How to Calculate Short Term Capital Gains Tax

How to Calculate Short Term Capital Gains Tax. In the previous article, we have given Section 80D: Deduction For Medical Insurance and How to Calculate Depreciation U/s 32 of Income Tax Act. Today we are providing the complete details of short-term capital gains tax. Gain arising on transfer of capital asset is charged to tax under the head “Capital Gains”. Income from capital gains is classified as “Short Term Capital Gains” and “Long Term Capital Gains”. In this article, you can gain knowledge about the provisions relating to tax on Short Term Capital Gains.

Short Term Capital Gains Tax

Meaning of Capital Gains Profits or gains arising from transfer of a capital asset are called “Capital Gains” and are charged to tax under the head “Capital Gains”.

Meaning of Capital Asset is defined to include:

(a) Any kind of property held by an assesse, whether or not connected with business or profession of the assesse.

(b) Any securities held by a FII which has invested in such securities in accordance with the regulations made under the SEBI Act, 1992.

However, the following items are excluded from the definition of “capital asset”:

any stock-in-trade (other than securities referred to in (b) above), consumable stores or raw materials held for the purposes of his business or profession ;
personal effects, that is, movable property (including wearing apparel and furniture) held for personal use by the taxpayer or any member of his family dependent on him,

but excludes—

jewellery;
archaeological collections;
drawings;
paintings;
sculptures; or (f) any work of art.

“Jewellery” includes—

ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stones, and whether or not worked or sewn into any wearing apparel;
precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;

(c). Agricultural Land in India, not being a land situated: [As amended by Finance Act, 2016]

Within jurisdiction of municipality, notified area committee, town area committee, cantonment board and which has a population of not less than 10,000;

Within range of following distance measured aerially from the local limits of any municipality or cantonment board:

not being more than 2 KMs, if population of such area is more than 10,000 but not exceeding 1 lakh;
not being more than 6 KMs , if population of such area is more than 1 lakh but not exceeding 10 lakhs; or
not being more than 8 KMs , if population of such area is more than 10 lakhs. Population is to be considered according to the figures of last preceding census of which relevant figures have been published before the first day of the year.

(d). 61/2 per cent Gold Bonds,1977 or 7 per cent Gold Bonds, 1980 or National Defence Gold Bonds, 1980 issued by the Central Government;

(e). Special Bearer Bonds, 1991;

(f). Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 or deposit certificates issued under the Gold Monetisation Scheme, 2015. Following points should be kept in mind:  The property being capital asset may or may not be connected with the business or profession of the taxpayer.

E.g. Bus used to carry passenger by a person engaged in the business of passenger transport will be his capital asset. Any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 will always be treated as capital asset, hence, such securities cannot be treated as stock-in-trade.

How to Calculate Capital Gains Tax on Shares

Capital gains are the rising worth of an investment that makes its current value higher than when it was originally bought by the owner.

There are two types of capital gains – short-term and long-term.

Short-Term Capital Gains:

As per the Income Tax laws of India, if an investor holds an immovable asset for less than 36 months before selling it, it would be considered a short-term capital gain.

But this is not applicable to stocks and bonds. Stocks, shares and bonds are faster-moving compared to real estate. Because of this, if they are held for 12 months or less before sale, they fall under short-term capital gains. However, this rule is applicable only to securities which are listed and traded on the stock exchange. If you are trading in unlisted or over-the-counter securities, then the 36-month rule applies.

Long-Term Capital Gains:

Income Tax laws in India specify that immovable property held for more than 36 months – or 3 years – before sale, fall under long-term capital gains. For stocks, shares and bonds, this period is more than 12 months instead of 36 months. Unlisted securities, on the other hand, will be considered as long-term capital gains only if sold after 36 months.

Read : How to Calculate Long-Term Capital Gains Tax

How to calculate Capital Gains on Shares?

Short-term capital gains can be computed by subtracting the following 3 items from the total value of sale:

Brokerage or expenditure incurred in connection with the sale of the asset
Purchase price of the asset

Calculating the long-term capital gains is a little more complicated. The 3 items you need to subtract from the total sales value are:

Brokerage or expenditure incurred in connection with the sale of the asset
Indexed purchase price of the asset

Computation of Short-Term Capital Gains

Short-term capital gain arising on account of transfer of short-term capital asset is computed as follows :

Particulars	Rs
Full value of consideration (i.e., Sales value of the asset)	XXXXX
Less: Expenditure incurred wholly and exclusively in connection with transfer of capital asset (E.g., brokerage, commission, etc.)	XXXXX
Net Sale Consideration	XXXXX
Less: Cost of acquisition (i.e., the purchase price of the capital asset)	XXXXX
Less: Cost of improvement (i.e., post purchases capital expenses on improvement of capital asset)	XXXXX
Short-Term Capital Gains	XXXXX

Short-Term vs. Long-Term Capital Gains

The difference between long- and short-term capital gains lies in the length of time the investment is held. Simply put, long-term capital gains are those derived from investments held for more than one year. If you purchase 100 shares of stock for $20 per share and sell them six months later for $25 per share, the $500 in profit is considered short-term capital gains by the IRS.

This distinction is of the utmost importance because short- and long-term capital gains are taxed very differently. In fact, depending on your tax bracket, if you held the 100 shares in the above example for a year or more, you could end up making more money if the stock price continues to increase but still pay less come tax time. In addition, only your in net investment come is taxable, meaning if you gain $500 from one investment but lose $500 on another in the same tax year, then your net gain is $0 and you are not required to pay any additional taxes. If you net a loss, you may be able to list it as a tax deduction.

Click Here to download Short-term capital gains tax notes with Illustrations.

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Content in this Article

Short Term Capital Gains Tax
How to Calculate Capital Gains Tax on Shares
Short-Term vs. Long-Term Capital Gains