PROSPERR.IO

Equity markets have become a mainstream investment avenue. With more people actively buying and selling shares through stock exchanges, tax implications of such transactions come into sharper focus. One area that often catches investors off guard is the tax on short term capital gains from listed shares. Getting the basics right, what qualifies, how it is taxed, and what can be done to manage it, goes a long way in avoiding unpleasant surprises at the time of filing returns.

What Is a Capital Gain?

When an asset is sold for a price higher than its purchase cost, the resulting profit is referred to as a capital gain. For tax purposes, capital gains are categorised as either short term or long term, depending on how long the asset was held before the sale. The holding period and the applicable tax rate differ across asset classes. For listed equity shares traded on a recognised stock exchange, the rules are specific and straightforward.

Short Term vs Long Term: The Holding Period Rule

For listed equity shares, the classification hinges on a 12-month holding period. If shares are sold within 12 months of purchase, the gain is treated as a Short Term Capital Gain (STCG). If held for more than 12 months, it becomes a Long Term Capital Gain (LTCG). This distinction is critical because the two attract different tax rates.

The STCG tax rate on listed shares was revised from 15% to 20% effective from July 23, 2024, following the Union Budget 2024. Transactions on or after this date attract the revised rate.

What Transactions Fall Under STCG on Listed Shares?

Not every equity transaction attracts STCG. The following conditions must be met for this provision to apply:

• The shares must be listed on a recognised stock exchange in India such as BSE or NSE
• The transaction must go through the stock exchange (i.e., it is not an off-market deal)
• Securities Transaction Tax (STT) must have been paid on the transaction
• The shares must have been held for 12 months or less before sale

Unlisted shares, off-market transactions, or shares sold without STT payment are governed by different provisions and do not qualify as STCG under this category.

How Is STCG Calculated?

The calculation of short term capital gain is relatively direct. The formula is:
STCG = Sale Price – Purchase Price – Brokerage / Transfer Expenses

The cost of acquisition is the actual price at which the shares were bought, including any brokerage or charges directly related to the purchase. Similarly, brokerage paid at the time of sale is deductible from the sale consideration. Indexation benefit, which allows the cost to be adjusted for inflation, is not available for listed equity shares, whether under STCG or LTCG.

Example: Calculating STCG

In this case, the shares were held for 8 months, clearly within the 12-month window, making the entire profit of Rs. 34,865 taxable as STCG at 20%.

Tax Rate and Surcharge on STCG

The flat rate of 20% on STCG from listed shares applies regardless of the income slab of the individual. Whether someone earns Rs. 5 lakhs or Rs. 50 lakhs in a year, the STCG tax rate remains fixed at 20%. This is a special rate under the Income Tax Act and is not subject to the basic exemption limit in the standard manner.

Over and above the 20% flat tax, surcharge and health & education cess are applicable:

A health and education cess of 4% is applied on the total tax including surcharge. Surcharge on STCG from equity shares is capped at 15%, which is a relief for higher income earners.

Can STCG Be Reduced by Basic Exemption Limit?

This is a question that often creates confusion. For resident individuals whose total income, including STCG which falls below the basic exemption limit (Rs. 2.5 lakhs for those below 60 years, Rs. 3 lakhs for senior citizens between 60 and 80, and Rs. 5 lakhs for super senior citizens above 80), the STCG can be adjusted against the shortfall.

In practical terms, if total income other than STCG is Rs. 1.5 lakhs and STCG is Rs. 50,000, the combined income of Rs. 2 lakhs is below the exemption limit, so no tax is payable. However, once the other income already meets or exceeds the exemption limit, STCG is fully taxable at 20%.

Set-Off and Carry Forward of STCG Losses

Losses from the sale of listed shares within the short term holding period can be used strategically. Here is how the set-off rules work:

• Short term capital loss can be set off against both short term and long term capital gains in the same financial year
• If the loss cannot be fully set off in the current year, it can be carried forward for up to 8 assessment years
• Carried forward STCL can only be set off against capital gains, not against salary, business income, or any other head
• The loss can be carried forward only if the income tax return is filed on or before the due date

This makes tax-loss harvesting, deliberately selling loss-making positions to reduce the overall capital gains tax — a legitimate and commonly used strategy near the end of a financial year.

Deductions Available Against STCG

Since STCG from equity shares is taxed at a special flat rate, the rules around deductions are restricted. Deductions under Chapter VI-A, which include Section 80C (PF, PPF, ELSS, LIC), Section 80D (health insurance), and others, cannot be claimed against STCG. These deductions apply only to income taxable at normal slab rates.

The only deductions permitted against STCG are direct expenses incurred in connection with the transfer, such as brokerage and STT (STT is not separately deductible, but it forms part of the cost basis computation in some interpretations). Beyond that, no other deductions reduce STCG tax liability.

Reporting STCG in the Income Tax Return

STCG from listed shares must be reported in the income tax return under the head Capital Gains. The applicable ITR form for salaried individuals with capital gains is ITR-2. Those who also have business or professional income use ITR-3.

The details required include the name of the scrip, purchase date, sale date, purchase price, sale price, and the resulting gain or loss. Most brokers now provide a capital gains statement often called a P&L statement or tax P&L, at the end of the financial year, which simplifies this process considerably.

Securities Transaction Tax (STT): A Quick Note

STT is a small tax levied at the time of buying or selling listed securities through a stock exchange. For equity delivery transactions, STT is currently 0.1% on both buy and sell sides. STT paid is not refundable and does not get added to the cost of acquisition for capital gain purposes. However, its presence is what qualifies a transaction for the concessional STCG tax rate of 20% instead of the higher rate applicable to non-STT transactions.

STCG Under New Tax Regime vs Old Tax Regime

Regardless of whether a resident individual opts for the old tax regime or the new tax regime, STCG on listed shares is taxed at the same flat rate of 20%. The regime choice affects only income taxed at slab rates. Since STCG attracts a special rate, the regime selection does not alter the tax outgo on short term equity gains. However, regime selection does impact how other deductions (like 80C or HRA) are applied against salary income, which in turn affects the overall tax picture.

Conclusion

Short term capital gains from listed shares deserve more attention than they often receive, especially when equity investing has become a regular activity. The 20% flat rate, the absence of indexation, the restriction on Chapter VI-A deductions, and the nuances around set-off rules all make it essential to track each transaction with care. Staying organised with a clean record of purchase and sale details and reconciling them against broker statements before the filing deadline, remains the most practical way to handle STCG with confidence. Book a Free Tax assessment call with us today!

Frequently Asked Questions

1. Is STCG applicable if shares are transferred as a gift?

If shares are received as a gift, the recipient does not pay tax at the time of receipt (subject to exemption limits). However, when those shares are eventually sold, capital gains tax applies. The holding period is counted from the date the original owner acquired the shares, and the cost of acquisition is the price at which the original owner purchased them.

2. What happens if shares are sold at a loss? is it still mandatory to report?

Yes, capital losses must be reported in the income tax return even if no tax is payable. Reporting the loss is the only way to carry it forward for set-off against future capital gains. If the loss is not reported in the return filed before the due date, the right to carry it forward is permanently lost.

3. Are shares bought through an Employee Stock Option Plan (ESOP) treated the same way?

ESOP shares have a two-stage tax treatment. At the time of exercise (allotment), the difference between the fair market value and the exercise price is taxed as a perquisite under salary. When those shares are later sold, capital gains rules apply. The holding period for STCG is counted from the date of allotment, not the date of grant, and the cost of acquisition is the fair market value on the allotment date.

4. Can STCG from shares be set off against a loss on mutual funds?

Yes. Short term capital loss from equity mutual funds (held for less than 12 months) can be set off against STCG from listed shares. Similarly, STCG from shares can be set off against short term capital losses from debt mutual funds, real estate, or any other capital asset. The rules permit cross-asset set-off within capital gains, provided both are in the short term category or the loss is short term in nature.

5. Does STCG affect eligibility for rebate under Section 87A?

Section 87A provides a rebate of up to Rs. 12,500 (old regime) for individuals with total income up to Rs. 5 lakhs. However, STCG from listed shares taxed at the special rate of 20% is not eligible for the Section 87A rebate under the old tax regime. Under the new tax regime, the rebate up to Rs. 25,000 is also not available against STCG taxed at special rates. This means even if total income is below Rs. 5 lakhs, the STCG portion will attract tax without the rebate benefit.