Short Term Capital Gain Tax - Section 111A of the Income Tax Act

What is short-term capital gain?

Short-term capital gain (STCG) is the profit that arises when you sell a short-term capital asset. An asset is categorized as short-term or long-term based on the period for which you hold the asset.

An asset held for less than 36 months before parting with the same shall be categorized as short-term.

Such term shall be reduced to 12 months for the following assets:

• Equity or preference shares of a company that are listed on any recognized stock exchange in India;
• Units of UTI;
• Units of equity-oriented mutual funds;
• Zero-Coupon Bonds;
• Other listed securities;

Note: The 36 months criteria shall be reduced to 24 months in case of immovable property (i.e., land, building, or both) and unlisted shares.

For section 111A, the criteria of 12 months are relevant for determining whether the asset is a short-term capital asset.

---

Conditions for applicability of Section 111A

Section 111A shall apply if the following conditions are fulfilled:

• STCG arises on the transfer of equity shares or units of business trust or units of equity-oriented mutual funds (*),
• if the above-mentioned capital assets are transferred on or after 1-10-2004 through a recognized stock exchange and
• if such a transaction is subjected to the levy of securities transaction tax (STT), a tax paid when you buy or sell securities on a recognized stock exchange.

*Note: Equity-oriented mutual fund means a mutual fund specified under section 10(23D) of the Act where 65% of its portfolio is invested in equity shares of domestic companies.

Therefore, any profit arising on the sale of equity/units of business trust/units of equity-oriented mutual funds, within one year of their acquisition, through a recognized stock exchange on which STT has been paid shall be treated as short-term capital gain under section 111A.

However, the third condition of payment of STT is not applicable in case:

• the transaction is undertaken on a recognized stock exchange that is located in an International Financial Service Centre, and
• the consideration is paid or payable in foreign currency.

---

The tax rate applicable under section 111A

The short-term capital gains under section 111A shall be taxed at a rate of 15% (plus surcharge if applicable and cess)

Illustrations:

Mr. A sold equity shares of Tata Motors Ltd. through National Stock Exchange (NSE) for a profit of INR 5,000 after holding them for 11 months. Is he liable to pay any tax on such a sale?
Yes, the profits earned on the sale of shares are treated as STCG and shall be taxable at @15% under section 111A.

Suppose Mr. A held the above-mentioned shares for 15 months. Will he still be liable to pay tax on the profits?
Yes, such profits will still be liable to tax as long-term capital gains and shall not be taxable under section 111A.

---

Can the basic exemption limit be adjusted against STCG mentioned in section 111A?

The basic exemption limit is the maximum amount that shall not be taxable. Such limit is INR 2.5 lacs, but for senior citizens(60 years or more but less than 80), it is INR 3 lacs and INR 5 lacs for super-senior citizens(80 years of age and above). Thus, the tax rate is nil for income within these specified limits.

There are certain rules for income adjustment against the basic exemption limit. According to this, resident individuals and HUF can adjust the STCG u/s 111A against the basic exemption limit. However, such adjustment is possible only after adjusting other income. In other words, the order of adjustment shall be as follows:

1. income other than STCG
2. STCG other than STCG u/s 111A, i.e., on sale of property, debt-oriented funds, etc.
3. STCG u/s 111A

Non-resident individuals/HUF can adjust all income specified in i) and ii) above except for STCG u/s 111A.

Certain illustrations on the above rules:

• a) Mr. A has a salary income of INR 1,80,000 p.a. and has earned an interest of INR 4000 from a savings bank account after considering a deduction under 80TTA. Since his total income, i.e., INR 1,84,000 (1,80,000 + 4,000), is lower than the basic exemption limit, Mr. A has no tax liability.
• b) Mr. B has an STCG of INR 4 lacs from the sale of a property. Can he adjust the STCG against the basic exemption limit?
  Yes, Mr. B can adjust STCG against the basic exemption limit of INR 2.5 lacs and pay tax on the remaining INR 1.5 lacs.
• c) Suppose Mr. B in the above illustration was 61 years old. Is there any change in the tax treatment?
  Yes. Mr. B’s basic exemption limit then shall be INR 3 lacs. The tax shall be discharged on a balance of INR 1 lac.
• d) Mr. C, a resident individual, earns STCG of INR 2 lacs on the sale of equity shares on NSE and has no other income. Can he claim the exemption limit on such STCG?
  As a resident individual, he can claim the exemption limit for STCG under section 111A. Therefore, he is not required to discharge any tax.
  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% on such STCG under section 111A.
• e) Mr. D (resident and 59 years old) earns a monthly pension of INR 5,000. He purchased shares of XYZ Ltd. in January 2020 and sold the same in March 2020 (sold on NSE and STT levied). Such a sale gave rise to an STCG of INR 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 INR 1.3 lac. What is his tax liability for the year 2020-21?
  Mr. D has these three incomes:
  STCG referred to in 111A- INR 1.5 lacs
  Other STCG (sale of the property)- INR 1.3 lac
  pension income- INR 60,000

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

---

Can the 80C to 80U deduction be adjusted against the STCG referred to in section 111A?

No, the deductions under 80C to 80U cannot be allowed from the STCG referred to in section 111A. However, such deductions are allowed against STCG other than that covered u/s 111A.

E.g.,

• a) Suppose you have STCG from the sale of equity-oriented mutual funds and investment in FD. In that case, you cannot claim a deduction of such investment in FD available under section 80C against the STCG arising from the sale of equity funds under section 111A.
• b) Suppose it was debt funds instead of equity funds in the above example. Then, you can adjust the 80C deduction amount against such STCG.
• c) Mr. D (resident and 59 years old) purchased shares of XYZ Ltd. in January 2020 and sold the same in March 2020 (sold on NSE and STT is levied). Such a sale gave rise to an STCG of INR 1.5 lacs. Apart from STCG, he does not have any other income. He has invested INR 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. D 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 INR 1.5 lacs which can be adjusted against the basic exemption limit.
• (d) When an individual sells listed equity shares or 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 years and use it to set off against future STCG and LTCG only. However, it is important to note that the carry forward can only be done for losses incurred in the previous years and not the current year.
  Overall, the tax laws in India provide a system for individuals to offset their capital gains with capital losses, which can help reduce their tax liability. Understanding the rules for setting off and carrying forward losses can benefit taxpayers who want to make the most of their investments while minimizing their tax obligations.

---