Save Tax on Short-Term Capital Gains

Short-term capital gains (STCG) occur from selling assets like stocks, real estates and mutual funds which is sold within a short holding period which is typically less than 12 months for the shares and less than 24 or 36 months for other assets. These gains are taxed at higher rates compared to long-term capital gains, often ranging from 15% to 30%, depending on the asset class and the taxpayer's income slab.

Here’s how you can save tax on short-term capital gains easily.

Table of Contents:

• ⇾ Definition of Short-Term Capital Gains Tax
• ⇾ STCG Tax Rate in India
• ⇾ Ways to Save Short-Term Capital Gain Tax
• ⇾ Save Short-Term Capital Gains Tax on Shares & Stocks
• ⇾ Example of Short-Term Capital Gains Tax Calculation on Equity
• ⇾ Short-Term Capital Gains Tax on Mutual Funds
• ⇾ Ways to Save Short-Term Capital Gain Tax on Property
• ⇾ Example of STCG Tax Calculation on Sale of Property
• ⇾ Strategies to Reduce Short-Term Capital Gains Tax
• ⇾ Exemption on Short-term Capital Gain
• ⇾ Frequently Asked Questions

Definition of Short-Term Capital Gains Tax

Short-term capital gains are the profits you make when you sell a personal or investment asset—like stocks, property, or mutual funds—after holding it for one year or less. These gains are taxed as part of your regular income, which means they fall under your standard income tax bracket (ranging from 10% to 37% in India, depending on your total income).

STCG Tax Rate in India

The short-term capital gains (STCG) tax rate in India depends on the type of asset sold and its holding period. While equity shares and equity-oriented mutual funds have a fixed 15% tax rate under Section 111A, other assets such as real estate, debt mutual funds, gold, and bonds are taxed as per the individual's income tax slab.

STCG Tax Rates for Different Assets

Ways to Save Short-Term Capital Gain Tax

Short-term capital gains (STCG) tax can significantly impact investment returns, especially for individuals in higher tax slabs.

1. Set Off Capital Gains Against Capital Losses

Short-term capital losses can be an offset against STCG, reducing taxable income. If your losses are more than your gains, you can carry the extra loss forward for up to 8 years and use it to lower your future capital gains tax.

2. Tax Harvesting Strategy

Investors can sell stocks or mutual funds intentionally losing money to show a capital loss. This loss can then be used to reduce the tax they owe on short-term capital gains, helping them pay less tax overall.

3. Optimize the Holding Period

By holding investments longer, taxpayers can convert STCG into long-term capital gains (LTCG), which are taxed at lower rates or may qualify for exemptions (such as the ₹1 lakh exemption on LTCG from equity shares).

4. Reinvesting Gains in Tax-Saving Instruments

You can't reinvest gains from shares to avoid tax, but if you sell real estate, you might get tax benefits by using the money to buy another home under Section 54F.

5. Invest in Tax-Advantaged Options

Certain investment options, such as ULIPs and PPFs, offer tax-free returns, reducing the impact of STCG tax on overall wealth accumulation.

Save Short-Term Capital Gains Tax on Shares & Stocks

If you’ve made profits from selling shares or stocks within a year, you may have to pay short-term capital gains (STCG) tax. However, with a few smart strategies, you can reduce or even avoid paying some of that tax, here are a few steps you can take into consideration :

STCG: The short-term capital gains tax on equity shares and equity-oriented mutual funds has indeed increased to 20%, effective from July 23, 2024. This applies when these assets are sold within 12 months of purchase. For other types of assets, the tax rate will depend on the individual's income tax bracket.

Offsetting Capital Losses: Short-term capital losses can be used to offset both short-term and long-term capital gains within the same financial year. If there are still unadjusted losses, these can be carried forward for up to eight subsequent assessment years to offset future capital gains.

1. Hold Investments for More Than 12 Months: Equity investments held for more than 12 months qualify for long-term capital gains (LTCG) tax, which is tax-free up to ₹1 lakh per year. Any LTCG beyond this limit is taxed at 10%, significantly lower than the 15% STCG tax.
2. Use Tax Harvesting: Tax harvesting involves selling investments at a loss to book a capital loss and then repurchasing them to maintain portfolio holdings.
3. Reinvest STCG Gains in Tax-Efficient Assets: Although STCG on shares cannot be reinvested for tax exemption, investors can reallocate gains to tax-efficient instruments like Index Funds, ELSS (Equity Linked Savings Scheme), or NPS, which provide tax benefits under Section 80C.
4. Invest in ULIPs for Long-Term Benefits: Unit Linked Insurance Plans (ULIPs) offer a combination of investment and insurance, with tax-free maturity proceeds under Section 10(10D).

Investing in Section 54EC Bonds (For Long-Term Gains): If the gains from the sale of shares qualify as long-term capital gains, investors have the option to reinvest these gains into specific bonds issued by entities like REC or NHAI under Section 54EC of the Income Tax Act.

Example of Short-Term Capital Gains Tax Calculation on Equity

Let’s assume an investor, Amit, purchases 500 shares of XYZ Ltd. at ₹200 per share and sells them after 6 months at ₹250 per share. Since the holding period is less than 12 months, the profit will be classified as short-term capital gains (STCG) and taxed at 15% under Section 111A.

Calculation:

In this case, Rahul makes a ₹25,000 short-term capital gain, out of which ₹3,750 is deducted as STCG tax, leaving him with a net profit of ₹21,250.

Short-Term Capital Gains Tax on Mutual Funds

Short-term capital gains (STCG) tax on mutual funds depends on whether the investment is in equity-oriented or debt-oriented funds. The tax treatment differs based on the holding period and fund type.

1. STCG on Equity Mutual Funds
• If sold within 12 months, gains are taxed at a flat 15% under Section 111A.
• This rule applies to mutual funds that invest at least 65% of their money in stocks.
2. STCG on Debt Mutual Funds
• If sold within 36 months, gains are taxed as per the investor’s income tax slab (5%, 10%, 20%, or 30%).
• After Budget 2023, you can’t use indexation for debt funds anymore, which makes them less tax-friendly if you're investing for a short time.

Example Calculation

Let’s assume Priya invests ₹1,00,000 in an equity mutual fund and sells it after 8 months for ₹1,20,000.

For debt funds, if Priya were in the 30% tax bracket, the STCG tax would be ₹6,000 instead of ₹3,000, making equity funds more tax-efficient for short-term investments.

Ways to Save Short-Term Capital Gain Tax on Property

Short-term capital gains (STCG) on real estate arise when a property is sold within 24 months of purchase. The profit is added to the seller’s total income and taxed as per their income tax slab (5%, 10%, 20%, or 30%).

1. Hold Property for More Than 2 Years

If the property is held for more than 24 months, the gains are classified as long-term capital gains (LTCG), which are taxed at 20% with indexation benefits, reducing the tax burden compared to STCG rates.

2. Reinvest STCG in Another Property

While Section 54F allows LTCG exemption if proceeds are reinvested in a residential property, no direct exemption exists for STCG. However, reinvesting in real estate can help in deferring future tax liabilities.

3. Use Home Loan Interest Deductions

If a property is purchased using a home loan, interest paid on the loan can be claimed as a deduction under Section 24(b), indirectly reducing the overall tax impact on capital gains.

4. Claim STCG Set-Off Against Losses

Short-term capital losses from other asset sales (stocks, mutual funds, property, etc.) can be offset against STCG from property to reduce taxable gains. Unused losses can be carried forward for up to 8 years.

5. Transfer Property to a Family Member in a Lower Tax Bracket

If a property is gifted or sold to a family member in a lower tax slab, the STCG tax liability may be lower, as gains will be taxed at their income tax rate instead of a higher slab.

Example of STCG Tax Calculation on Sale of Property

Let’s assume Amit purchased a residential property for ₹50 lakh and sold it after 18 months for ₹65 lakh. Since the holding period is less than 24 months, the profit is classified as short-term capital gains (STCG) and taxed as per his income tax slab.

STCG Calculation:

If Amit were in the 20% tax bracket, his STCG tax would be ₹3,00,000, whereas for a 30% slab, the tax increases to ₹4,50,000.

Strategies to Reduce Short-Term Capital Gains Tax

Short-term capital gains (STCG) tax can significantly impact investment returns, especially for individuals in higher income tax brackets.

1. Use Marginal Tax Relief: If your STCG pushes your total income into a higher tax bracket, consider spreading sales over multiple financial years to stay within a lower tax slab and reduce the overall tax impact.
2. Plan Sale Timing Wisely: Holding assets for longer than the short-term threshold (12 months for stocks, 24 months for property, 36 months for debt funds) can convert STCG into long-term capital gains (LTCG), which are taxed at lower rates or may qualify for exemptions.
3. Gift Shares or Property to Family Members in Lower Tax Brackets: Transferring assets to parents, spouses, or children in a lower tax slab before selling can help reduce the overall tax burden, as STCG will be taxed at their lower rate instead of yours.
4. Invest in Tax-Saving Bonds (For LTCG Only): Although Section 54EC bonds apply only to long-term capital gains, planning asset sales accordingly can help reinvest proceeds into tax-exempt government bonds like NHAI and REC bonds to defer or eliminate tax liability.
5. Opt for Index Funds or Debt Funds Instead of Direct Stocks: Investing in index funds or debt mutual funds with longer holding periods can reduce exposure to STCG, as these funds offer more favorable taxation when held for the long term.

Exemption on Short-term Capital Gain

Unlike long-term capital gains (LTCG), short-term capital gains (STCG) have limited exemptions under the Income Tax Act. However, certain tax-saving provisions can help reduce or offset STCG liability.

1. Set Off Against Capital Losses
• Short-term capital losses (STCL) can be set off against STCG, reducing taxable income.
• If losses exceed gains, the remaining amount can be carried forward for up to 8 years and adjusted against future capital gains.
2. Basic Exemption Limit for Individuals
• Individuals with total taxable income (including STCG) below ₹2.5 lakhs (₹3 lakh for senior citizens, ₹5 lakhs for super senior citizens) do not need to pay STCG tax.
• If total income is under ₹5 lakh, they may also qualify for a full rebate under Section 87A, making STCG tax-free.
3. Agricultural Land Exemption
• Gains from the sale of agricultural land in rural areas are exempt from STCG tax, provided they meet conditions under Section 10(37) of the Income Tax Act.
4. STCG Exemption for NRIs Under DTAA
• Non-resident Indians (NRIs) may get STCG exemptions or lower tax rates under Double Taxation Avoidance Agreements (DTAA) with certain countries.