Short Term Capital Gains: Tax Implications

• Posted By Amritesh
• On December 15th, 2020
• Comments: 9 responses

Understanding Capital Gain

Capital Gain is the appreciation in value of the asset over a period of time when compared to the purchase price. The Gain is realized only at the time when the asset is sold. Short Term Capital Gains is determined based on the holding period of the respective Asset.

Any Profit or Gain arising out of transfer of capital asset held in form of investment (including real estate or stocks) is known as Capital Gain. The gain or profit is charged to Capital Gains Tax in the year the sale of asset is done. Any property, whether movable or immovable when sold, capital gain tax is applicable. However, Income Tax Act exempts assets received in form of inheritance or will.

Income from Capital Gain is classified as:

“Short Term Capital Gains”;and

“Long Term Capital Gains”

Short Term Capital Asset may be classified as “an asset held for not more than 36 months”. Exception being Equity Shares, Equity Mutual Funds, Zero Coupon Bonds, etc as it is considered short term assets if held for less than 12 months.

However, Financial Year 2017-18 onwards, Period of Holding is reduced to 24 months for immovable assets. The tenure is also applicable for unlisted shares of a company.

Classification of Capital Asset

Capital asset may be defined as the following:

(a) Any kind of property held by an assesse, irrespective of it being connected with business or profession of the assesse.

(b) Any securities held by a FII with investment in securities in accordance with the regulations made under the SEBI Act, 1992.

However, the following items are excluded from the definition of “capital asset”:

i.) Any stock-in-trade (other than securities referred above), Consumable or Materials used in Business or Profession;

ii.) Personal Items, moveable items (including wearing apparel, furniture and gadgets) held for personal use by the taxpayer or any member of his family dependent on him, but excludes—

(a) Jewellery;

(b) Archaeological collections;

(c) Drawings;

(d) Paintings;

(e) Sculptures; or

(f) Any work of art.

“Jewellery” includes—

Ornaments made of gold, silver, platinum or any other precious metal/stones or any alloy containing one or more of such precious metals, in any form; including ones used in furniture, utensils and apparels.

iii.) Agricultural Land in India, not being a land situated; subject to fulfillment of certain conditions.

iv.) 6.5 per cent Gold Bonds,1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government;

v.) Special Bearer Bonds, 1991;

vi.) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetization Scheme, 2015.

Determination of Short Term Capital Assets

Any capital asset held by the taxpayer not exceeding 36 months immediately preceding the date of its transfer is to be considered as short-term capital asset.

However, with consideration to certain class of assets such as stocks (equity or preference) which are listed in a recognized stock exchange in India, units of equity based mutual funds, listed securities like Debentures and Government securities, Units of UTI and Zero Coupon Bonds, the period of holding to be considered is 12 months instead of 36 months

As amended by Finance Act, 2017, for the FY 2017-18, Period of holding to be considered as 24 months instead of 36 months in case of unlisted shares of a company or an immovable property being land or building or both.

Computation of Short Term Capital Gains

Tax Implication on Short Term Capital Gains

Short Term Capital Gain (STCG) covered under section 111A is charged to tax @ 15% (plus 4% Health & Education Cess is applicable).

Normal STCG, i.e., STCG on transaction not covered under section 111A is charged to tax at normal rate of tax which is determined on the basis of the total taxable income of the Assesse. This includes sale of shares other than Equity Shares and Debt Oriented Mutual Funds, qualifying as STCG. Sale of immovable property, Gold, Silver, Bonds, Debentures, Government Securities is also not covered under Section 111A.

Long Term Capital Gains: Tax Implications

Section 111A is applicable in case of STCG arising on transfer of equity shares or units of equity oriented mutual-funds (U/S 23D & 65% of the proceeds invested in Domestic Equity Shares) or units of business trust, which are transferred on or after 1-10-2004 through a recognized stock exchange and such transaction is liable to Securities Transaction Tax (STT).

If the above condition is fulfilled, then the STCG is termed as STCG covered under section 111A. Such gain is charged to tax at 15% (plus 4% Health & Education cess as applicable).

However, effective Assessment Year 2017-18, benefit of concessional tax rate of 15% shall be available even where STT is not paid, provided that transaction is undertaken on a recognized stock exchange located in any International Financial Service Centre, or consideration is paid or payable in foreign currency.

Adjustment of Short Term Capital Loss

Short Term Capital Losses may be set off against Long Term & Short Term Capital Gains. In case, one cannot set off the entire capital loss in the same year. It may be carried forward for 8 Assessment Years immediately following the Assessment Year in which it was recorded. Such carry forward is only possible if Income Tax Return is filed on or before the due date, as provided U/S 139 (1).

Adjustment of STCG against Basic Exemption Limit 

Only Resident Individual & Hindu Undivided Family (HUF) is allowed to adjust the basic exemption limit against Gains covered under section 111A. But such adjustment is possible only after making provision for other income.

Deductions Chapter VI of the Income Tax Act 

No deduction is allowed under Chapter VI of the Income Tax Act on STCG covered under Section 111A. However, deduction may be claimed on STCG not covered under Section 111A.

Wealthtech Speaks or any of its authors are not responsible for any errors or omissions, accuracy, completeness, timeliness or for the results obtained from the use of this information. This article is for informational purpose only. Readers are advised to research further to have detailed knowledge on the topic. It is very important to do your own analysis and consult your Financial Advisor before arriving at any conclusion.