Short-Term Capital Gains on Shares under Section 111A: Capital gains from the transfer of a capital asset are subject to taxation under the head of capital gains. The rates of tax vary based on the type of capital asset and its holding period. This article focuses on short-term capital gains in shares/stocks, specifically those covered under section 111A.
Table of contents
- Short-Term Capital Gains Covered under Section 111A
- Holding Period to Calculate Short-term Capital Gains on Shares
- Short-term Capital Gains Tax Rates U/s 111A
- Deductions and Set-Offs on Short-Term Capital Gains u/s 111A
- Basic Exemption Limit Adjustment of STCG u/s 111A
- Planning Tips for STCG u/s 111A
- Examples of STCG u/s 111A
Short-Term Capital Gains Covered under Section 111A
- Definition: Short-term capital gains arising from the transfer of equity shares, units of equity-oriented funds, or units of business trusts fall under this category.
- Tax Rate: The entire short-term capital gain is taxable at a flat rate of 15%.
- Conditions: The asset should have been acquired after October 1, 2004, and Security Transaction Tax (STT) must have been paid at the time of transfer.
When it comes to the taxation of capital gains, the holding period of the asset plays a significant role. Different types of assets have varying holding periods that determine whether the gains will be classified as short-term or long-term.
In the table provided below, we outline the holding periods and taxation for different types of assets, including securities listed in a recognized stock exchange, units of equity-oriented funds, units of UTI, and zero-coupon bonds. By familiarizing yourself with these classifications, you can better navigate the tax implications associated with your investments.
| Nature of Asset | Short-Term Capital Gains | Long-Term Capital Gains |
|---|---|---|
| Security Listed in a Recognised Stock Exchange (shares/stocks) | Less than 12 months | More than 12 months |
| Units of Equity-Oriented Fund | Less than 12 months | More than 12 months |
| Units of UTI | Less than 12 months | More than 12 months |
| Zero-Coupon Bonds | Less than 12 months | More than 12 months |
Short-term Capital Gains Tax Rates U/s 111A
Under Section 111A, certain assets, such as listed equity shares, equity-oriented mutual funds, and business trust units, are subject to flat tax rates @ 15% for short-term capital gains. These rates provide clarity and consistency in the taxation of gains arising from the sale or transfer of these assets within a specified holding period. In the table below, we present the tax rates applicable to different types of assets falling under Section 111A. By understanding these rates, taxpayers can effectively assess their tax obligations and make informed decisions regarding their investments.
| Types of Assets | Tax Rate |
|---|---|
| Listed Equity Shares | Flat Rate @ 15% |
| Equity Oriented Funds | Flat Rate @ 15% |
| Business Trust Units | Flat Rate @ 15% |
Explanation:
- Listed Equity Shares: Tax Rate: The short-term capital gains on listed equity shares are subject to a flat rate of 15%.
- Equity-Oriented Funds: Tax Rate: The short-term capital gains on equity-oriented funds are also taxed at a flat rate of 15%.
- Business Trust Units: Tax Rate: Short-term capital gains on business trust units are subject to the same flat rate of 15%.
Deductions and Set-Offs on Short-Term Capital Gains u/s 111A
- Deductions under Chapter VI-A are not allowable against short-term capital gains covered under section 111A.
- Short-term capital losses can be set off against any capital gain (both long-term and short-term), but not against any other income.
- Unused short-term capital losses can be carried forward for up to eight assessment years and set off against capital gains in those years.
Basic Exemption Limit Adjustment of STCG u/s 111A
If you are an Indian resident and your total income after deducting the deductions is below the basic exemption limit (the amount below which you are not required to pay taxes), you can use your gains from selling stocks or other investments to reduce the gap between your total income and the basic exemption limit.
By using this benefit of basic exemption limit against the STCG u/s 111A, you can potentially reduce or eliminate your tax liability. This provision helps individuals with lower incomes benefit from the basic exemption limit and reduce their tax burden by utilizing their gains from investments.
Understanding Adjustment of Basic Exemption on Short-Term Capital Gains: Step-by-Step Explanation
1. Determine your total income: Calculate your total income, which includes all sources of income, including short-term capital gains (STCG) from investments.
2. Check if total income is below Rs 2.5 lakh: If your total income is below Rs 2.5 lakh, you are not liable to pay any tax. No tax liability will arise, including for short-term capital gains covered under section 111A. This is because your income falls within the basic tax exemption limit.
3. Determine tax liability if total income is above Rs 2.5 lakh: If your total income, including short-term capital gains, is more than Rs 2.5 lakh, you will be subject to income tax. For short-term capital gains covered under section 111A, a flat tax rate of 15% will be levied on the gains.
4. Consider the rebate under section 87A: If your total income is less than Rs 5 lakh, you may be eligible for a rebate under section 87A. This rebate can reduce your tax liability by up to Rs 12,500, subject to the current income tax regime. It is important to note that this rebate is applicable to the overall tax liability, including short-term capital gains.
By following these steps, you can determine your tax liability based on your total income, deductions, and the applicability of short-term capital gains tax under section 111A. It is always recommended to consult with a tax professional or refer to the latest income tax regulations for accurate and up-to-date information regarding tax exemptions, deductions, and rebates.
Planning Tips for STCG u/s 111A
Timing for Capital Gains
- Plan the transfer of capital assets to coincide with years when recurring income falls below taxable limits, maximizing the benefit of the basic exemption limit.
- For transfers of equity shares/units of equity-oriented mutual funds (Section 111A), opt for long-term capital gains instead of short-term capital gains, as long-term gains exceeding 1 lakh are taxed at 15%, while short-term gains are taxed at the same rate.
Optimizing Losses
- Avoid claiming short-term capital losses against long-term capital gains. Instead, utilize them against short-term capital gains. If possible, create some short-term capital gains in the same year or defer long-term capital gains to the following year.
Other Points to Note:
- Benefit of Rebate u/s 87A: Taxpayers are eligible for the rebate under section 87A.
- Enhanced Surcharge: Enhanced surcharge rates of 25% or 37% do not apply to short-term capital gains tax under section 111A. The maximum surcharge leviable on such gains is 15%.
Understanding the taxation rules for short-term capital gains on investments in shares/stocks (Section 111A) is essential for taxpayers. By considering the applicable tax rates, holding periods, deductions, set-offs, and planning strategies, individuals can make informed decisions to optimize their tax liabilities and achieve maximum returns on their investments.
Don’t forget to read the detailed article on Capital Gains Tax on Shares: Long-Term & Short-Term A.Y. 2023-24
Examples of STCG u/s 111A
Example: Priya sold units of an equity-oriented mutual fund after holding them for 10 months, resulting in a profit. What will be the rate applicable on the short-term capital gains (STCG)?
In this scenario, Priya’s gain from selling the units of an equity-oriented mutual fund falls under the category of short-term capital gains (STCG). To determine the applicable tax rate, we need to consider the provisions of Section 111A and the holding period.
Since Priya held the units for 10 months, which is less than 12 months, the gain will be treated as short-term capital gains.
According to Section 111A, short-term capital gains on equity-oriented funds are subject to a flat tax rate.
The applicable tax rate for short-term capital gains covered under Section 111A is a flat rate of 15%.
Therefore, Priya’s short-term capital gains from the sale of units in the equity-oriented mutual fund will be subject to a tax rate of 15%.
Example: Meera sold shares of a company after holding them for 9 months, resulting in a loss. How will the loss be treated for tax purposes?
In this example, Meera incurred a loss from selling shares of a company after holding them for 9 months. It is important to understand how such losses are treated for tax purposes.
When an individual incurs a loss from the sale of shares or other capital assets, it is considered a capital loss. Capital losses can be set off against capital gains to reduce the overall tax liability.
If Meera has any capital gains (short-term or long-term) from other investments in the same financial year, the capital loss from the sale of shares can be set off against those gains. This means that Meera can deduct the loss from her capital gains, reducing the taxable amount.
If the capital loss exceeds the capital gains in a particular financial year, the remaining loss can be carried forward to future years. Meera can carry forward the loss for up to eight assessment years and set it off against capital gains in those years.
However, it’s important to note that capital losses can only be set off against capital gains and not against salary income.
