STCG

STCG arises when a capital asset is disposed of before the minimum holding period required for long-term classification. For listed shares and equity-oriented mutual funds on which Securities Transaction Tax (STT) has been paid, the holding period threshold is 12 months. Any gain on such assets held for 12 months or less is classified as short-term and taxed under Section 111A of the Income Tax Act.

Budget 2024 increased the Section 111A rate from 15% to 20% with effect from July 23, 2024. This 33% hike in the effective rate significantly impacts active traders and short-tenure investors. Unlike LTCG, there is no annual exemption threshold for STCG under Section 111A — the entire gain is subject to the 20% flat rate, plus applicable surcharge and cess.

For assets not covered under Section 111A — such as debt mutual funds, gold, real estate, and unlisted shares held short-term — STCG is added to the investor's total income and taxed at the applicable slab rate. This distinction is important: an equity investor trading F&O pays tax on business income at slab rates, not under Section 111A, because F&O profits are not capital gains but business income.

Setting off STCG against short-term capital losses from the same year is permitted under Section 70. STCG under Section 111A can also be set off against short-term capital losses from other assets. However, STCG cannot be set off against long-term capital losses in the same year — only LTCG can absorb LTCG losses. Understanding this asymmetry is essential for efficient tax planning.

Frequent traders often underestimate cumulative STCG liability because each profitable trade — even small ones — contributes to the taxable base. Brokers now report all STT-paid transactions to the income tax department, and the AIS reflects them. Reconciling broker contract notes with AIS data before filing ITR-2 or ITR-3 is a necessary step to avoid notices from the tax department.