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- What Are Capital Gains and Its Types?
- Income Tax Exemption Limit for Different Age Groups
- STCG and LTCG Tax Rule for Taxpayers Falling in the Exemption Limit
- What is the Capital Gains Tax on LTCG and STCG?
- Rules Applicable To Adjusting Short Term Capital Gains Against The Exemption Limit
- Are Tax Deductions Applicable Under Sections 80 C to U, if the STCG is Invested in Eligible Products/Assets?
- Can NRIs Adjust STCG Against Basic Exemption Limit?
- Reducing Your Income Tax Liability by Adjusting STCG Against Basic Exemption Limit
- FAQS - FREQUENTLY ASKED QUESTIONS
As per India's tax laws, capital assets can be of two types- financial and non-financial. Intangible assets with monetary value, like stocks , are financial assets. Assets like real estate and gold ornaments that have a physical value are considered non-financial assets.
What Are Capital Gains and Its Types?
The profits generated by selling or redeeming these assets are known as capital gains. Now, capital gains are further categorised into; STCG ( ShortTerm Capital Gains ) and LTCG (Long-Term Capital Gains) , based on the duration for which you held the asset. Capital gains tax is applicable on STCG and LTCG.According to the IT laws, taxpayers are allowed to adjust the capital gains against their basic income tax exemption limit for reducing their tax liabilities. If you've made short-term capital gains this financial year and want to set it off against any shortfall in the exemption limit, here are a few things you should know-
Income Tax Exemption Limit for Different Age Groups
As per the current budget, the following is the exemption limit on taxable income;
| Age Group (Years) | Tax Exemption Limit (Rs) |
| Below 60 | 2,50,000 |
| 60-80 | 3,00,000 |
| Above 80 | 5,00,000 |
STCG and LTCG Tax Rule for Taxpayers Falling in the Exemption Limit
If the total income of a taxpayer in a financial year is lower than the applicable exemption limit, he/she can set off the LTCG and STCG from financial assets and LTCG from non-financial assets to make up for the shortfall and reduce their income tax liability.
What is the Capital Gains Tax on LTCG and STCG?
The capital gains tax varies for different assets and depends on the holding period.For instance, LTCG tax at the rate of 10% is applicable to financial assets like stocks and equity mutual funds held for more than 1 year. STCG at 15% is applicable on these assets if they are sold or redeemed within 1 year of purchase.In case of non-financial assets, LTCG tax is applicable at the rate of 20%. If a taxpayer has generated STCG from these assets, the gains will be added to the total income of the financial year and taxed as per the income tax slab .
Example-
Let us assume that after using all the deductions and exemptions, the income of a taxpayer below 60 years is Rs. 1 lakh. However, he has sold stocks and made STCG of Rs. 3 lakhs. The applicable tax exemption limit is Rs. 2.5 lakhs. So, there is a shortfall of Rs. 1.5 lakhs in the basic limit as total income in the financial year is only Rs. 1 lakh.So, the taxpayer can set off Rs. 1.5 lakhs from the STCG against the exemption limit shortfall. With this, the taxpayer will now only be required to pay capital gains tax at 15% on the remaining Rs. 1.5 lakhs STCG and not on the entire STCG of Rs. 3 lakhs.
Rules Applicable To Adjusting Short Term Capital Gains Against The Exemption Limit
Here are some rules you should know for adjusting STCG against a shortfall in tax exemption limit-
- The exemption limit includes the total income of the taxpayer in a financial year, including short-term capital gains and income from other sources.
- The tax liability will be if a taxpayer's income after adding capital gains is under the exemption limit.
- STCG adjustment is only possible after the required adjustments are made to other income sources.
- If there is a shortfall even after adjusting other income, STCG from non-financial assets will be adjusted before STCG from financial assets if applicable.
Are Tax Deductions Applicable Under Sections 80 C to U, if the STCG is Invested in Eligible Products/Assets?
Yes, taxpayers can also take advantage of deductions available under sections 80 (C to U). But this is only possible if the STCG is generated from assets that don't fall under Section 111A and is used for purchasing or investing in eligible products or assets, like health insurance , life insurance , PPF, etc.In other words, if you've generated STCG from the sale of a property and the gains are invested in an 80C tax-saving instrument, you are eligible to claim deductions under the relevant section. However, if gains from selling stocks are invested in an 80C instrument, you cannot claim deductions on the same.
Can NRIs Adjust STCG Against Basic Exemption Limit?
Yes, non-resident Indians can also adjust their STCG against any shortfall in tax exemption limit if the STCG does not fall under Section 111A of the IT Act. So, STCG from financial assets like stocks or equity mutual funds cannot be adjusted against the basic exemption limit.However, short term capital gains from the sale of real estate, gold ornaments, debt mutual funds, etc., can be adjusted against the basic tax exemption limit.
Reducing Your Income Tax Liability by Adjusting STCG Against Basic Exemption Limit
If you have any shortfall in the basic tax exemption limit and have generated fromshort-term capital gains, you should definitely take advantage of this provision to reduce the taxes applicable to your capital gains.While income tax is a complex topic, it is wise to understand the basics at least as there are several ways in which you can legally reduce your tax liabilities and save your hard-earned money. Alternatively, you can always consult a professional tax advisor to get all the help you need.
FAQS - FREQUENTLY ASKED QUESTIONS
How much short term capital gain is taxable?
Short Term Capital Gains (STCG) vary for different assets. If you have made STCG from financial assets where STT is applicable like equity shares or equity mutual funds, then the gains are taxed at 15%. In Financial Assets and in Non-Financial Assets where STT is not applicable, the STCG is added to the total income of the individual and the amount over and above the exemption limit will be taxable as per the income tax slab.
How to avoid paying short term capital gains?
You cannot avoid paying Short Term Capital Gain Tax on securities like equity shares or equity mutual funds i.e. securities where STT is applicable. A flat tax rate of 15% is levied on such gains. However, for securities other than equity shares and mutual funds, one can avoid paying STCG if they have a total income during a financial year that falls under the exemption limit as per the Income Tax Act. An individual can also reduce or avoid paying STCG from other securities by adjusting their short-term capital loss with STCG as well as LTCG and they can also carry forward the loss for the next 8 years.
How is short-term capital gains tax calculated?
To understand the calculation of how the tax on STCG is calculated, we first need to understand how to calculate STCG on the sale of financial or non-financial assets. Here is a formula to calculate STCG.
STCG = Sale Value of an Asset - [Cost of acquisition of the asset + Cost of repair or improvement + Cost of Transfer or Sale]
For STCG made on assets that fall under Section 111A of the Income Tax Act, tax is calculated at 15% of STCG. For example, Mr. A bought 100 shares of XYZ Ltd. on 17th May 2022 for Rs. 1280 each. He sold off these shares on 29th November 2022 for Rs. 1400 each after a span of 6 months. These shares were listed on NSE hence STT was levied on Mr. A for the transaction. He also paid Rs. 25 towards brokerage charges. Let us calculate the STCG that Mr. A made through the sale of these shares as well as the STCG Tax that will be added to the total tax liability of Mr. A during FY 22-23.
Sale Value of the shares
i.e. 1400 x 100 = Rs. 1,40,000
Less: Cost of Acquisition of shares
i.e. 1280 x 100 = Rs. 1,28,000
Less: Cost of improvement
Rs. 0
Less: Cost of Sale
Rs. 25
Short Term Capital Gain
i.e. 1,40,000 - [1,28,000 + 25] = Rs. 11,975
STCG Tax
i.e. 11,975 x 15% = Rs. 1796
Other Tax Liability of Mr. A
Rs. 18,756
Add: STCG Tax
Rs. 1796
Add: 4% Cess
i.e. Rs. 20,552+4%
Total Tax Liability of Mr. A
Rs. 21,374
This is how you calculated STCG and tax towards STCG made on assets under Section 111A of the ITA. Now the STCG made on other assets is added to the person's total income and the applicable tax rate according to the income tax slab applies. For example, if Mr. Z has earned an income of Rs. 12,00,000 from sources other than Capital Gains and has also made Rs. 15,000 as STCG, then this STCG will be added to his total income and the total taxable income (Rs. 12,15,000) will be applicable as per the income tax slab.
How do I declare short term capital gains in ITR?
Once you have divided up your Capital Gains into STCG and LTCG, filing them under relevant sections is also necessary. To file income from STCG, you must report them under the Schedule Capital Gains. Once you select Schedule CG, you need to select the asset types from where you have earned STCG and provide the amounts that you have received from the sale of such short-term assets less the costs. Once you have filled in the necessary details the STCG will be calculated for you and you need to confirm it and then move on to fill in other details of the ITR.
What happens if you don't pay capital gains tax?
If you don’t correctly report the capital gains that you might have earned in a particular FY, you might get a notice from the Income Tax Department. Also, with the launch of AIS (Annual Information Statement), your financial transactions including the capital gains that you might have earned are mapped in the statement so if you misreport it, you might face problems in filing your ITR. And there are hefty penalties and interest that you need to pay if you skip paying taxes in a certain year.
Can I claim a TDS refund on capital gains made via the sale of a property?
Yes, a seller can claim a refund on TDS on the capital gains or capital loss they made during the sale of their property. Whenever a person sells an immovable property valued over Rs. 50 Lakhs, the buyer has to deduct 1% TDS on the transaction value. If the seller has made capital gains, he can invest the gains in eligible assets and be eligible to claim a refund on the tax deducted by the buyer. Even if the seller makes a capital loss, he is eligible to claim a refund on the TDS.
What is the one time capital gains exemption?
Section 54 of the Income Tax Act or as it is popularly known as Once in a Lifetime Exemption is the exemption from tax on Long-Term Capital Gains that an individual or HUF selling a residential property is allowed to avail. The asset sold should be a long-term capital asset and the gains should be invested in the purchase of residential property within 2 years (3 years in case the seller is constructing a house). Once the seller fulfils the required conditions then the capital gains made on the sale of the property are exempted once in the lifetime of a seller. Such capital gains exemption amount was without a cap but from 1st April 2023, the exemption amount is capped at Rs. 10 Crores.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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