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.
We have used a few illustrations so that you can understand the section better.
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).
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).
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.
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%).
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:
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:
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.
Section 111A operates for short-term capital gains in the following cases:
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:
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).
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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STCG or short-term capital gains is the returns you earn on mutual fund returns depending on a particular holding period. For equity mutual fund investments, STCG is applicable on returns earned on mutual fund units held for less than 12 months. For debt mutual fund investments, STCG is applicable if the holding period is less than 36 months.
For equity mutual funds, the STCG tax rate is 15%. For debt funds, STCG is taxed as per the investor’s tax slab rate.
Follow the below pointers to understand the exemption limit under Section 111A:
-The exemption limit is Rs.5 lakh for resident individuals of the age of 80 years or above.
-The exemption limit is Rs.3 lakh for resident individuals of the age of 60 years or above but below 80 years.
-The exemption limit is Rs.2.5 lakh for resident individuals of the age below 60 years.
-The exemption limit is Rs.2.5 lakh for non-resident individuals irrespective of the age of the individual.
-The exemption limit is Rs.2.5 lakh for Hindu Undivided Family (HUF).
Section 111A deals with provisions for tax on STCG on listed equity shares whereas Section 112A deals with long term capital gains (LTCG) on listed equity shares. The period of holding should be more than 1 year to qualify for taxation under Section 112A.
|Section 112A||Section 50||Section 245|
|Section 80QQB||Section 32AD||Section 250|
|Section 35D||Section 143 (1a)||Section 115BAB|
|Section 143||Section 79||Section 140A|
|Section 17(2)||Section 3||Section 94A|
|Section 147||Section 80||Section 40A|
|Section 48||Section 115AD||Section 14A|
|Section 45||Section 285BA||Section 6|
|Section 36||Section 87A||Section 80GGA|
|Section 244A||Section 234E||Section 28|
|Section 197||Sectio 548||Section 194J(1)(ba)|
|Section 145A||Section 80P||Section 92CD|
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