The taxation of short-term capital gains (STCG) resulting from the sale of specific assets, such as equity shares and units in equity-oriented mutual funds, is covered by Section 111A of the Income Tax Act, 1961. For these gains, this section gives a special tax rate. The idea is to get people to trade in the Indian stock market while keeping taxes low for those who do.
What is a Short-Term Capital Gain (STCG)?
A short-term capital gain is the profit made when an asset is sold within a short time frame after purchase. According to the Income Tax Act, assets like equity shares are considered short-term capital assets if they are sold within 12 months of purchase. If you sell them before the 12-month period ends, any profit you make is taxed as STCG.
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Assets Covered Under Section 111A of Income Tax Act
Section 111A applies to equity shares in a company and units of equity-oriented mutual funds. Equity shares, mutual funds, and business trust units are examples of eligible assets under Section 111A. It is important to note that debt mutual funds and non-equity mutual funds are excluded. However, for the concessional tax treatment to apply, these conditions must be met:
The asset must be listed on a recognized stock exchange in India.
The transaction must be subject to Securities Transaction Tax (STT), which is a tax paid on the sale of securities through the stock exchange.
Tax Rate Under Section 111A of Income Tax Act
Section 111A provides a concessional tax rate of 15% on the short-term capital gains from the sale of listed equity shares and units of equity mutual funds. This is a much lower rate compared to the regular tax rates that apply to other types of income. For example, if you make ₹1,00,000 from the sale of listed equity shares and pay the STT on the transaction, you will be taxed 15% on that ₹1,00,000. This means you will pay ₹15,000 in tax.
Calculation of Tax
The tax on short-term capital gains under Section 111A is calculated in two parts:
Tax on the short-term capital gain: This is calculated at a rate of 15% on the profit earned from the sale of the asset.
Tax on the remaining income: The tax on any other income is calculated as per the normal income tax slabs. For example, if you have a total income of ₹5,00,000, and ₹1,00,000 is from STCG, you will pay the STCG tax of 15% on ₹1,00,000. Then, the remaining ₹4,00,000 will be taxed based on the applicable income tax slabs.
Tax Relief for Resident Individuals and Hindu Undivided Families (HUFs)
Section 111A also provides relief for resident individuals and Hindu Undivided Families (HUFs). If their total income (after reducing the STCG) is below the basic exemption limit, the taxable short-term capital gains will be reduced. This means that if the total income, after deducting STCG, is below the threshold that is not taxable, the tax rate on the remaining STCG will be lowered to 10% instead of the regular 15%.
For example:
If your total income, excluding STCG, is ₹2,40,000, which is below the exemption limit of ₹2.5 lakh, the short-term capital gains will be reduced by the amount needed to bring your income to ₹2.5 lakh.
In such a case, the remaining STCG after this reduction will be taxed at 10% instead of 15%.
Deductions Under Chapter VI-A
Section 111A also allows deductions under Chapter VI-A. Chapter VI-A includes deductions for various investments such as in PPF (Public Provident Fund), life insurance premiums, and other savings instruments. These deductions are allowed from the gross total income after reducing the short-term capital gains.
For example, if you have made investments in a PPF and are eligible for deductions under Chapter VI-A, you can claim these deductions from your income after subtracting the short-term capital gains. This helps in reducing your overall tax burden.
Rebate Under Section 88
If the total income of an individual includes STCG, the individual can also claim a rebate under Section 88. This rebate can be applied to the income tax that is calculated after reducing the short-term capital gains. This is another way in which the government provides relief to taxpayers.
How to Report STCG in Tax Returns?
Taxpayers who earn short-term capital gains from equity shares or equity mutual funds must report the gains in their Income Tax Return (ITR). You must declare the amount of STCG in the capital gains section of the ITR. Additionally, ensure you report the Securities Transaction Tax (STT) paid on the transaction. The STT paid is a crucial piece of information for the tax calculation.
Exclusions from Section 111A of Income Tax Act
While Section 111A offers a concessional tax rate for certain types of assets, it does not apply to all assets. The following are excluded from this section:
Debt mutual funds
Non-equity mutual funds
Unlisted shares
Bonds
Debentures
Real estate or immovable property
For these assets, the gains are taxed according to the regular income tax slabs.
Summary
Section 111A of Income Tax Act, 1961, is an important provision for taxpayers who invest in the stock market and equity mutual funds. It provides tax relief by offering a lower tax rate of 15% on short-term capital gains arising from the sale of listed equity shares and equity-oriented mutual funds. Additionally, for resident individuals and Hindu Undivided Families (HUFs), there is further relief available, where the tax rate on STCG can be reduced to 10% if their total income (after deductions) is below the exemption limit.
Investors need to understand how Section 111A works to take full advantage of the concessional tax rate and ensure that they report their gains correctly in their income tax returns.
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Section 111A of Income Tax Act: FAQs
Q1: What is Section 111A of Income Tax Act?
Section 111A addresses the taxation of short-term capital gains (STCG) arising from the sale of listed equity shares and equity-oriented mutual funds, to which Securities Transaction Tax (STT) is applicable.
Q2: What are short-term capital gains (STCG)?
STCG is the gain realized on the sale of assets such as equity shares or mutual funds that are held for 12 months or less.
Q3: What is the tax rate under Section 111A of Income Tax Act?
The tax rate on short-term capital gains under Section 111A is 15%.
Q4: Are there any tax exemptions under Section 111A?
Yes, for resident individuals and Hindu Undivided Families (HUFs), if their total income after deducting STCG is less than the exemption limit, the tax rate on STCG can be lowered to 10%.
Q5: What assets are covered under Section 111A?
Section 111A deals with the listed equity shares and equity-oriented mutual fund units liable for Securities Transaction Tax (STT).
Q6: Is Section 111A of Income Tax Act applicable to all mutual funds?
No, but it is only for equity-oriented mutual funds. It does not apply to debt mutual funds.
