The gains on shares be it short term or long term are decided by the holding period. The investment in stocks are classified into two parts as per the income tax act
- Short term capital gains as per section 111A
- Short term capital gains other than section 111A
Short term capital gain as under Section 111A
Gains from equity shares listed on a recognised stock exchange having a holding period of less than 12 months are considered as short term capital gains.
Section 111A is applicable in the case of STCG on the purchase or sale of-
- Equity shares or equity-oriented mutual fund units
- Transferred through a recognised stock exchange
- Such transaction is liable to securities transaction tax (STT)
Please note that equity-oriented mutual funds are those that invest at least 65% of their assets in the equity shares of domestic companies.
If the conditions mentioned above are satisfied, then the transfer of the stocks will be considered as ‘Short term capital gains under section 111A.
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.
Tax rate applicable for STCG on shares
Short-term capital gain under section 111A is taxed at a flat tax rate of 15% with applicable cess.
Adjustment of STCG u/s 111A against basic exemption limit
If you are an Indian resident as per income tax and your total income post various deductions is lower than the basic exemption limit, then you are entitled to set off your short-term capital gains and long-term capital gains on equity investments (> 1-year holding); and long-term capital gain on investments other than the equity investments, against the shortfall in your basic exemption limit.
Let us understand this by an illustration –
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 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%.
Points to be noted-
- If your total income including STCG after applicable tax deductions is below Rs 2.5 Lakh, 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 i.e up to Rs 12,500 of tax liability as per current income tax regime)
Deductions from STCG under section 80C-80U
Income tax Laws do not allow any deduction under section 80C to 80U from the short term capital gains referred to section 111A.
However, the investor can claim such deduction on short term capital gains other than those covered under section 111A.
Illustration of STCG under Section 111A
- 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?
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% (plus surcharge and cess as applicable).
- 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 unites were held for less than 12 months, gains are considered as short term capital gains. STCG will be charged at 15% (plus surcharge and cess as applicable).
- Iyer 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 Iyer sold units of a debt fund. STCG other than those applicable to Section 111A are 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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