Short-Term Capital Gains Tax Under Section 111A of the Income Tax Act

What is Section 111A of the Income Tax Act?

Section 111A of the Income Tax Act deals with taxation on STCG (Short-Term Capital Gains) for equity investments. STCG is applicable for returns earned on debt mutual fund investments as well, however, the taxation isn’t covered under Section 111A. Let’s understand this with an example.

Point to Note:

Equity mutual funds are mutual funds that invest more than 65% of its corpus in equity shares of domestic companies.

Section 111A of the Income Tax Act Example

We have used a few illustrations so that you can understand the section better.

Situation 1

Rajat sells shares of MNL Pvt. Ltd via the Bombay Stock Exchange. He holds the units for 7 months. So, he will have short-term capital gains. Since the shares have been moved through a well-known stock exchange (with STT charged), Section 111A will be applicable. A tax of 15% is levied on STCG (plus cess and surcharge). 

Situation 2

Lalit sells mutual fund units (investing 65% of the corpus in equity) via the National Stock Exchange. The investment has a holding period of 10 months, and Lalit is entitled to short-term capital gains. Section 111A covers such an investment option, and a tax of 15% is applicable on STCG (with cess and surcharge).

Situation 3  

Meera sells debt fund units after 9 months of holding them. She will be having short-term capital gains, which don’t come under section 111A. In this case, the tax implication on STCG will depend on the regular tax rate applicable to Meera’s income.   

Example

For Miss Rekha, the taxable salary is Rs.2,00,000 and STCG through the sale of shares is Rs.3,00,000. The tax deduction limit for her is Rs.2,50,000. So, there is a deficit of Rs.50,000 (Rs.2,50,000 – Rs. 2,00,000) in this limit. 

Miss Rekha can adjust her STCG with the additional Rs.50,000 deduction. Now, the residual STCG of Rs.2,50,000 (Rs.3,00,000 – Rs.50,000) will be taxable (tax rate is 15%).   

Exemptions Under Section 111A of the Income Tax Act 

In certain cases, Section 111A will not be levied on short-term capital gains. Here’s a list of instances where Section 111A will not be applicable:

• If you hold capital assets and not stocks.
• Securities Transaction Tax (STT) is not charged on the transfer of shares listed on the Stock Exchange in the International Financial Service Center (IFSC).
• Foreign Institutional Investors (FII) as they are capital assets.

Deductions from Short-Term Capital Gains Under Section 111A

Deductions under Chapter VI-A are allowed from the gross total income after reduction from capital gains under Section 111A of the Income Tax Act. The following deductions are allowed against the sale of shares leading to STCG:

1. Cost of acquisition
2. Transfer expenses

Additionally, income tax rebates under Section 88 are allowed on total income if it includes any short-term capital gains. This provides a tax rebate of up to 20% of expenses deposited towards life insurance or annuity plans. 

When is Section 111A of the Income Tax Act Applicable?

Section 111A operates for short-term capital gains in the following cases:

• Buying and selling of stocks or equity-based fund units.
• Transferring shares via a recognised stock exchange.
• STT or Securities Transaction Tax is applicable on the sale of equity shares/funds. 

• STCG on selling units of a trust.
• STCG through the sale of mutual fund units, business trust units or shares via a stock exchange situated in IFSC wherein foreign currency is used (even if there is no STT).

Also Read

Differences Between Taxes On Long-Term and Short-Term Capital Gains

Section 115AD of Income Tax Act: Taxation On Foreign Institutional Investors

STCG Adjustment as per the Exemption Limit

If you’re an Indian resident, and your income after tax deductions is below the exemption limit, you can set off the following against a deficit in your exemption limit:

• STCG on equity investments
• LTCG from investing in equity
• LTCG from investments other than equity

Things to Remember while Considering Section 111A of the Income Tax Act

• If your earnings (adding STCG) after tax deductions are less than Rs.2.5 lakh there will be no tax liability for you. Tax implications under section 111A will also be nil. 
• When your income (adding STCG) exceeds Rs.2.5 lakh then taxation on STCG at the rate of 15% is applicable. However, when your earnings are below Rs.5,00,000, you can avail of a tax rebate under Section 87A. The old and new tax regimes allow a rebate of up to Rs.12,500.

Adjustment on Unused Basic Exemption Limit on ST Gains under Section 111A

According to Income Tax laws, taxpayers can adjust capital gains against the basic exemption limit. In India, this exemption limit is Rs.3 lakh for individuals below 60 years of age and all NRIs. Senior citizens (60-80 years) and super senior citizens (80 years+) are not liable to pay taxes for an annual income of up to Rs.3 lakh and Rs.5 lakh, respectively. 

According to Section 111A, those with annual income below the above limits can set off their capital gains to reduce their tax liability. They can offset their short-term capital gains (STCG) and long-term capital gains (LTCG) from both equity and debt investments against the shortfall in their basic exemption limit. 

Let us say that Mr Sharma has a total income of Rs.2 lakh in a year. If he makes Rs. 2 lakh in capital gains by selling shares, taxes would be applicable on capital gains of Rs.1.5 lakh (Rs.2 lakh – Rs.50,000).

Final Word

Section 111A of the Income Tax Act stipulates a tax rate for short-term capital gains specified under Section 2(42A). Note that the section only deals with sale of equity shares. Any form of debt investments are not covered under this section.

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