When you hold your capital asset like equity shares, bonds or mutual fund units for only a few months before selling, you may incur what is called a short-term capital gains tax. 

Capital gains are profits you make on the sale of an investment. These profits are bucketed as short or long term and taxed accordingly. For shares which are listed on stock exchanges and for equity-oriented mutual funds, short term is defined as a period fewer than 12 months. 

Which means that if you buy shares or equity mutual funds and sell them within 12 months, any profits you make will be considered as short-term gains. The tax applicable on this is a flat 15%. 

What you need to know

Short term capital gains arising from equity-oriented investments are taxed differently than such gains if they come from investing in debt securities like bonds and debt mutual funds. The short-term holding period is also defined differently. 

In case of the latter, short term gains arise if you sell a listed bond within 12 months but for unlisted bonds and debt mutual fund schemes short term gains arise if you hold your investment for less than 36 months or 3 years. 

Short term capital gains tax is applicable only if there are gains or profits. Which means your buy price has to be lower than your selling price. If that is not the case you will end up selling at a loss and have a short-term capital loss.

For tax purposes, this short-term loss can be written off against any other short- or long-term capital gains and you can carry it forward for eight years if you are not able to do so in the year you book the loss. 

Tax deducted at source

There was an announcement made in Budget 2020 which suggested a withholding tax or tax to be deducted at source for income arising from mutual fund units. This tax was to be deducted at a rate of 10% of the income or gains.

 After the initial announcement, there was some debate on whether this is applicable on capital gains as well, but it was clarified that the TDS pertained only to dividend income arising out of mutual fund units and not on capital gains.

Hence, it remains that you don’t have to pay any TDS on short term capital gains. 

Tax Liability

This tax liability is calculated along with your income tax return and the tax amount added to your overall tax bill. If, however, you short term capital gains tax is more than Rs 10,000, you are liable to pay advance tax in the quarter that the gains are realised and the tax is due. 

It’s important to ensure that you pay your taxes on time so that there is no penalty incurred on late payment. Short term capital gains in equity assets are not tax-efficient given the 15% tax rate and ideally, even as an investment, equity assets should be held for a few years before you decide to sell.

Learn Short-Term Capital Gains Tax on Shares