We have various short-term goals like purchasing gadgets, planning vacations, and renovating houses. While there are investments that can help us fulfil these goals, we can also incur a short-term capital gains tax on their redemption.
These taxes don’t just apply to virtual assets like gold mutual funds but also physical assets like gold ornaments, coins and more. But how are short-term capital gains taxed?
Let’s understand the nuances of short-term capital gains (STCG) tax.
Suppose you bought gold jewellery for an event. You faced a financial emergency a few months after the event, where you had to sell these ornaments back to the shopkeeper. Fortunately, the gold prices had increased more than the making charges; thus, you could sell it at a profit. The amount was transferred to your bank account.
Say there was a profit of ₹10,000 on selling the jewellery. This amount was added to your income as it was added to your bank account. Now, you will be charged a short-term capital gains tax on this profit.
These taxes will depend on your income tax slab. So, if your income tax bracket is above ₹12 Lakhs per annum, your income tax rate is 30%.
Therefore, you will be charged 30% of ₹10,000, i.e. ₹3000, as STCG tax on your profit. However, this tax rate will not apply to all types of securities.
Let’s look at the STCG tax rates for capital gains of different securities.
The profits on assets like immovable property, physical gold items and debt mutual funds are added to your income when redeemed. Therefore, they become part of your income and are taxed accordingly.
However, if you have invested in listed stocks for less than 12 months, an STCG tax rate of 15.60% will apply to your profit.
Furthermore, STCG tax would only apply to any equity-based mutual fund if your gains are above ₹1 lakh in a financial year.
Refer to the table below to understand tax rates on different securities:
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You can calculate STCG tax on your investments by using the following steps:
There are different deductibles applicable to the STCG tax calculation of different securities. These are as follows:
1. Deductibles on the sale of real estate assets
While selling a residential or commercial real estate property, you might incur expenses like brokerage charges, commissions, stamp paper and transfer procedures. These can be deducted from your profit to obtain your taxable capital gains.
You can also include expenses incurred while travelling for the property deeds, inheritance property transfer, renovation and improvement of the property before sales, and other certificates and duties as deductibles.
2. Deductibles on the sale of gold jewellery
You are also allowed to consider deductibles on selling gold coins and jewellery. However, these deductibles can only be considered when a broker is involved in the transaction. The cost incurred on the brokerage is the only expense that can be deducted to calculate your taxable profit.
3. Deductibles on the sale of listed stocks
How do you purchase or sell a share? You do this by trading on a stock broker portal. Therefore, your brokerage expense on the sale of the shares can be your deductibles in taxable profit calculation.
It is important to note that the Securities Transaction Tax (STT) is not included as a deductible cost while calculating STCG tax on equities.
Here are the three major points of difference between LTCG and STCG tax in India:
The application of the capital gains tax is also different for different tenures for different assets.
Look at the table below to understand:
Short-term capital gains might not have tax benefits like indexation and exemptions. Still, they can be instrumental in meeting short-term goals. So, if you are investing to achieve them, you might incur STCG tax depending on your assets. These taxes even consider different deductibles while calculating taxable profit from different securities, making it comprehensive for short-term goals.
You cannot avoid short-term capital gains tax.
If you have made tax-saving investments, and your income after profit is still in the tax-free slab, you can manage these taxes. This especially applies to assets, where your short-term capital gains are added to your income.
Another way to manage short-term capital gains taxes is by staying invested for the long term. However, you can base this decision on your financial goals and their tenure. If you invest for a short-term goal, you might have to make redemptions accordingly.
The tax bracket for STCG tax is different for different securities. You can refer to the table below for details:
Capital gains may apply to reinvesting different assets depending on their investment tenure.
For example, if you sell a property after two years of purchase, you can get tax exemptions for profits up to ₹2 crores. You can get this exemption only once in your lifetime on reinvesting your amount for the purchase or construction of a maximum of two properties within a certain period. This exemption is also available for the reinvestment of gains to buy agricultural land within a specific time frame.