Bought and sold shares within a year? Understand the tax implications of short-term capital gains

Three years after the pandemic-induced stock market crash of early 2020, the markets are looking up. People who made good returns during this period and booked profits are required to pay capital gains tax. The tax rate depends on how long the shares were held. In this article, we will discuss what is meant by capital gains, how to calculate it and the short-term capital gain tax on shares.

Capital gains on shares

When equity shares are sold at a higher price than they were bought, the profit is known as capital gains. For example, let’s assume that Ajay bought 100 shares of Reliance Industries at Rs 1500 per share. After a couple of years, he sold the shares for Rs 2500 per share. In the process, Ajay made a profit of Rs 1,00,000. The profit of Rs 1 lakh is considered to be Ajay’s capital gain. Its taxation depends on whether it is categorised as short- or long-term capital gain.

1) Short-term capital gains

When the equity shares or units of an equity-oriented mutual fund are sold within a year (less than 12 months) of purchase, it is known as Short-Term Capital Gain (STCG). Many people make STCG when selling shares received during Initial Public Offerings (IPOs) on the day of listing.

2) Long-term capital gains

When the equity shares are sold after 12 months of purchase, the capital gain is called a long-term capital gain.

Also Read: What You Need To Know About Taxes On Sale Of Shares?

Computation of short-term capital gain

Let us understand the calculation of short-term capital gains on shares with an example. Assume that shares of ABC Company Limited have been bought and sold as follows:

Note: In the case of shares, usually, there is no cost of improvement, so this factor will not apply. It may apply when calculating the short-term capital gain on an asset such as immovable property (land/building).

What is the short-term capital gains tax on shares?

Short-term capital gains (STCG) are taxed under Section 111A of the Income Tax Act. The STCG tax on shares is levied at the rate of 15%. For the application of STCG under Section 111A, the equity shares should be listed on a recognised stock exchange, and the Securities Transaction Tax (STT) should have been paid.

Apart from equity shares, the provisions of Section 111A for STCG are applicable for the following:

1. Sale of units of an equity-oriented mutual fund
2. Sale of units of a business trust

For example, let’s assume that Priya bought 500 shares of ABC Company at Rs 600 per share. After 10 months, she sold the shares at Rs 630 per share. In our example, Priya made a profit of Rs 15,000. Since the shares were sold within 12 months (or 10 months in this case), the capital gain will be categorised as short-term.

The short-term capital gains tax on the profit of Rs 15,000 @ 15% works out to Rs 2250. So, Priya will have to pay short-term capital gains tax at the time of Income Tax Return filing or ITR filing.

Also Read: Taxation On Mutual Funds And What You Should Know About It?

Actionable insights

Whenever you sell shares and make a profit, take the following steps:

1. Calculate the capital gain.
2. Based on the shares’ holding period, work out whether it is a short- or long-term capital gain.
3. If it is a short-term capital gain, calculate the STCG tax at the rate of 15%.
4. Pay the STCG tax at the time of ITR filing.