of asset and the current tax laws. Generally, STCG tax is taxed at a higher rate than long-term capital gains tax because the government encourages long-term investment.

New Short-Term Capital Gains Tax Rates

The STCG tax rates can change each year with the government’s budget announcements. For the financial year 2023-2024, the tax rates for short-term capital gains are as follows:

• Equity Shares: The tax rate on STCG for equity shares is 15% if sold within one year.
• Real Estate: For real estate assets, the STCG rate may range from 20-30%, depending on the type of property and holding period.
• Other Assets (like Bonds, Gold): Other capital assets like bonds and gold may have different tax rates, but typically fall within the range of 15%-30%.

For example, if you sell stocks for a profit of ₹5,000 and the STCG tax rate is 15%, your tax will be:

Tax = 15% of ₹5,000 = ₹750

This is the STCG tax that you owe for the profit made from the sale.

Different Types of Capital Assets

Capital assets refer to the items you purchase and later sell for a profit, and which are subject to capital gains tax when sold. Some of the most common types of capital assets include:

1. Equity (Stocks):
   Stocks are shares of companies that you can buy and sell. When the price of these shares increases, you make a profit by selling them. This profit is subject to STCG tax if the shares are sold within a year.
2. Real Estate (Land, Houses, Commercial Properties):
   This includes property such as land, houses, and buildings. Selling these properties for a profit within a short period (less than three years) is subject to STCG tax.
3. Bonds:
   Bonds are debt securities issued by companies or the government. If you sell a bond before it matures and make a profit, you are required to pay STCG tax.
4. Gold and Precious Metals:
   Gold, silver, and other precious metals can be bought and sold as investments. Selling these metals for a profit is subject to STCG tax if the holding period is short.
5. Mutual Funds:
   When you invest in mutual funds, you are buying a collection of stocks and other securities. If you sell the units of the mutual fund for a profit, STCG tax will apply.

Each type of capital asset is taxed differently based on how long it is held, and STCG tax is applied to assets sold within the short-term holding period.

Capital Gains Account Scheme

The Capital Gains Account Scheme (CGAS) is an important option for investors who have made a profit from selling property but have not yet used the profit to buy another property. Under this scheme, investors can deposit the capital gains (profit made from the sale of the property) into a special account to defer the tax payment. This option allows you to save on tax as long as you use the money to purchase a new property within a certain time period.

For example, if you sell a house for ₹10,00,000 and plan to buy another one, you can deposit the capital gain from the sale into this account. By doing this, you can delay paying the capital gains tax until you purchase the new property. This scheme is helpful when you need time to find another suitable investment.

How to Calculate Capital Gains

To calculate capital gains, you need to know the purchase price and the selling price of the asset. The formula for capital gains is:

Capital Gain = Selling Price - Purchase Price

For example:

• You bought a stock for ₹10,000 and sold it for ₹12,000.
• Your capital gain is ₹12,000 - ₹10,000 = ₹2,000.

Once you have the capital gain, you apply the STCG tax rate to calculate how much tax you need to pay. If the STCG tax rate is 15%, you will owe:

Tax = 15% of ₹2,000 = ₹300

This ₹300 is the STCG tax that you will pay on your profit.

How to Calculate Short-Term Capital Gains

The process of calculating STCG is simple. Here are the steps:

1. Find the purchase price: This is the price at which you bought the asset.
2. Find the selling price: This is the price at which you sold the asset.
3. Subtract the purchase price from the selling price to get the capital gain.
4. Apply the STCG tax rate: Multiply the capital gain by the appropriate tax rate for that asset.

For example:

• You purchased 100 shares for ₹5,000 and sold them for ₹6,500.
• Your capital gain is ₹6,500 - ₹5,000 = ₹1,500.
• If the STCG tax rate is 15%, then the tax payable will be ₹1,500 x 15% = ₹225.

So, the tax you owe for the short-term capital gain is ₹225

Short-Term Capital Gains Tax is a significant aspect of investing that every investor should understand. Whether you're investing in stocks, real estate, or any other asset, knowing how STCG tax works will help you manage your investments and tax liabilities better. With clear rules and exemptions, you can plan your investments accordingly and minimize your tax burden. Always stay updated on tax rates and policies to ensure that you're making the best financial decisions.