Section 111A: Tax on Short-Term Capital Gains (STCG) on Equity Shares & Mutual Funds

Section 111A of the Income Tax Act, 1961, is a pivotal provision that governs the taxation of Short-Term Capital Gains (STCG) arising from the sale of specific equity-related financial assets. Introduced to streamline taxation on market-linked transactions, it provides a special tax rate for gains from listed equity shares and equity-oriented mutual funds, provided certain conditions are met.

What is Short-Term Capital Gain (STCG)?

A capital gain is the profit realized from the sale of a capital asset. For taxation purposes, capital gains are categorized into short-term and long-term based on the holding period of the asset.

• For listed equity shares, equity-oriented mutual funds, and units of a business trust, an asset is considered a short-term capital asset if held for 12 months or less immediately preceding the date of transfer.
• Any profit made from the sale of such assets within this 12-month period is treated as Short-Term Capital Gain (STCG).

Applicability of Section 111A

Section 111A applies specifically to STCG arising from the transfer of the following capital assets:

• Listed Equity Shares: Equity shares of a company listed on a recognized stock exchange in India.
• Units of Equity-Oriented Mutual Funds: Mutual fund schemes that invest at least 65% of their investible funds in equity shares of domestic companies.
• Units of a Business Trust: This includes Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).

Key Conditions for Applicability:

For the special provisions of Section 111A to apply, the following conditions must be satisfied:

• The transaction of sale of such equity share or unit must be entered into on or after October 1, 2004.
• The transaction must be chargeable to Securities Transaction Tax (STT). This means the sale must typically occur on a recognized stock exchange in India.
• Exception: The benefit of the concessional tax rate may also be available if the transaction is undertaken on a recognized stock exchange situated in an International Financial Services Centre (IFSC) and the consideration is paid or payable in foreign currency, even if STT is not paid.

Tax Rate under Section 111A

The STCG covered under Section 111A is subject to a special concessional tax rate. According to recent amendments (effective July 23, 2024), the tax rate is:

• 20% of the STCG.

Prior to July 23, 2024, this rate was 15%. This tax rate is applied plus applicable surcharge and health & education cess.

Benefit for Resident Individuals and HUFs (Basic Exemption Limit Adjustment):

For resident individuals and Hindu Undivided Families (HUFs), if their total income (excluding the STCG taxable under Section 111A) is below the basic exemption limit, then the STCG will be reduced by the amount by which the total income (excluding STCG) falls short of the basic exemption limit. The remaining STCG will then be taxed at 20%.

Example: If a resident individual's basic exemption limit is Rs. 2.5 lakh, and their other income is Rs. 2 lakh, they have an unutilized exemption of Rs. 50,000 (Rs. 2.5 lakh - Rs. 2 lakh). If they have an STCG of Rs. 3 lakh taxable under Section 111A, then Rs. 50,000 of this STCG will be exempt, and the tax of 20% will be applied only on the remaining Rs. 2.5 lakh (Rs. 3 lakh - Rs. 50,000).

Calculation of Short-Term Capital Gains

The STCG is calculated as follows:

It's important to note that Securities Transaction Tax (STT) paid on the transaction is not allowed as a deduction when calculating the capital gain or as an expense against the income under Section 111A.

When Section 111A is NOT Applicable

The provisions of Section 111A do not apply in the following cases:

• Unlisted Equity Shares: Gains from the sale of unlisted equity shares are taxed at the applicable slab rates.
• Debt-Oriented Mutual Funds: Gains from debt mutual funds are taxed as per the investor's income tax slab rates, irrespective of the holding period (for units acquired on or after April 1, 2023). Previously, if held for less than 36 months, they were short-term.
• Other Capital Assets: Short-term gains from assets like real estate, gold, bonds, debentures, etc., are not covered by Section 111A and are taxed at the normal slab rates applicable to the taxpayer.
• Off-Market Transactions: If listed equity shares or equity-oriented mutual funds are transferred off-market (i.e., not through a recognized stock exchange) or if the transaction is not subject to STT.

Important Points to Remember

• No Deductions under Chapter VI-A: Deductions under Chapter VI-A (e.g., Section 80C, 80D, 80G, etc.) are not allowed from the STCG taxable under Section 111A. These deductions are only allowed from other sources of income.
• Rebate under Section 87A: For resident individuals whose total income (including STCG under Section 111A) does not exceed Rs. 5 lakh, a tax rebate of up to Rs. 12,500 is available under Section 87A. This rebate can effectively make STCG up to a certain limit tax-free, if the total taxable income falls within the eligible bracket.
• Set-off of Losses: Short-term capital losses can be set off against both short-term and long-term capital gains. Unabsorbed short-term capital losses can be carried forward for 8 assessment years.
• Securities Transaction Tax (STT): STT is a tax levied on the value of securities transacted through a recognized stock exchange. It is typically 0.1% for delivery-based equity trading (both buy and sell side) and varies for other transactions like intraday, futures, and options. While STT makes the transaction eligible for Section 111A, the STT amount itself is not deductible from the capital gain.

Understanding Section 111A is crucial for investors dealing in equity markets and equity-oriented mutual funds. The special tax rate and specific conditions associated with this section significantly impact the overall tax liability on short-term gains, making it essential for effective tax planning and compliance.