Short Term Capital Gain on Shares (Section 111A of Income Tax Act) - STCG Tax Rate & Calculation

Any profit or gain that arises from the sale of shares is treated as Capital gains under the Income Tax Act. Capital gains are further classified as short-term or long-term based on their holding period. Gains from equity shares listed on a recognised stock exchange and units of equity-oriented mutual funds having a holding period of less than or equal to 12 months are considered short-term capital gains. Short-term capital gains (STCG) from shares are classified into two parts:

• Short-term capital gains as per section 111A
• Short-term capital gains other than section 111A 

STCG Tax Rate on Shares Under Section 111A

Short-term capital gain under Section 111A is taxed at a concessional rate of 15% with applicable cess. However, with effect from 23rd July 2024, the tax on Short-term capital gain under Section 111A has been increased to 20%.

Short Term Capital Gains (STCG) under Section 111A

1. Applicable on certain assets:

Section 111A is applicable in the case of STCG on the purchase or sale of:

• equity shares or 
• units of equity-oriented mutual funds or 
• units of business trust

2. Conditions for availing concessional rate under Section 111A 

• Transferred through a recognized stock exchange 
• Such transaction is liable to securities transaction tax (STT)

Exception: Transactions undertaken on an International Financial Service Center (IFSC) would be taxable at the concessional rate of 15% even though STT is not leviable.

3. Adjustment of STCG u/s 111A against basic exemption limit

If you are an Indian resident as per income tax and your total income after all the deductions is lower than the basic exemption limit (i.e. basic exemption limit not exhausted) then you are entitled to set off your short-term capital gains, against the shortfall in your basic exemption limit and only the balance amount will be taxed at u/s 111A.

Note: Non-residents, would not be allowed to claim the exemption limit and shall be required to pay a tax of 15% (20% from 23rd July 2024 onwards) on such STCG under section 111A.

Let us understand this by some illustrations –

Illustration 1: Ajay has a taxable salary income of only Rs 1 lakh and a short-term capital gain on the sale of equity shares of Rs 4 lakh. He also has Rs 50,000 as Income from Other Sources. Calculate the STCG Tax applicable. 

You have to add income from other sources of Rs 50,000 to the total taxable salary thereby making it Rs 1.5 Lakh. As there is a shortfall in the absorption of the basic income tax exemption limit of Ajay by Rs 1 lakh, short-term capital gain on the sale of equity can be adjusted to the extent of Rs 1 lakh. 
Tax will be applicable on a short-term capital gain of Rs 3 lakh (Rs 4 lakh – Rs 1 Lakh) at a flat rate of 15% (20% from 23rd July 2024 onwards).

Note: This calculation is as per the old tax regime assuming the basic exemption limit as Rs. 2,50,000.

Suppose he was a non-resident, then he would not be allowed to claim the exemption limit for such STCG and shall be required to pay a tax of 15% (20% from 23rd July 2024 onwards) on the full value of the STCG.

Illustration 2: Mr. A (resident and 59 years old) earns a monthly pension of Rs. 5,000. He purchased shares of ABC Ltd. in January 2024 and sold the same in March 2024 (sold on NSE and STT levied). Such a sale gave rise to an STCG of Rs. 1.5 lacs. Apart from pension income and gain on the sale of shares, he has also made an STCG on property sale amounting to Rs. 1.3 lac. What is his tax liability for the year 2023-24?
Mr. A has these three incomes:
STCG referred to in 111A- Rs. 1.5 lacs
Other STCG (sale of the property)- Rs. 1.3 lac
pension income- Rs. 60,000

The income calculation and taxes thereon shall be calculated as follows,

• He shall first adjust Rs 60,000 against the basic exemption limit of Rs. 2.5 lacs.
• Then Rs.1.3 lac from the sale of property against the remaining Rs. 1.9 lacs (2.5 lacs-60,000).
• STCG on the sale of equity shares shall be adjusted at the end against the balance of Rs 60,000 (2.5 lacs- 1.9 lacs).
• Therefore, he is required to discharge tax @ 15% on the balance STCG of Rs. 90,000 (1.5 lacs- 60,000) along with a cess of 4%.

Points to be noted- 

• If your total income including STCG after applicable tax deductions is below Rs 2.5 Lakh (under old regime) and Rs. 3 lakhs (under new regime), then your total tax liability is nil and also no liability will arise us/ 111A as deduction up to the basic tax exemption limit is allowed
• However, if your total income including STCG is more than Rs 2.5 Lakhs, then a flat 15% on STCG will be levied. 
• However, rebate u/s 87A will be available if total income is less than 5 lakhs (old tax regime) and 7 lakhs (new tax regime) i.e. up to Rs 12,500 or Rs 25,000 of tax liability respectively as per the current income tax regimes

4. No Deductions from STCG under section 80C-80U

Income tax law does not allow any deduction under sections 80C to 80U from the short-term capital gains referred to in section 111A. However, the investor can claim such deduction on short-term capital gains other than those covered under section 111A. 

Example:  Mr A (resident and 59 years old) purchased shares of ABC Ltd. in January 2024 and sold the same in March 2024 (STT is levied). Such a sale gave rise to an STCG of Rs. 1.5 lacs. Apart from STCG, he does not have any other income. He has invested Rs. 1.5 lacs in the Public Provident Fund and wants to claim a deduction of such amount under section 80C. Can he do so?
In the given case, Mr A cannot claim such a deduction under 80C against the STCG as it is a gain referred to in section 111A. Therefore, his taxable income will be Rs. 1.5 lacs which can be adjusted against the basic exemption limit.

5. Set off & carry forward of losses

When an individual sells listed equity shares or units of equity-oriented mutual funds or debt mutual funds that they have held for up to 12 months at a loss, it is considered a Short-Term Capital Loss (STCL). The Indian Income Tax rules allow taxpayers to set off STCL from one capital asset against Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) from another capital asset. This means that if an individual has incurred an STCL from the sale of one capital asset, they can use it to offset gains from the sale of another capital asset within the same financial year.
In addition, a taxpayer can carry forward any remaining STCL for up to 8 future years and use it to set off against future STCG and LTCG only. 

6. No Indexation benefit for STCG

Indexation benefit is not available on the sale of short-term capital assets. Indexation means calculating the cost of the asset by taking inflation into consideration. It is calculated using the Cost Inflation Index (CII) and is applicable only for long-term assets. But with effect from 23rd July 2024, the indexation benefit was removed for long-term assets also.

Calculation of STCG

The STCG on shares can be calculated as follows:

Example:

Mr. A purchased 1000 shares on June 2023 for Rs. 1,00,000 and sold the shares at Rs. 1,40,000 on December 2023 and paid Rs.1,000 as  brokerage. Calculate Capital gains.

Instances of STCG Covered Under Section 111A

• STCG on sale of equity shares of a listed company through the recognised stock exchange and liable to STT
• STCG on sale of units of equity-oriented mutual funds through a recognised stock exchange and liable to STT
• STCG on sale of units of business trust
• STCG on sale of equity shares, units of business trust or units of equity-oriented mutual funds through a recognised stock exchange located in IFSC (International Financial Service Centre) where consideration is paid in foreign currency, even if STT is not liable.

Examples of STCG under Section 111A

1. Ajay sold equity shares of XYZ Ltd (Indian company) on BSE at a profit after holding them for a period of 8 months. What will be the rate applicable on the STCG?
   Ans- As the holding period is less than 12 months gains are classified as short term capital gains. The equity shares are transferred through a recognised stock exchange (STT being paid),  this case is covered under Section 111A.  STCG will be charged at 15% or 20% if sold after 23rd July 2024 (plus surcharge and cess as applicable).
2. Puneet sold units of a mutual fund (with more than 65% corpus vested in equity) through NSE at a profit after holding them for a period of 11 months. What will be capital gains tax applicable?
   Ans- The sale of mutual funds is covered under Section 111A as the fund is an ‘equity-oriented mutual fund’. As units were held for less than 12 months, gains are considered as short-term capital gains. STCG will be charged at 15% or 20% if sold after 23rd July 2024 (plus surcharge and cess as applicable).
3. Ram sold units of a debt fund after holding them for a period of 10 months. What will be the capital gain tax applicable on profits?
   Ans- The capital gains in this case are not covered under Section 111A as Ram sold units of a debt fund. STCG other than those applicable to Section 111A is chargeable to tax at the normal rate applicable.  The normal rate applicable will be determined on the basis of his total income.

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