SEBI registered Investment advisor (RIA) with Registration number – INA 000000342.

Rajiv was very happy to get a good offer for his flat, which was almost double the cost. He purchased this brand new flat in January 2011 for Rs. 20 lakhs and now he is getting an offer of Rs. 35 lakhs in just 2 years. Rajiv is planning to sell the flat because of some medical emergency in his family. He was planning to spend the profit of Rs. 15 lakhs for the medical emergency and plans to buy a small house with the balance Rs. 20 lakhs. But he was not aware of the implications of Short Term Capital Gains Tax in India!

He was shocked to hear the tax liability on this deal. He is supposed to add this profit of Rs. 15 lakhs to his taxable salary and pay tax. With Rs. 12 lakhs annual salary, he was in the 30% tax slab. So he has to pay tax at the rate of 30% on this gain of Rs. 15 lakhs. His tax liability on this Rs. 15 lakhs gain is Rs. 4.5 lakhs! This is because, it is a Short Term Capital Gains Tax.

Short Term Capital Gains Tax in India

What is Short Term Capital Gains Tax?

When you are selling an asset, you are liable to pay tax on the gains earned. Such gains can be categorised into two:

  1. Short Term Capital Gain
  2. Long Term Capital Gain

Short Term Capital Gains Tax 

If the asset is held for less than 36 months, then the gain you are getting by selling that asset is called Short Term Capital Gains. If it is held for more than 36 months, then the gains will be called as Long Term Capital Gains.

This definition of Short Term Capital Gains Tax is true for real estate, physical gold, egold etc.

Rate of Short Term Capital Gains Tax

It is the marginal rate at which you are taxed. If you are in the 30% tax slab like Rajiv, you have to pay 30% tax on the Short Term Capital Gains. But if you are in the lower slab, you have to pay only 10% or 20%.

It is different for Mutual Funds and Shares

In the case of Shares and Mutual Funds, the period for such classification is 12 months instead of 36 months. So, if you sell shares after 12 months, the gains will be treated as Long Term.

Short Term Capital Gains Tax on Shares and Equity Mutual Funds

The rate of Short Term Capital Gains Tax on Equity Shares or Equity Mutual Funds will be 15%, irrespective of your tax slab. Even if you are in the 30% slab, you need to pay only 15% Short Term Capital Gains Tax on such gains.

Short Term Capital Gains Tax on Debt Mutual Funds

The Short Term Capital Gains Tax rate on Debt Funds is the same as your marginal rate. So, if you are in the 30% slab, you have to pay 30% tax on the Short Term Capital Gains in Debt Mutual Funds. Any Fund with less than 65% allocation in Equity will be treated as Debt Funds for taxation. Gold Funds, MIPs, International Funds, Fund of Funds etc. also fall under this category for taxation.

This makes the tax on mutual funds a bit complicated.

Given below is an abstract of various asset classes and their tax treatment of Capital Gains.

Asset class Minimum holding period for Long Term Short Term tax rate Long Term tax rate
Real Estate 36 months and above Marginal tax rate 20% with indexation
Physical Gold 36 months and above Marginal tax rate 20% with indexation
eGold 36 months and above Marginal tax rate 20% with indexation
Shares 12 months and above             15% Nil
Equity Mutual Funds 12 months and above              15% Nil
Debt Mutual Funds 12 months and above Marginal tax rate 20% with indexation/10% without indexation
Gold Mutual Funds 12 months and above Marginal tax rate 20% with indexation
Gold ETF 12 months and above Marginal tax rate 20% with indexation

 Though there are many provisions to save Long Term Capital Gains Tax, in the case of Short Term Capital Gains, such provisions are not there. But you can plan your investments in such a way that you can minimise the incidence of Short Term Capital Gains Tax.

 

5 Comments

  • jeetuojha Posted August 13, 2013 11:53 am

    Good Post Cleared doubt

    Thanks
    Jeetu Ojha

  • Harish Prajapati Posted August 24, 2013 7:24 pm

    Really vary useful information

    thanks for post

    Harish Prajapati

  • Harinathan.K Posted October 5, 2013 1:02 pm

    Good presentation. Since these mails help individual earners,can you also mention for which class of earnings 80C,D,DD,G and other Deduction sections will be available.

  • NiharPal Posted August 27, 2014 4:01 pm

    Sir,
    Thanks for the informative write up. Can u pls clarify what is meant by “Marginal Rate” for STCG on Debt funds… Is the gain added to the income. Or if I am in the 20% bracket the STCG will be at 20% and NOT added to income. In case if its added to income u may go into the next tax slab. Can u pls help me out on this issue.
    Thanks

    • Melvin Joseph Posted August 27, 2014 4:07 pm

      Yes, the gain will be added to your other income and will be taxed as per the slab rate. It can take you even to the next slab.

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