Important Keyword: Section 111A, Capital Gains, Equity Trading, STCG, STT.

Section 111A: Tax on Short-Term Capital Gain

When it comes to understanding taxes on capital gains, Section 111A of the Income Tax Act holds significance. This section specifically addresses short-term capital gains arising from the sale of listed equity shares, equity mutual funds, and units of business trust, provided Securities Transaction Tax has been paid.

Short-term capital gains refer to the profits or losses incurred from selling listed equity shares and similar equity instruments held for less than 12 months. Under Section 111A, these gains are subject to taxation at a rate of 15%, plus any applicable surcharge and cess.

This provision ensures clarity and uniformity in taxing short-term capital gains, offering investors a clear understanding of their tax liabilities when dealing with listed equity shares, equity mutual funds, and units of business trust. Understanding these taxation rates enables investors to make informed decisions and plan their investments effectively.

What is Short-Term Capital Gain Tax under Section 111A?

Section 111A of the Income Tax Act is a crucial provision governing the taxation of Short-Term Capital Gains arising from specific securities, subject to certain conditions. It applies to Short Term Capital Gains derived from equity shares, units of equity-oriented mutual funds, and units of business trusts, provided the transactions meet specific criteria.

For the benefit of Section 111A to apply, the following conditions must be fulfilled:

1. The securities must be transferred through a recognized stock exchange.
2. Securities Transaction Tax must be paid at the time of both purchase and sale.

Moreover, Section 111A extends its coverage to transactions involving the sale of equity shares, equity mutual funds, or units of business trusts listed on a recognized stock exchange in an International Financial Services Centre (IFSC), even if Securities Transaction Tax is not paid, provided the consideration is paid or payable in foreign currency.

When these conditions are met, any Short-Term Capital Gains realized from such transactions is taxable at a special rate of 15%, as per Section 111A.

However, it’s important to note that Short Term Capital Gains arising from the sale of unlisted shares, debt mutual funds, bonds, debentures, immovable property, motor vehicles, jewelry, etc., are taxed at slab rates and not under the special rate prescribed by Section 111A.

Calculation of tax on STCG u/s 111A

Let’s delve into the tax calculation using an example:

Mr. Akash, a resident of India, purchased 10,000 equity shares of Reliance Industries Limited in December 2022 at INR 100 per share. Subsequently, he sold the shares in April 2023 at INR 135 per share via the Bombay Stock Exchange (BSE). For the transaction, he incurred brokerage costs amounting to INR 1 per share and paid Securities Transaction Tax totaling INR 1500. Additionally, he earns a salary income of INR 8,40,000.

Since Mr. Akash sold the equity shares within 12 months, the gain will be treated as Short-Term Capital Gain. Given that the shares were listed and Securities Transaction Tax was paid, the Short-Term Capital Gains is taxable at a special rate of 15% under Section 111A.

Hence, in this case, the calculation of short-term capital gain tax will be as follows:

Adjustment of STCG u/s 111A against Basic Exemption Limit

resident taxpayers have the advantage of offsetting special rate income against the basic exemption limit to minimize taxes. If the total taxable income falls below the basic exemption limit, it can be adjusted against special rate income such as Short Term Capital Gains under Section 111A, LTCG under Section 112A, etc., and taxes are only paid on the remaining income.

For instance, let’s consider Mr. Akash, a resident Indian, who solely earns income from capital gains without any other earnings. In such a scenario, the tax liability is calculated as follows:

As Mr. Akash is a resident taxpayer and hasn’t utilized the basic exemption limit, he can utilize the benefit of adjusting special rate income against the basic exemption limit.

Therefore, taxable STCG amounts to INR 90,000 (3,40,000 – 2,50,000). Tax Liability equals INR 13,500 (90,000 * 15%).

Reporting in ITR

When reporting income from capital gains, taxpayers must utilize specific sections of the Income Tax Return (ITR), such as ITR-2 and ITR-3. This information is documented in sr.no. A2 of Schedule CG of the ITR. Here’s what taxpayers need to provide:

1. Full value of consideration (sales value)
2. Deductions under Section 48
3. Cost of acquisition (purchase value)
4. Expenditure wholly and exclusively in connection with transfer (transfer expenses)

Once these details are entered, the Short-Term Capital Gain on shares is automatically calculated.

Regarding losses, if a taxpayer incurs a loss on the sale of listed equity shares and mutual funds held for up to 12 months, it’s classified as a Short Term Capital Loss (STCL). Here’s how losses can be managed:

• STCL can be set off against both Short Term Capital Gains and Long Term Capital Gains (LTCG) in the current year.
• Any remaining loss can be carried forward for up to 8 years to set off against future STCG and LTCG.

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Official Income Tax Return filing website: https://incometaxindia.gov.in/