Short-Term Capital Gains (STCG) on Shares

Investment in equities, commonly known as shares, has become increasingly popular in recent years. As of January 2025, the number of Demat accounts reached an impressive 18.5 crore. Investors typically purchase equities to profit from these transactions. Shares can be sold at various intervals depending on the profits realised or other objectives set by the investors or traders. 

It's important to note that gains or losses on shares are classified as either short-term or long-term capital gains, depending on how long you hold the shares. In this blog, we will explain the structure of Short-Term Capital Gains, including what they are, the applicable tax rates, how to calculate them, and the differences between short-term and long-term capital gains.

What is Short Term Capital Gains (STCG) on Shares?

Any profit you make falls under short-term capital gains (STCG) when you buy and sell shares within a short period. Understanding how these gains are taxed can help you make better investment decisions and avoid surprises during tax season.

Short-term capital gains occur when you sell shares you've held for 12 months or less. Unlike long-term investments, these gains don't enjoy preferential tax treatment and are taxed at higher rates. Whether you're a seasoned trader or just starting your investment journey, knowing the ins and outs of STCG taxation is crucial for your financial planning.

The Securities and Exchange Board of India (SEBI) regulations define the holding period clearly, and the Income Tax Department has specific provisions for taxing these gains.

Tax Rate on Short-Term Capital Gain

The taxation of short-term capital gains on shares depends on several factors, including the type of shares and your total income. Here's what you need to know about the current tax rates:

Current STCG Tax Rates

For shares sold on recognised stock exchanges where Securities Transaction Tax (STT) is paid, short-term capital gains are taxed at 20% plus applicable surcharge and cess. This rate applies regardless of your income tax slab. The rate was revised from 15% to 20%, effective from 23rd July 2024. 

Special Considerations

• Equity Delivery Trading: When you buy shares and sell them within 12 months through delivery-based trading, the gains are subject to STCG tax at 20%.

• Intraday Trading: Profits from buying and selling shares on the same day are treated as business income, not capital gains. These are taxed according to your income tax slab rates.

• Unlisted Shares: For unlisted company shares, short-term capital gains are added to your total income and taxed according to your applicable income tax slab rates. However, any holding period of 24 months or below is considered as short term for unlisted shares.

Example Calculation

Let's say you bought 100 shares of Reliance Industries at ₹1,200 per share in December 2024 and sold them at ₹1,400 per share in May 2024.

• Purchase Value: 100 × ₹1,200 = ₹1,20,000

• Sale Value: 100 × ₹1,400 = ₹1,40,000

• Short-term Capital Gain: ₹1,40,000 - ₹1,20,000 = ₹20,000

• Tax on STCG: ₹20,000 × 20% = ₹4,000

How to Calculate STCG on Shares?

Calculating short-term capital gains might seem straightforward, but there are several components you need to consider for accurate computation. Here's a step-by-step guide:

Basic STCG Formula

Components Breakdown

• Sale Consideration: This is the amount you receive when selling your shares, minus any brokerage or transaction charges.

• Cost of Acquisition: The original purchase price of shares plus brokerage, STT, and other transaction costs incurred while buying.

• Cost of Improvement: For shares, this is typically nil as shares don't involve improvement costs like real estate.

• Cost of Transfer: Brokerage, STT, and other charges paid while selling the shares.

Detailed Calculation and Example

1. Example

You purchased 200 shares of HDFC Bank on 15th February 2024:

• Share price: ₹1,600 per share

• Brokerage: ₹50

• STT: ₹64

• Other charges: ₹20

You sold these shares on 10th Aug 2024:

• Share price: ₹1,750 per share

• Brokerage: ₹60

• STT: ₹70

• Other charges: ₹25

2. Calculation:

Cost of Acquisition:

• Share cost: 200 × ₹1,600 = ₹3,20,000

• Transaction costs: ₹50 + ₹64 + ₹20 = ₹134

• Total cost of acquisition: ₹3,20,134

Sale Consideration:

• Gross sale value: 200 × ₹1,750 = ₹3,50,000

• Less Transaction costs: ₹60 + ₹70 + ₹25 = ₹155

• Net sale consideration: ₹3,49,845

Short-term Capital Gain: ₹3,49,845 - ₹3,20,134 = ₹29,711

Tax Liability: ₹29,711 × 20% = ₹5,942

Multiple Transactions and FIFO Method

When you have multiple purchases of the same share at different prices, you need to use the First In, First Out (FIFO) method for calculating gains.

Example:

• January: Bought 100 shares at ₹500 each

• March: Bought 100 shares at ₹600 each

• May: Sold 150 shares at ₹700 each

For the 150 shares sold:

• First 100 shares: Cost ₹500 each (January purchase)

• Next 50 shares: Cost ₹600 each (March purchase)

Gain calculation:

• 100 shares: (₹700 - ₹500) × 100 = ₹20,000

• 50 shares: (₹700 - ₹600) × 50 = ₹5,000

• Total STCG: ₹25,000

Record Keeping Tips

To ensure accurate calculations, maintain detailed records of:

• Purchase and sale dates

• Number of shares transacted

• Transaction prices

• All associated costs (brokerage, STT, other charges)

• Contract notes from your broker

• Bank statements showing fund transfers

Filing STCG in Income Tax Return

Filing short-term capital gains in your income tax return requires attention to detail and proper documentation. Here's how you can ensure compliance:

Which ITR Form to Use for STCG on Shares?

ITR-2: Most individual investors use this form when they have capital gains from shares. This form is mandatory if you have capital gains exceeding the basic exemption limit.

ITR-3: If you're engaged in business activities along with your investments, you might need to use ITR-3.

Step-by-Step Filing Process

Step 1: Gather Documentation
Before you begin filing, collect all necessary documents:

• Contract notes for all buy and sell transactions

• Bank statements

• Dividend statements

• Annual information statement (AIS) from the income tax portal

• Form 16 from your employer

Step 2: Calculate Total STCG 

Sum up all your short-term capital gains from share transactions during the financial year. Remember to net off any short-term capital losses against gains.

Step 3: Fill the Capital Gains Schedule 

In ITR-2, you'll find the capital gains schedule where you need to report:

• Details of shares sold

• Purchase and sale dates

• Cost of acquisition and sale consideration

• Expenses incurred

• Net capital gains

Step 4: Report in the Main Form 

Transfer the total STCG amount to the main income computation section of your ITR.

Important Sections in ITR-2

Common Mistakes to Avoid

• Incorrect Holding Period Calculation: Ensure you're correctly identifying whether gains are short-term (≤12 months) or long-term (>12 months).

• Missing Transaction Costs: Don't forget to include brokerage, STT, and other transaction charges in your calculations.

• Not Setting Off Losses: You can set off short-term capital losses against short-term capital gains and even against long-term capital gains.

• Advance Tax Obligations: If your STCG liability exceeds ₹10,000, you're required to pay advance tax. Many investors overlook this requirement.

Documentation Requirements

Keep the following documents ready for verification:

• Original contract notes

• Bank statements showing share transactions

• Demat account statements

• TDS certificates (if any tax was deducted)

• Previous year's ITR if carrying forward losses

E-Verification

After filing your return, complete the e-verification process within 120 days using:

• Aadhaar OTP

• Net banking

• Digital signature certificate

• Bank account number verification

Short Term Capital Gain vs Long Term

Understanding the difference between short-term and long-term capital gains is crucial for tax planning and investment strategy. The distinction affects not only your tax liability but also your overall investment returns.

Key Differences Overview

Holding Period Calculation

The holding period is calculated from the date of purchase to the date of sale, excluding both dates. Here are some examples:

Example 1:

• Purchase date: 15th January 2024

• Sale date: 14th January 2025

• Holding period: 364 days (Short-term)

Example 2:

• Purchase date: 15th January 2024

• Sale date: 16th January 2025

• Holding period: 366 days (Long-term)

Tax Implications Comparison

Let's compare the tax impact with a practical example:

Assume you made a capital gain of ₹2,00,000 and fall in the 30% tax bracket:

Short-term Capital Gains Tax:

• Tax rate: 20% 

• Tax liability: ₹2,00,000 × 20 = ₹40,000

Long-term Capital Gains Tax:

• Exemption: First ₹1,25,000 is tax-free

• Taxable gain: ₹2,00,000 - ₹1,25,000 = ₹75,000

• Tax rate: 12.5%

• Tax liability: ₹75,000 × 12.5% = ₹9,375

Tax Saving: ₹40,000 - ₹9,375 = ₹30,625

Set-off and Carry Forward Rules

1. Short-term Capital Losses:

• Can be set off against short-term capital gains

• Can be set off against long-term capital gains

• Can be carried forward for 8 years if not fully utilised

2. Long-term Capital Losses:

• Can only be set off against long-term capital gains

• Cannot be set off against short-term capital gains

• Can be carried forward for 8 years

Top Tips to Keep in Mind

• Tax Harvesting: You might consider booking losses in short-term investments to offset gains and reduce tax liability.

• Timing of Sales: If you're close to completing 12 months of holding, waiting a few more days could significantly reduce your tax burden.

• Portfolio Balancing: Maintain a mix of short-term and long-term investments based on your financial goals and tax efficiency.

Conclusion

Understanding short-term capital gains taxation helps you make informed investment decisions and ensures compliance with tax regulations. Always maintain proper records, consider the timing of your transactions, and consult with a tax professional for complex situations. Remember that tax laws can change, so stay updated with the latest regulations from the Income Tax Department and SEBI guidelines.