Short-term Capital Gains Tax on Equity Investments

6 mins read

Investors must pay careful attention to their tax outgo on all the asset classes that they have chosen. This is because taxes affect your earnings – what you end up with might be drastically different from what you had expected. Moreover, taxes on different asset classes – or different categories of investments – can differ drastically. However, one thing is true across the board –  all your investments come with some tax component.

Imagine standing at your window and watching two workers finishing off some road work and filling back the trenches they had dug. Man 1 has a small spade and man 2 has a big spade. But man 1 is somehow finishing faster. You’re curious so you whip out your phone, click on camera and zoom in. Man 2’s spade is not solid but sort of netted, like a strainer or a sieve. So half of what he’s picking up is falling through the sieve.

Taxes can sieve out a good chunk of your earnings and while there is no escaping them, it is essential to understand them. The government also offers to you options to work around taxes and reduce your tax burden.

In this post, we are going to wrap our heads around short-term capital gains tax on equity investments, or the tax that you pay on stock market investments and stock market – linked investments. We’ll also recommend some (government approved) ways in which you can minimize your tax outgo.

What are capital gains?

Capital gains refers to the gains, or earnings or profits that you make on your investments when you sell a ‘capital asset’ for a price higher than what you purchased it at. This could include gains made from property, automobiles, stocks, bonds or even collectibles or art. For example, if Bhavin bought stock worth Rs 5000 and sold it for Rs 6000, his capital gains stood at Rs 1000.

What is STCG tax on equity investments?

Stock market investments that mature, or are redeemed or are sold in less than 12 months are classified as short term. Short-term capital gains (STCG) from equity investments are subject to short-term capital gains tax in India.

The short term capital gains tax rate is higher than the long term capital gains tax rate in India. This is one of the benefits to remaining invested for the longer term.

However, if your investment horizon and financial goals call for a short term investment, go for it! But of course, understand the applicable tax implications so that you can set your targets accordingly.

10 important things to know about short term capital gains tax on equity investments

1. Tax rate – the STCG rate is 15% irrespective of your tax slab and whether you have invested for 1 month or 11 months and 29 days.

2. Tax applicability/deduction – the tax is applicable only when you actually redeem your mutual fund or sell your stock. You cannot be taxed if you still hold the mutual fund or the stock or the derivative contract you have invested in. If you can hold out for even a month longer, you might have the chance to pay only 10% LTCG instead.

3. Exemption- if the investor’s overall earnings (including their salary) is less than Rs 250,000 per year, he or she is exempt from paying STCG. The same goes for an individual of 60+ years, with an annual income of less than Rs 300,000 or an individual of 80+ years with an annual income of less than Rs 500,000.

4. Gains is the keyword – STCG is not paid on the entire chunk of capital you walk away from the stock market with, but only on your gains. If you make no gains, you pay no tax. If you take a hit and experience losses, once again, you do not have to pay any tax. In fact, in some cases, capital gains on other investments can be offset against capital losses, reducing your overall tax burden. In other words, capital gains tax is a tax on selling stocksor transferring stocks where equity investments are concerned..

5. Amount to be taxed – You also deduct what you pay as brokerage charges from your capital before you calculate your tax. Cess and Surcharge are extra.

6. Formula – 2020 and 2021 have been the years of DIY. If you want to do your own calculations, the formula for arriving at STCG is:

Step 1: Full sale or redemption value minus brokerage charges minus purchase price

Step 2: Calculate 15% on the amount you are left with

In our example from earlier, Bhavin’s capital gains stood at Rs 6000; now minus brokerage fees at a flat Rs 20 for the transaction. That gives you Rs 5980. Now you need to minus the purchase price, which is Rs 5000. You are left with Rs 980

Now you will calculate 15% on Rs 980 which is Rs 147.

Bhavin will pay Rs 147 STCG tax on his investment.

7. Common mistake – short term capital gains are applicable not just on your investments in equity shares but on a whole host of stock market investments, including mutual funds, Exchange Traded Funds, derivatives and so on.

8. Exception – Bonds and debentures are not subject to STCG.

9. Not an exception – You pay STCG when you opt for transfer as well – so if you transfer your investment from one mutual fund to another via STP or any other method, you still pay tax 15% STCG.

10. Hack – If you are likely to need your mutual fund capital in a staggered manner let’s say to pay EMIs or fees or for incremental income, you can always opt for an SWP – or systematic withdrawal plan – because STCG needs to be paid up only for investments that are held for less than 12 months. You can save that 5% on all the amounts withdrawn after 12 months.

The same goes for stock that you hold. Perhaps you don’t need the whole chunk all at once. You can sell off only the amount of stock that can cover your immediate needs and then perhaps sell stock once your 12 month period is over, giving you the option of paying a lower amount of tax by paying LTCG instead of STCG.


STCG can eat into your returns and as such you need to ensure that you consider it when setting your targets. That said, STCG and risk have nothing to do with each other – even if you escape paying STCG, your investment is still subject to market risks and you must use other logical selection criteria such as the profitability of the company, historical pricing data and valuation if you’re investing in stocks. If you’re investing in mutual funds, you might consider the track record of the asset management company and the fund manager apart from consistency in past returns. In both cases, you must consider how the cost of investment affects your earnings. Always adopt a 360 degree approach to scoping out your investments. Taxation is a significant angle, but not the only one.