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Short-Term Capital Gain in India: Investing in the stock market or real estate can be an excellent way to earn some extra income. However, it’s essential to understand the tax implications of your investments, especially when it comes to capital gains. Capital gains refer to the profit earned by an investor from the sale of an asset. When an investor sells an asset for a profit, they must pay taxes on that profit.
The Indian tax system divides capital gains into two categories: short-term and long-term. In this article, we’ll focus on the short-term capital gain in India.
What Is Short-Term Capital Gain in India?
Short-term capital gain in India refers to the profit earned by an investor from the sale of an asset that has been held for less than 36 months. For example, if an investor purchases shares of a company and sells them within 36 months for a profit, the profit earned will be considered a short-term capital gain.
It’s important to note that the 36-month rule only applies to shares and securities. For other assets, such as real estate, the holding period is 24 months. If an investor sells an asset after holding it for more than the prescribed period, the gain is considered a long-term capital gain.
How Is Short-Term Capital Gain Taxed in India?
Short-term capital gain in India is taxed as per the income tax slab of the individual. The tax rates for short-term capital gain range from 10% to 30%, depending on the investor’s income. Additionally, a short-term capital gain is added to the investor’s total income for the year and taxed accordingly.
For example, suppose an investor has an annual income of INR 10 lakhs and earns a short-term capital gain of INR 1 lakh from the sale of shares. In that case, their total income for the year will be INR 11 lakhs. They will be taxed at the applicable tax rate of INR 11 lakhs.
How to Calculate Short-Term Capital Gain in India?
Calculating short-term capital gain in India is relatively simple. The formula for calculating short-term capital gain is:
Short Term Capital Gain = Sale Price – Cost of Acquisition – Brokerage Fees – Other Expenses
Let’s break down the formula:
- Sale Price: The price at which the asset was sold
- Cost of Acquisition: The price at which the asset was purchased
- Brokerage Fees: The fees paid to the broker for the sale and purchase of the asset
- Other Expenses: Any other expenses incurred in the sale and purchase of the asset, such as legal fees, stamp duty, etc.
Suppose an investor purchased shares of a company for INR 50,000 and sold them for INR 70,000 within 6 months. The brokerage fees paid were INR 1,000. The short-term capital gain for this transaction would be:
Short Term Capital Gain = 70,000 – 50,000 – 1,000 = INR 19,000
The investor would be required to pay taxes on the INR 19,000 short-term capital gain as per their income tax slab.
How to Minimize Short-Term Capital Gain Tax in India?
Short-term capital gain tax can significantly impact an investor’s returns. However, there are several ways to minimize tax liability:
- Tax Saving Investments: Investing in tax-saving instruments such as Public Provident Fund (PPF), National Pension Scheme (NPS), and Equity Linked Saving Scheme (ELSS) can help reduce tax liability.
- Indexation Benefit: Indexation benefit allows investors to adjust the cost of acquisition of an asset for inflation. This can help reduce the tax liability by increasing the cost of acquisition, thereby reducing the capital gain.
- Loss Set-Off: If an investor incurs a loss from the sale of an asset, they can set off the loss against the gain to reduce the tax liability.
- Avoid Frequent Trading: Frequent trading can lead to short-term capital gain, which is taxed at a higher rate. Holding on to an asset for a more extended period can help reduce the tax liability.
Click here to learn about Long Term Capital Gains
Short-term Capital Gains Rate 2023:
Conclusion
In conclusion, short-term capital gain in India refers to the profit earned by an investor from the sale of an asset held for less than 36 months (for shares and securities) or 24 months (for real estate and other assets). Short-term capital gain is taxed as per the income tax slab of the individual, ranging from 10% to 30%. Calculating short-term capital gain is relatively simple, and there are several ways to minimize tax liability. It’s essential to understand the tax implications of your investments to make informed decisions and maximize your returns.
FAQs
What is a long-term capital gain in India?
Long-term capital gain in India refers to the profit earned by an investor from the sale of an asset held for more than 36 months (for shares and securities) or 24 months (for real estate and other assets). Long-term capital gain is taxed at a lower rate than short-term capital gain, ranging from 0% to 20%, depending on the asset.
How do short-term and long-term capital gains differ?
The primary difference between short-term capital gain and long-term capital gain is the period of holding of the asset. If an investor sells an asset held for less than the specified period, it is considered a short-term capital gain, and if an investor sells an asset held for more than the specified period, it is considered a long-term capital gain.
What is the tax rate for short-term capital gain in India?
The tax rate for short-term capital gain in India ranges from 10% to 30%, depending on the income tax slab of the individual.
Can short-term capital gain be set off against long-term capital gain?
No, the short-term capital gain cannot be set off against long-term capital gain, and vice versa.
Is there any tax exemption on the short-term capital gain in India?
No, there is no tax exemption on the short-term capital gain in India. However, there are several ways to minimize tax liability, as discussed in the article.
