Dive into the intricacies of capital gains and learn all about the calculation of Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG). Explore tax rates associated with STCG and LTCG and understand their implications in Income Tax Returns (ITR).
Short-term Capital Gains (STCG) and Long Term Capital Gains (LTCG): Overview
STCG and LTCG are defined as two distinct categories of capital gains that arise from the sale of assets such as equities. STCG refers to gains from asset classes held for one year or less, while LTCG pertains to gains from asset classes held for more than one year.
The tax treatment of STCG and LTCG varies, with STCG being taxed at normal income tax rates and LTCG being taxed at preferential rates, ranging from 0% to 20% based on the asset. Understanding the tax implications of STCG and LTCG is essential for investors and individuals involved in asset transactions.
Filing ITR- 2 Form With Capital Gains
Filing the ITR-2 form is necessary for individuals with capital gains from the sale of assets. The form requires detailed reporting of capital gains, including STCG and LTCG, and provides a platform for individuals to claim exemptions under Section 54 of the Income Tax Act. The form is essential for accurate tax reporting and compliance with capital gain tax regulations.
STCG and LTCG Tax Rate on Shares
- For LTCG on equity shares and units of equity-oriented mutual funds, apply a 10% tax rate on gains exceeding Rs 1 lakh without indexation.
- For STCG on shares, the gain is taxed at a rate of 15% or income slab rate depending on the treatment of the income.
How to Calculate Capital Gains Tax on STCG?
- Determine if Securities Transaction Tax (STT) is applicable. If STT is not applicable, STCG is taxed at normal slab rates based on the individual’s income tax bracket
- If STT is applicable, the STCG is taxed at a rate of 15%.
How to Calculate Capital Gains Tax on LTCG?
- For equity shares and units of equity-oriented mutual funds, LTCG tax is 10% on gains exceeding Rs 1 lakh without indexation
- For other assets such as real estate and gold, the LTCG tax rate is 20% with indexation benefit.
| The tax treatment of STCG and LTCG on shares is influenced by various factors such as the duration of asset holding, tax rates, and prevailing tax regulations. Understanding the tax implications of STCG and LTCG is crucial for accurate tax planning and compliance with capital gain tax regulations. |
Difference Between STCG Vs LTCG
The difference between STCG and LTCG lies in the tax rates, holding period, risk investment, offset and special tax treatment. STCG is taxed at normal income tax rates and arises from assets held for one year or less, while LTCG is taxed at preferential rates and pertains to assets held for more than one year.
Understanding the differences between STCG and LTCG is essential for effective tax planning and investment decisions.
If Short term capital gains need to be calculated, then it can be done by reducing the value of the cost of Brokerage or dealer commission or the expenses involved in the sale of the asset or share, that is:
- The buying price of the share
- Brokerage prices on the sale of the asset or the selling of share
In simpler mathematical equation form, the relationship between short-term capital gains, brokerage prices and purchasing prices/ selling prices of the shares by the share owner is:
If Long term capital gains need to be calculated then it can be done by subtracting the values of two factors from the selling price of the shares or bonds or commodities or estate, by the owner, they are
- Brokerage costs and the associated expenses in the sale of assets or selling of share
- The indexed Buying price of the asset/share. (The benefit of indexation is just to balance off the inflation on the capital gain in the sale of a share or bond etc)
When the inflation or fluctuation in the currency rate is balanced well against the value of the asset or share, then the long-term capital gain can be easily calculated.
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When an individual pitches a redemptive retrieval of the funds invested in a share after its selling, the surplus amount incurred by them is called capital gains.
Holding period Returns are also used to compare the capital gains or incomes garnered after the sales of shares and stocks or other commodity and gives a fastidious summarisation of the overall performance of investment sought by the share or asset owner etc.
The holding period and its asset appreciation (income) can be calculated by two important components in the equation
- End of period value- An increased value of bond or commodity or share after the holding period (during which the owner keeps the share with himself), after which it is sold to another.
- Initial Value- The price at which the share was purchased
Short Term Capital gain STCG= Full sales value – (Brokerage expenses + Associate costs + purchase price of share/bond/ commodity)
For STCG and LTCG, the methods and rates of taxes levied on the profits or capital gains differ greatly from others. Section 111 (A) of the Income Tax Act or ITA, is mentioned a 15 percent tax on short-term capital gains. This includes equity stocks, bonds, shares, and other components of business trust, sold either on 1st October 2004 or after that date on a verified, recognized and legitimate stock exchange, and falling under the STT or the Securities Transaction Act.
Long Term Capital Gain LTCG= Full value consideration received – (cost of indexation+ indexed improvement cost (if any) + other associate or transfer cost (If any))
At first, the long-term capital gain that fell under Section 10 (38) under the Income Tax Filing Under Act (ITA): was not to be taxed. However, post-2019, it was determined in the ITA, that earlier the exempted capital gains which were long term were to be taxed if the gain through the sale of assets exceeded 1 lakh rupees (tax without indexing)
The STCG and LTCG capital gains tax on mutual fund schemes aims to invest in equity stocks on non-equity assets like equity shares, equity-oriented or equity-related instruments, which are taxable. The components of business trust need to be calculated using the aforementioned formula, by putting the values of all the added subdivisions in the equation. The tax which is applicable (without indexing) (except on the equity assets like commodities/ bonds/ shares/ real estate etc) on non-equity ones that reflect no ownership is unconditionally fixed at 10%.
However, for short-term capital gains, the tax levied on the amount of asset appreciation deducted from the purchase value is 15% (that is, five percent more Long-Term Capital Gains). Hence, it is deduced that having long-term Capital Gains is far more profitable and beneficial for equity owners than that short-term Capital Gains. capital gains. Investing in listed securities and equity-oriented mutual funds for long-term holdings also works out better as the capital gains from these sources are not subject to tax. Apart from the short-term capital gain tax, a surplus Cess Tax is also charged over the gained amount due to asset appreciation.
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Short Term Capital Gains (STCG) under Section 111A
Short-term capital gains (STCG) are taxable gains arising from the sale of a capital asset held for less than 12 months. In India, STCG on certain assets, such as equity shares and equity-oriented mutual funds, are taxed at a concessional rate of 15% under Section 111A of the Income Tax Act.
Instances of STCG Covered under Section 111A
The following instances of STCG are covered under Section 111A:
- Short-term capital gains arising from the sale of equity shares listed on a recognized stock exchange in India.
- Short-term capital gains arising from the sale of units of an equity-oriented mutual fund listed on a recognized stock exchange in India.
- Short-term capital gains arising from the sale of units of a business trust listed on a recognized stock exchange in India.
Example of STCG under Section 111A
Mr X sold 100 equity shares of Tata Motors Ltd. on the National Stock Exchange (NSE) for a profit of INR 10,000 after holding them for six months. Since the shares were sold within 12 months of purchase, the gain is considered a short-term capital gain. As the shares are listed on a recognized stock exchange, the STCG is covered under Section 111A and will be taxed at a rate of 15%.
Section 112A – Applicability
Section 112A of the Income Tax Act deals with the taxation of long-term capital gains (LTCG) on listed equity shares and equity-oriented mutual funds. LTCG is taxable at a rate of 10% on gains up to INR 1 crore and 15% on gains above INR 1 crore.
What is the Grandfathering Clause in Section 112A?
The grandfathering clause in Section 112A provides that LTCG on equity shares and equity-oriented mutual funds acquired on or before 31 January 2018 will be taxed at a rate of 10% without any limit.
Illustration for LTCG on Shares as Per Grandfathering Rule
An individual buys 100 shares of a company for ₹100 each before 1 February 2018. The market value of the shares increases to ₹200 each by 31 January 2023. The individual sells the shares on 1 February 2023.
The LTCG, in this case, will be ₹100 per share, i.e., ₹10000 in total. However, the taxpayer will only be liable to pay LTCG tax on ₹50 per share, i.e., ₹5000 in total, as the grandfathering clause covers the remaining ₹50 per share.
To summarise, STCG under Section 111A is taxed at a rate of 15%, while LTCG on equity shares is taxed at a rate of 10% on gains exceeding ₹1 lakh in a financial year. However, the grandfathering clause in Section 112A protects taxpayers from the LTCG tax on equity shares acquired before 1 February 2018 up to the cost of acquisition.
Conclusion:-
Through some of the obvious unbridled advantages of the STCG and LTCG holding of capital gains of the equity and non-equity funds, the owner can hold the assets for far longer than planned, if the profits seem to be hesitant during the time of holding assets which may have been pre-determined. One can always wait it out till the shares are at a profitable go-to rate, from where they can be sold, and also through the convenience of paying the lesser bock of tax levied on the long-term capital gains as compared to the STCG and LTCG holdings of the same.
FAQs on STCG and LTCG
How much is the STCG tax on shares?
STCG on shares is taxed at a rate of 15%. This is a flat rate, and there are no slabs or exemptions.
At what limit is STCG tax-free?
There is no limit for STCG to be tax-free. All STCG is taxable at a rate of 15%.
What is the limit of STCG on shares?
There is no limit on the amount of STCG that can be generated from the sale of shares. However, the tax rate on STCG is always 15%.
Is STCG taxable at 30%?
No, STCG is not taxable at 30%. STCG is always taxed at a rate of 15%.
How do I avoid STCG tax on shares?
There are a few ways to avoid STCG tax on shares: Hold the shares for more than 12 months. Shares held for more than 12 months are considered to be long-term capital assets (LTCG), and LTCG is taxed at a lower rate of 10%. Invest the STCG proceeds in certain specified assets within six months of the sale of the shares. If you invest the STCG proceeds in certain specified assets, such as capital gains bonds or eligible start-up companies, you can claim exemption from STCG tax. Offset STCG losses against STCG gains. If you have incurred STCG losses in the same financial year, you can offset them against STCG gains to reduce your taxable income.
What is the tax rate for 1 lakh of STCG?
The tax rate for STCG of ₹1 lakh is 15%. This means that you will have to pay ₹15,000 in STCG tax on ₹1 lakh of STCG.
What is the minimum holding period for STCG?
The minimum holding period for STCG is less than 12 months. Any shares held for less than 12 months are considered to be short-term capital assets (STCG).
How do I declare short-term capital gains in ITR?
To declare STCG in your ITR, you will need to fill in Schedule CG of your ITR. In Schedule CG, you will need to provide details of your STCG gains and losses, as well as the tax you have paid on your STCG gains.
How can I save capital gains tax?
There are a few ways to save capital gains tax: Hold your shares for more than 12 months. LTCG is taxed at a lower rate of 10% than STCG. Invest your STCG proceeds in certain specified assets within six months of the sale of the shares. This will allow you to claim an exemption from STCG tax. Offset STCG losses against STCG gains. This will reduce your taxable income. Take advantage of tax-saving schemes such as Section 80C. This will reduce your overall tax liability, including your capital gains tax liability.
Are short-term capital gains taxed under 111A or 112A?
STCG on shares is taxed under Section 111A of the Income Tax Act. Section 112A deals with the taxation of LTCG on equity shares.
How do you calculate tax on shares sold?
To calculate the tax on shares sold, you will need to know the following: The cost of acquisition of the shares. The selling price of the shares. The tax rate on STCG (15%). Once you have this information, you can use the following formula to calculate the tax on shares sold:
Tax on shares sold = (Selling price of shares - Cost of acquisition of shares) * Tax rate Is STCG on mutual funds taxable?
Yes, STCG on mutual fund units is taxable. STCG on mutual fund units is taxed at the same rate as STCG on shares, i.e., 15%.
Can STCG be set off against salary income?
Yes, STCG can be set off against salary income. However, you cannot set off STCG against LTCG.
Are there any exemptions or deductions available for STCG?
There are no specific exemptions or deductions available for Short-Term Capital Gains (STCG) in India. STCG is taxed at the applicable income tax slab rate or 15% under Section 111A for certain assets.
How do I report STCG on my tax return?
Short-Term Capital Gains (STCG) should be reported on the tax return by calculating the gains and including them in the appropriate section of the tax form.
Can losses from STCG be offset against other gains or income?
Yes, losses from Short-Term Capital Gains (STCG) can be offset against other gains or income in the same financial year to reduce the overall tax liability.
Are there any exemptions or deductions available for LTCG?
Long-Term Capital Gains (LTCG) on equity shares and equity-oriented mutual funds are taxed at a concessional rate of 10% for gains exceeding ₹1 lakh, and there are exemptions available under Section 112A for LTCG on equity shares acquired before 1 February 2018.
Can losses from LTCG be offset against other gains or income?
Yes, losses from Long-Term Capital Gains (LTCG) can be offset against other gains or income in the same financial year to reduce the overall tax liability.
