Understanding Short-Term Capital Gain on Shares
Capital gains can be realized while trading shares, either as long-term or short-term gains. Typically, a seller aims to achieve a short-term capital gain when selling shares at a higher price than their purchase price.
Short-term capital gain (STCG) arises when shares held for up to 12 months are sold at a profit. Conversely, gains from shares held for more than 12 months are considered long-term capital gains (LTCG). Notably, STCG is taxed at a higher rate than LTCG.
Categories of STCG on Shares
STCG tax rates on shares are classified into two categories:
1. STCG Under Section 111A
A 15% tax rate applies to STCG on shares falling under Section 111A, with additional surcharge and cess as applicable. Examples of gains covered under this section include:
- Sale of equity shares listed on a recognized stock exchange.
- Sale of equity-oriented mutual funds listed on a recognized stock exchange.
- Sale of units of a recognized business trust.
Example:
Mr. Alok sold units of his equity-oriented funds at the Bombay Stock Exchange after holding them for eight months. These gains fall under Section 111A, attracting a 15% tax rate plus any applicable surcharge and cess.
2. STCG Not Under Section 111A
STCG on shares not covered by Section 111A is taxed according to the individual’s income tax slab. Examples include:
Sale of equity shares not listed on a recognized stock exchange.
Example:
Mr. Subash, a 45 year old salaried employee with an annual income of Rs. 8,40,000, sold his debt funds after holding them for eight months. The STCG from these sales does not fall under Section 111A and is taxed according to his income tax slab.
Calculating STCG on Shares
Calculating STCG on shares is straightforward:
STCG=Sale Price−Purchase Price
Example:
If Mr Ganguly bought 100 shares of ABC Ltd. at Rs. 100 each and sold them at Rs. 120 each after six months:
Sale Price: Rs. 130 x 100 shares = Rs. 13,000
Purchase Price: Rs. 100 x 100 shares = Rs. 10,000
STCG: Rs. 13,000 – Rs. 10,000 = Rs. 3,000
Calculating STCG on Assets
To calculate STCG on shares, use the following formula:
STCG=Sale Value−(Cost of Acquisition+Expenses Incurred in Sale+Cost of Asset Improvement)
Note: The cost of asset improvement is not applicable to equity shares.
(i) Sale Value:
The sale value is the gross selling price of the asset. For equity shares:
Gross Selling Price=Sale Value−(Brokerage Charges+Securities Transaction Tax)
(ii) Cost of Asset Acquisition:
For shares purchased before 1st February 2018:
Compute the fair market value by multiplying the number of shares by their highest price as of 31st January 2018.
Compare this value with the actual sale price and choose the lower value.
Compare this resultant value with the actual purchase price and choose the higher amount. This is the cost of acquisition.
(iii) Expenses Incurred in Sale:
These include brokerage, registration, and other associated charges. For equity shares, Securities Transaction Tax (STT) levied during the sale is not deducted in STCG computation.
(iv) Other Considerations:
Holding Period: The period from the acquisition date to the day before the sale date.
Indexation: Adjusting prices for market inflation, not applicable for STCG on shares.
Conclusion
Investors must understand the computation of short-term capital gains and the associated tax liabilities to accurately assess potential profits from share trading. The purchase price, including brokerage charges, forms the basis for calculating the cost of asset acquisition.
For optimal tax planning and investment strategies, familiarize yourself with the provisions under the Income Tax Act, 1961, regarding STCG on shares.
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Also Read: Short-Term Capital Gain on Sale of Shares as per Section 111A of Income Tax
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