What Is Short-Term Capital Gain (STCG) Tax on Shares? The 20% Rate, Section Rules, and Set-Off Mechanics

 

STCG, or Short-Term Capital Gain, is the profit you make when you sell listed equity shares within 12 months of buying them. For qualifying listed-equity transactions, the special STCG tax rate is 20%. Unlike LTCG, there is no separate ₹1.25 lakh annual threshold that makes the first ₹1.25 lakh of qualifying STCG tax-free. The ₹1.25 lakh threshold applies to qualifying LTCG under the relevant provision. 

But the 20% rate isn't the whole story. Surcharge, cess, capital losses, your other income, and your residential status can also affect the final tax. The tax treatment also changes when the gain doesn't qualify for the special STCG rate. So, how much STCG tax do you actually pay? Let's break down the rules with simple examples.

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What Is Short-Term Capital Gain Tax on Shares?

Short-Term Capital Gain (STCG) tax is the tax you pay on a qualifying capital gain when you sell a capital asset after a short holding period. For listed equity shares, the short-term holding period is generally 12 months or less. So, if you buy listed shares and sell them within 12 months, the gain can qualify as STCG. 

Is Intraday Trading Short-Term Capital Gain?

No. Equity intraday trading is generally treated as speculative business income rather than capital gains because the shares are bought and sold on the same day without delivery. Section 43(5) of the Income-tax Act defines speculative transactions subject to specific exceptions.

The holding period matters only when you're dealing with a capital asset. Intraday trading doesn't involve delivery of the shares, so it generally falls under business income instead. The usual classification looks like this.

1. Equity delivery investment sold within 12 months — STCG, when the shares are held as a capital asset and the transaction qualifies for the special rate.

2. Equity delivery investment sold after 12 months — LTCG, subject to the applicable conditions.

3. Equity intraday — Speculative business income.

4. F&O trading — Generally non-speculative business income, subject to the applicable rules.

5. BTST — Depends on whether the activity is treated as investment activity or business or trading activity.

The tax rate follows the classification. Profits from intraday trading are generally included in business income and taxed according to the applicable rules for business income rather than the special STCG rate.

How Are F&O and BTST Profits Taxed?

F&O trading is generally treated as non-speculative business income under Section 43(5), provided the transaction falls within the specified exchange-traded derivative framework. BTST, or Buy Today Sell Tomorrow, needs more care. Its tax treatment depends on whether you're holding the shares as an investment or as stock-in-trade.

Tax on F&O: F&O contracts are derivatives rather than the actual shares. Eligible exchange-traded derivatives are therefore generally treated as non-speculative business transactions. The resulting profit or loss is normally dealt with under the business-income provisions.

Tax on BTST: BTST can be treated as a capital gain when the shares are held as an investment and the transaction is consistent with investment activity. The fact that delivery wasn't received before the sale doesn't automatically decide the classification.

There is a practical gray area here. If you use BTST frequently and systematically as a trading strategy, the tax treatment can depend on the overall facts and whether the shares are being held as investments or stock-in-trade. The pattern of activity matters.

What Is the STCG Rate on Shares Right Now?

For qualifying listed-equity STCG, the applicable special tax rate is 20%. From 1 April 2026, the Income-tax Act, 2025 applies. The corresponding special provision for these short-term capital gains is Section 196. The previous Income-tax Act, 1961 used Section 111A for the same broad special-rate category. 

The important point is simple. The ₹1.25 lakh exemption is associated with qualifying LTCG, not with qualifying STCG. So, if you have ₹2 lakh of qualifying STCG, you don't subtract ₹1.25 lakh simply because that amount is available for LTCG.

For example, suppose you make a ₹2 lakh qualifying STCG. Before considering surcharge, cess, losses, or other applicable adjustments, the basic special-rate tax calculation is:

1. Capital gain — ₹2,00,000

2. STCG taxable at the special rate — ₹2,00,000

3. Tax at 20% — ₹40,000

4. Health and Education Cess at 4% — ₹1,600

5. Tax including cess — ₹41,600

For comparison, qualifying LTCG has a 12.5% rate with the applicable ₹1.25 lakh annual threshold. That means a ₹2 lakh qualifying LTCG would leave ₹75,000 taxable before considering other adjustments. 

When Is a Short-Term Gain Taxed at Slab Instead of 20%?

Not every short-term capital gain gets the special 20% rate.

If the gain doesn't fall within the special-rate provision for specified assets and transactions, it can be taxed at the applicable income-tax rate instead. This is why simply saying "all STCG is taxed at 20%" can be misleading.

The asset, transaction, holding period, and applicable section all matter. Unlisted shares, for example, can have different treatment from listed equity shares.

How Do You Calculate STCG on Shares?

You can calculate STCG in three broad steps. First, work out the capital gain. Secondly, account for eligible expenses that are allowed under the capital-gains rules. Thirdly, apply the relevant tax rate.

Let's use a Vedanta Limited trade as an example.

Step 1: Calculate the STCG

Suppose we bought 1,000 shares of Vedanta Limited on 15 December 2025 at ₹215 per share. The shares were later sold on 13 April 2026 at ₹296 per share.

The holding period was 119 days.

Buying cost = 1,000 × ₹215 = ₹2,15,000

Selling value = 1,000 × ₹296 = ₹2,96,000

Gross gain = ₹2,96,000 − ₹2,15,000 = ₹81,000

The gross capital gain is therefore ₹81,000 before considering eligible expenses.

Step 2: Calculate Eligible Transfer Expenses

Suppose the trade was executed through Zerodha. The exact charges depend on the applicable tariff and transaction details at the time of the trade.

For illustration, the original calculation gives the following charges:

Brokerage — ₹0

STT — ₹511.00

Exchange transaction charges — ₹16.45

SEBI charges — ₹0.51

GST — ₹3.05

Stamp duty — ₹32.25

DP charge — ₹15.93

The total illustrated charges are approximately ₹579.19.

One important point is easy to miss. Not every trading charge is automatically treated in exactly the same way for capital-gain computation. The tax calculation should use only expenses that are allowable under the applicable capital-gains rules.

STT also has special treatment. For a transaction covered by the special STCG provision, STT isn't simply added to the cost of acquisition or deducted from the sale consideration for calculating the capital gain.

Step 3: Calculate STCG Tax

If the transaction qualifies for the special STCG rate, the applicable rate is 20%.

Using the simplified illustration:

Short-term capital gain = ₹81,000

Tax at 20% = ₹16,200

Health and Education Cess at 4% = ₹648

Total tax including cess = ₹16,848

The final figure can change if allowable expenses, capital losses, surcharge, or other applicable provisions affect the calculation.

Net Summary

Gross profit — ₹81,000

Less: allowable transaction expenses — depends on the applicable tax treatment

Basic STCG tax at 20% — ₹16,200

Health and Education Cess — ₹648

Tax including cess — ₹16,848

Net profit after tax — depends on the final allowable expense and tax calculation

The key takeaway is that the tax calculation shouldn't be based simply on the amount your broker shows as "profit." The tax return calculation follows the capital-gains provisions and the expenses that are actually allowable.

Is There Any Exemption on Short-Term Gains?

There is no separate ₹1.25 lakh STCG exemption similar to the LTCG threshold.

That doesn't mean every taxpayer must automatically pay 20% on every rupee of qualifying STCG in every situation. A resident individual or resident HUF may be able to use an unused portion of the basic exemption limit against certain special-rate capital gains, subject to the applicable conditions. 

So, the better way to think about STCG is this: there is no ₹1.25 lakh STCG threshold, but the basic exemption provisions can still matter in specific cases.

Can You Use Your Basic Exemption Limit Against STCG?

Yes, a resident individual or resident HUF can potentially use an unused portion of the basic exemption limit against qualifying special-rate STCG when the conditions are met.

For example, suppose your other income is below the basic exemption limit. The shortfall can potentially reduce the portion of qualifying special-rate STCG that is taxed at the special rate. The exact basic exemption limit depends on the applicable tax regime and tax year.

This is different from the ₹1.25 lakh LTCG threshold. The two provisions shouldn't be mixed.

The Income Tax Department's guidance specifically recognises that when a resident individual or HUF has total income excluding the specified STCG below the maximum amount not chargeable to tax, the shortfall can reduce the amount of such STCG subject to the special rate. 

How Do You Set Off Short-Term Capital Losses?

Short-Term Capital Loss (STCL) is more flexible than Long-Term Capital Loss (LTCL).

A current-year STCL can generally be set off against both STCG and LTCG, subject to the applicable provisions. This is one reason capital-loss planning matters when you have both profitable and loss-making investments.

Suppose you have:

STCL — ₹2,00,000

STCG — ₹80,000

LTCG — ₹1,50,000

The calculation can be understood in two steps.

Step 1: Offset the STCG first

Short-Term Capital Loss — ₹2,00,000

Short-Term Capital Gain — ₹80,000

STCL used against STCG — ₹80,000

Taxable STCG — ₹0

Remaining STCL — ₹1,20,000

Step 2: Use the remaining loss against LTCG

Long-Term Capital Gain — ₹1,50,000

Remaining STCL — ₹1,20,000

STCL used against LTCG — ₹1,20,000

Remaining LTCG — ₹30,000

If your capital losses are not fully absorbed in the same year, eligible losses can generally be carried forward for up to eight assessment years, provided the relevant return-filing conditions are satisfied.

This is why filing the return correctly matters. A loss that isn't properly reported can affect your ability to use it in later years.

Why Is the Surcharge Cap Important for High Earners?

Surcharge can materially change the final tax bill for high-income taxpayers.

For qualifying STCG covered by the special-rate provision, the surcharge on that special-rate tax is subject to a 15% cap under the applicable rules. The Income Tax Department's surcharge table shows the 15% cap for STCG covered under Section 111A for the relevant period. 

Consider a simplified example where ₹2 crore of total income is qualifying STCG.

Basic STCG tax at 20% = ₹40 lakh

If a 15% surcharge applies to that special-rate tax:

Surcharge = ₹6 lakh

Tax plus surcharge = ₹46 lakh

Health and Education Cess would then be considered separately.

The important point is that the surcharge treatment for special-rate capital gains isn't the same as the surcharge treatment that can apply to ordinary income. For a high-income taxpayer, that distinction can make a significant difference to the final tax bill.

Which Act and Section Applies to STCG Now?

The law changed from 1 April 2026.

For transfers governed by the Income-tax Act, 1961, qualifying STCG on specified listed securities was covered by Section 111A.

From 1 April 2026, the Income-tax Act, 2025 applies. The corresponding special-rate provision for STCG is Section 196. Section 197 under the new Act deals with long-term capital gains, not STCG. 

The broad comparison is:

Earlier law — Income-tax Act, 1961

Earlier STCG provision — Section 111A

New law — Income-tax Act, 2025

New STCG provision — Section 196

New LTCG provision — Section 197

New Act effective from — 1 April 2026

The important change is the section numbering and the new statutory framework. The special-rate treatment for qualifying STCG remains 20%. 

When Do You Pay STCG Tax, and Where Does It Go in Your Return?

You generally recognise the capital gain when you transfer or sell the investment. An increase in the market price while you still hold the shares is an unrealised gain. It isn't the same as a realised capital gain.

Suppose you sell shares on 15 March 2026. The sale falls in financial year 2025–26. The resulting income is therefore reported for that financial year and generally dealt with in the return for Assessment Year 2026–27.

There are two common ways in which the resulting tax liability can be paid.

Advance Tax: If your estimated tax liability meets the applicable advance-tax threshold after considering relevant tax credits, you may need to pay tax during the financial year rather than waiting until the return is filed. Advance tax is normally paid according to the prescribed instalment schedule.

Self-Assessment Tax: This is the balance tax you pay after calculating your final liability while preparing your return. For example, if TDS and advance tax don't cover the full amount payable, the remaining amount can be paid as self-assessment tax before filing the return.

How Do You Reduce STCG on Shares Legally?

You don't reduce STCG tax by hiding gains. You reduce the tax legally by using provisions that the tax law allows.

Five areas can matter.

1. Tax-Loss Harvesting

Sell an eligible loss-making investment and realise the loss when the transaction fits your investment plan and tax rules. The resulting capital loss can potentially offset eligible capital gains.

For example, if you have ₹2,00,000 of STCG and ₹80,000 of eligible STCL, the net amount after the set-off can be ₹1,20,000, subject to the applicable rules.

2. Use an Unused Basic Exemption Limit

If your other income is below the applicable basic exemption limit, a qualifying resident individual or HUF may be able to use the unused portion against certain special-rate STCG. The exact calculation depends on the tax regime and applicable year.

3. Consider the Holding Period

If you're already close to the 12-month holding period and your investment strategy supports continuing to hold the shares, crossing the required holding period can change the gain from short-term to long-term. Qualifying LTCG is taxed at 12.5% above the applicable ₹1.25 lakh annual threshold. 

But don't hold a stock purely for tax reasons. A tax saving can be smaller than a fall in the share price.

4. Consider an HUF Structure Only Where Appropriate

A Hindu Undivided Family (HUF) is a separate taxable entity in certain circumstances. It can have its own tax treatment and exemption provisions.

However, transferring assets to an HUF isn't a simple way to double tax benefits. The transfer, ownership, income attribution, documentation, and clubbing provisions all need to be considered. Take professional advice before using this structure.

5. Carry Forward Eligible Losses

If you have eligible unused capital losses, you may be able to carry them forward for up to eight assessment years, subject to the applicable conditions. Those losses can then be used against future eligible capital gains.

The basic idea is simple. Tax planning should use the rules that already exist. It shouldn't rely on hiding income or artificially changing the nature of a transaction.

STCG, LTCG or Business Income — Which Applies to You?

The answer depends on what you traded, how you held it, how frequently you traded, and whether the activity is treated as investment or business activity.

STCG (Short-Term Capital Gain)

This generally applies when qualifying listed equity shares are held as a capital asset for 12 months or less before sale. Where the transaction falls under the special-rate provision, the rate is 20% plus applicable surcharge and cess. 

LTCG (Long-Term Capital Gain)

This generally applies when qualifying listed equity shares are held for more than 12 months. The applicable rate for qualifying LTCG is 12.5%, with the ₹1.25 lakh annual threshold applying to the relevant LTCG category. Surcharge and cess can also apply. 

Business Income

This applies when your trading activity is treated as a business rather than an investment. Intraday equity trading is generally treated as speculative business income. Eligible F&O trading is generally treated as non-speculative business income. Frequent and systematic trading activity can also require careful classification based on the facts.

The biggest takeaway is that STCG tax isn't just about multiplying your profit by 20%. The holding period, nature of the transaction, tax classification, eligible losses, basic exemption rules, surcharge, cess, and the applicable tax law all matter. For transactions from 1 April 2026 onward, use the Income-tax Act, 2025 framework and the corresponding provisions rather than relying on the old section numbers.