What Is Section 111A Of The Income Tax Act: Exemptions And Deductions

Section 111A of the Income Tax Act deals with taxation rules for short-term capital gains. The profits generated from investments in stocks are termed as long-term or short-term capital gains depending on the holding period of equity shares. If you have invested in short-term equity funds, you must know the tax rules under Section 111A.

This post gives a detailed overview of Section 111A of the Income Tax Act, when it is applicable, examples and exceptions. Read on to get all the details!

What is Section 111A of the Income Tax Act?

Section 111A of the Income Tax Act stipulates 15% taxation on STCG (Short-Term Capital Gains) on the taxable income of the assessee. However, this would be applicable only if an individual or HUF’s (Hindu Undivided Family) total income from capital gains exceeds a certain maximum limit not chargeable to income tax.

Investors holding equity shares for 1 year or less are said to have short-term capital gains or STCG. Income from equities is taxable as per rules of the IT Act 1961 under the following two categories:

• Short-term capital gains under Section 111A 
• Short-term capital gains except for Section 111A

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).

Examples of Section 111A of the Income Tax Act

Let’s go through the following illustrations to understand this 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%).   

Also Read: Difference Between Long-Term and Short-Term Capital Gains Tax

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. 

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.

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

STCG Adjustment as per the Exemption Limit

When you are 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. 2,50,000, there will be no tax liability for you. Tax implications under section 111A will also be nil. 
• When your income (adding STCG) exceeds Rs. 2,50,000, 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. 2.5 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). You must know about the crucial deductions of the IT department to reduce your tax burden. Section 80C gives a deduction of up to Rs. 1,50,000 on investments in ELSS funds. Navi Long Term Advantage Fund is an ELSS fund offering a tax benefit of up to Rs. 46,800 to investors. You can avail of this scheme through platforms such as Groww, Kuvera and Paytm Money. 

FAQs on Section 111A of the Income Tax Act

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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.