What Is Short-Term Capital Gain?

Short-term capital gains (STCG) are the profits earned from selling an asset held for less than a year. These gains are frequently subject to higher tax rates than long-term capital gains due to their short holding period.

Short-Term Capital Gain – Short-Term Capital Gain Meaning

The term ‘short-term capital gain’ specifically denotes the profit made from selling assets like stocks, bonds, or property owned for less than one year. This gain is subject to tax, which varies based on the asset type and holding period. The definition emphasizes the temporary nature of the investment, differentiating it from long-term capital gains.

Short-term capital gains are crucial in financial planning and investment strategies. They occur when assets such as stocks, bonds, or real estate are sold after being held for a relatively short period (usually less than 12 months). For instance, selling stocks bought six months ago at a profit would result in a short-term capital gain, which is taxable at the investor’s ordinary income tax rate.

Short-Term Capital Gain Example

For instance, if an investor buys shares worth ₹50,000 and sells them at ₹70,000 within a year, the ₹20,000 profit is considered a short-term capital gain. This gain is subject to taxation according to the investor’s income tax slab.

Consider an investor who purchases 100 shares of a company at ₹500 each, totaling ₹50,000. Six months later, the share price rose to ₹700 per share. The investor decides to sell all shares, receiving ₹70,000. The profit of ₹20,000 (₹70,000 – ₹50,000) is classified as a short-term capital gain since the shares were held for less than a year. 

This gain will be taxed per the investor’s applicable income tax bracket, potentially adding to their tax liability for the year. This example demonstrates how short-term trades can lead to taxable gains, affecting an investor’s overall financial planning and tax strategy.

Difference Between Short Term And Long Term Capital Gain

The main distinction between short-term and long-term capital gains is that short-term gains are from assets held for less than a year, whereas long-term gains are from assets held for more than a year. 

How To Calculate Short-Term Capital Gain?

Calculating Short-Term Capital Gain (STCG) involves subtracting the purchase price and associated costs from the asset’s sale price. The formula is STCG = Sale Price – (Purchase Price + Cost of Improvement + Transfer Costs).

• Sale Price: The total amount received from selling the asset.
• Purchase Price: The initial amount paid for acquiring the asset.
• Cost of Improvement: Any expenses incurred in improving the asset during ownership.
• Transfer Costs: Expenses related to the sale or transfer of the asset, like brokerage or legal fees.

Suppose you bought shares for ₹50,000 and sold them for ₹70,000 within a year. If the cost of improvement was ₹5,000 and transfer costs were ₹2,000, the STCG calculation would be: STCG = ₹70,000 – (₹50,000 + ₹5,000 + ₹2,000) = ₹13,000. This amount is the short-term capital gain subject to taxation at applicable rates.

Short-Term Capital Gain Tax On Shares

Short-term capital gains tax on shares applies when shares are sold within a year of purchase. In India, STCG on shares is taxed at a flat rate of 15%, irrespective of the income tax slab of the investor.

When an investor sells shares held for less than a year, the gains are considered short-term and are taxed at 15%. This rate applies regardless of the investor’s income bracket, making it a distinct feature compared to other types of income taxation. For example, if an investor earns a short-term gain of ₹1,00,000 from share transactions, the tax payable would be ₹15,000 (15% of ₹1,00,000). 

Short-Term Capital Gain Tax On Mutual Funds

Short-term capital gain tax on mutual funds varies based on the type of fund and the period for which the units are held. Here are the tax rates:

• Equity Mutual Funds, Arbitrage Funds, and Other Funds (65%+ in equity): Short-term capital gains (STCG) for these funds, if held for 12 months or less, are taxed at 15%.

• Debt Mutual Funds, Floater Funds: For investments held for 36 months or less, STCG is taxed according to the investor’s income tax slab rate.

• Conservative Hybrid Funds and Other Funds (35% or less in equity): STCG for these funds is also taxed based on the investor’s income tax slab rate.

• Other Funds (more than 35% but less than 65% in equity) and Balanced Hybrid Funds (equity: 40%-60%, debt: 60%-40%): STCG for these funds falls under the investor’s income tax slab rate.

• Aggressive Hybrid Funds (equity: 65%-80%, debt: 35%-20%): STCG is taxed at a flat rate of 15%.

To understand the topic and get more information, please read the related stock market articles below.

What Is Short-Term Capital Gain? – Quick Summary

• Short-Term Capital Gain refers to profits from selling assets held for less than a year, taxed differently based on asset type and investor’s income.
• STCG is calculated by subtracting the acquisition cost from the sale price; specific formulas and rates apply based on asset category.  STCG = Sale Price – (Cost of Acquisition + Improvement Costs + Transfer Costs).
• The main difference between STCG and LTCG is that STCG applies to assets held for less than a year, while LTCG applies to assets held for longer, with different tax rates and exemptions.
• STCG Calculation Formula: STCG = Sale Price – (Cost of Acquisition + Improvement Costs + Transfer Costs).
• Short-Term Capital Gain Tax from selling shares within a year are taxed at a uniform rate of 15%, regardless of the investor’s tax bracket.
• Short-Term Capital Gain Tax from selling mutual fund units within their respective short-term periods are taxed at 15% for equity-oriented funds and according to the investor’s income tax slab for debt funds and certain hybrid funds.
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Short-Term Capital Gain – FAQs

What Is Short-Term Capital Gain?

Short-term capital gain (STCG) is the profit earned from selling an asset for less than a year. This gain is subject to taxation, and the rate depends on the type of asset and the investor’s income tax bracket.

How Do You Calculate Short-Term Capital Gains?

The formula for calculating STCG is STCG = Sale Price – (Cost of Acquisition + Improvement Costs + Transfer Costs). This calculation involves subtracting the cost of acquiring, improving, and transferring the asset from its sale price.

How Much Short-Term Capital Gain Is Tax-Free?

There is no tax-free threshold for short-term capital gains. All gains are subject to tax as per the applicable rates, which differ based on the asset type and the taxpayer’s income slab.

What Is the Difference Between LTCG and STCG?

The main difference between long-term capital gains (LTCG) and short-term capital gains (STCG) is the asset’s holding period. STCG applies to assets held for less than a year, while LTCG applies for longer ones. They are taxed at different rates and have different exemptions.

How Do You Save Tax on Short-Term Capital Gains?

Saving tax on STCG can involve investing in tax-saving instruments, offsetting gains with capital losses, or using exemptions and deductions available under the Income Tax Act. However, options to save tax on STCG are limited compared to LTCG.

Is Short-Term Capital Gain Exempt from ₹1 Lakh?

No, the ₹1 lakh exemption applies only to long-term capital gains from equity investments. Short-term capital gains do not have this exemption and are taxed from the first rupee of gain.

We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, commodity and hence we bring you the important topics and areas that you should know: