Section 111A of Income Tax Act – Tax on Short-Term Capital Gains

Key Takeaways

• Section 111A of the Income Tax Act deals with Short-Term Capital Gains (STCG). You are liable to pay 20% tax under Section 111A; earlier (before 2024) it was 15%.
   
• You need to pay 20% tax on STCG under Section 111A arising from the sale of Equity shares of a listed company, Equity-oriented mutual funds, and Units of a business trust traded on a recognised stock exchange with STT paid.
   
• You are eligible to adjust STCG against the unused portion of your exemption limit under Section 111A. However, this is not applicable for a non-resident.

Section 111A of the Income Tax Act deals with the taxation of short-term capital gains (STCG) on specific securities at a concessional rate.

Suppose Deepak earns a monthly salary of ₹35,000. During the year, he purchased listed shares worth ₹1,50,000. After holding them for 8 months, he sold them for ₹1,90,000. His profit was ₹40,000. Since these shares were sold on a recognised stock exchange and Securities Transaction Tax (STT) was paid, his gain fell under Section 111A. 

Deepak’s total income was ₹4,20,000. His basic exemption was ₹2,50,000. This left ₹1,70,000 as taxable income. Out of this, ₹40,000 was taxed separately under Section 111A at 20% (before July 2024). This results in ₹8,000 tax under Section 111A.

In this blog, we will learn more about Section 111A, its importance, objectives, and exemptions. 

What Is Section 111A?

Section 111A provides that STCG from the sale of equity-oriented mutual funds, equity shares, or units of a business trust are taxed at a special rate when sold through a recognised stock exchange with STT paid. Earlier, the rate was 15%, but from 23 July 2024 onwards, the rate has been revised to 20%.

This rate applies irrespective of the individual’s normal tax slab. However, resident individuals and Hindu Undivided Families (HUFs) can still adjust unused basic exemption limits before applying this tax.

Importance Of Section 111A

Section 111A plays an important role in the taxation of stock market and mutual fund investments. The following table highlights why Section 111A is important for taxpayers:
 

Section 111A offers uniform treatment. This builds confidence among investors and reduces confusion around tax planning.

Objectives Of Section 111A

The main aim of Section 111A is to bring fairness, consistency, and clarity in taxing certain STCG. The following table highlights the key objectives of Section 111A:
 

From the above-mentioned table, you can conclude that the provision supports fair taxation while keeping investments attractive.

Exemptions Under Section 111A

If you are a resident, then you can reduce your STCG under Section 111A using the leftover basic exemption limit.

• If the total income (excluding STCG) is below the exemption threshold, the shortfall can reduce the taxable STCG.
   
• The balance, if any, is then taxed at 15% (20% from 23 July 2024 onwards).
   

However, non-resident taxpayers cannot claim this benefit and must pay tax at the prescribed rate on the entire gain.

Nimisha’s taxable salary income is ₹1,00,000. She earned ₹4,00,000 by selling equity shares (STCG). Nimisha also earned ₹50,000 from other sources. The following table shows her total income:
 

Here, taxable income other than STCG is ₹1,50,000. Since the basic exemption limit is ₹2,50,000, Nimisha can still use ₹1,00,000 for other deductions. This can be adjusted against STCG, reducing taxable STCG from ₹4,00,000 to ₹3,00,000.

Nimisha needs to calculate tax on the remaining gain as per Section 111A (20% of ₹3,00,000 = ₹60,000). However, if Nimisha were a non-resident, then she would not be allowed to adjust the exemption limit. In that case, the entire STCG of ₹4,00,000 would be taxable at 15% (or 20% after 23rd July 2024).

Bonus Tip: A short-term capital loss under Section 111A cannot be set off against salary, rent, or business income. It can only be adjusted against other capital gains, and if unused, carried forward for 8 years.

Final Thoughts

Equity-based mutual funds and equity shares generating STCG are taxed under Section 111A. If you know the exemption rules, rebate conditions, and rate changes, then it helps you plan better.

As a resident taxpayer, you can adjust short-term capital gains against the portion of the basic exemption limit you have not used. This is not applicable to a non-resident. You must always remember that correct reporting in your ITR is necessary to avoid notices.

FAQs

1. Do NRIs get the benefit of the basic exemption limit under Section 111A?

No, NRIs must pay tax on the full STCG amount.

2. When was section 111A introduced?

Section 111A was introduced in 1961.

3. Can I show STCG in ITR 1?

No, capital gains cannot be shown in ITR 1. You need to file ITR 2 for STCG.

4. Do I need to file ITR for mutual funds?

Yes, you are required to file your income tax return if mutual funds have given you capital gains.

5. Can I offset short-term capital gains with long-term capital gains?

No,it is not possible to offset STCG with long-term capital gains (LTCG). You can only adjust STCG against short-term losses.

6. Is 87A rebate available for 111A?

From FY 2025-26, 87A rebate under the new regime does not apply to STCG under Section 111A, though some taxpayers were denied it early in FY 2023-24 and 2024-25.

7. Is capital gain indexation removed?

Yes, indexation benefits have been removed for debt mutual funds purchased in the budget 2024.

 

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