As Indian citizens, you must pay taxes on your income, including capital gains. Capital Gain refers to the profit earned through the sale of a capital asset. Capital assets may consist of either real estate or securities. The government imposes special tax rates on capital gains income. Depending on the holding time, income tax on equity trading classification is either long-term or short-term capital gains. Section 111A applies to short-term capital gains on assets transferred on or after 1 October 2004 and are listed on recognised stock exchanges in India, as well as units of equity-oriented mutual funds and business trusts.
What is Short-Term Capital Gains Tax as defined by Section 111A?
Short Term Capital Gain (STCG) or Short Term Capital Loss (STCL) refers to the profit or loss on selling a capital asset for a shorter than the required holding time. A short-term capital asset is what the Income Tax Act stipulates in Section 2(42A). According to this definition, the holding period is 12 months for listed equity shares and equity mutual funds. Therefore, the profit or loss is a short-term capital gain (STCG) or short-term capital loss (STCL) if the sale of the listed equity share of a domestic firm happens within a year after acquisition.
Under the Section 111A of Ithe ncome Tax Act, sales of the following items are subject to a 15% STCG tax:
- Shares, equity mutual funds, or business trust units
- Listed on a reputable Indian stock exchange
- On which Securities Transaction Tax is paid
Even if Securities Transaction Tax (STT) payment has not happened on the following transaction, Section 111A still applies:
- STCG on the selling of equity mutual funds, equity shares, or business trust units listed on a reputable stock exchange in an International Financial Services Centre (IFSC) if the payment on the purchase price has happened or is due in a foreign currency.
Sales of unlisted shares and securities, debt mutual funds, bonds, debentures, real estate, automobiles, jewellery, etc., are all subject to slab rates rather than the special rate under Section 111A.
Examples of STCG excluded under section 111A
- STCG results from selling equity shares outside of a recognised stock exchange.
- STCG results from the selling of non-equity shares.
- STCG results from selling non-equity mutual fund units (debt-oriented mutual funds).
- STCG on bonds, debentures, and government securities.
- STCG on selling assets other than shares/units, such as real estate, gold, silver, etc.
Determining Short-Term Capital Gain Taxation
The following categories apply to short-term capital gains to determine the tax rate:
- Short-term capital gains are covered by section 111A.
- Short-term capital gains are not covered under section 111A.
STCG Taxation Rates
The tax rate for STCG applicable to section 111A is 15% plus any applicable surcharge and cess. Standard STCG, i.e., STCG not covered by section 111A, is taxed at the regular tax rate, which is computed based on the taxpayer’s total taxable income.
Adjustment of STCG to the Basic Exemption Limit
The basic exemption limit refers to the amount of income over which a person is free from paying tax. The basic exemption limit applicable to a person for the 2021-22 fiscal year is as follows:
- The exemption limit for resident individuals above the age of 80 is Rs. 5,00,000.
- The exemption limit for resident individuals aged 60 or older but younger than 80 is Rs. 3,00,000.
- The exemption limit for resident individuals under the age of 60 is Rs 2,50,000.
- The exemption limit for non-resident individuals, irrespective of their age, is Rs. 2,50,000.
- The exemption limit for HUF is Rs. 2,500,000.
Allowed Deductions for STCG Under Sections 80C to 80U
No deduction is permitted under sections 80C to 80U for short-term capital gains described in section 111A of Income Tax Act. Section 111A does not cover such deductions, but other STCG deductions may be claimed.
Reporting on Schedule CG of the ITR for STCG on Shares
ITR-2 and ITR-3 are the ITR forms under which the taxpayer must disclose income from capital gains. The taxpayer must record capital gains income on line A2 of the ITR’s Schedule CG. The taxpayer must disclose the following information:
- The complete value of consideration, i.e. sales value
- Deductions according to Section 48:
Acquisition cost, i.e. purchase price
Expenditures totally and solely related to the transfer, i.e., transfer expenses
- STCG, or Short Term Capital Gain, is automatically calculated on shares.
Set-off and Carry Forward STCL under Section 111A of the Income Tax Act.
A short-Term Capital loss is a loss on the sale of listed equity shares and mutual funds held for less than a year. A taxpayer may deduct the STCL from one capital asset against the STCG and LTCG from another capital asset. STCL, or Short Term Capital Loss, may be offset against both Short Term Capital Gains and Long Term Capital Gains in the current tax year, following the income tax regulations governing the set-off and carrying forward losses. The residual loss may be carried forward for eight years and deducted against future STCG and LTCG alone.
Suppose the taxpayer has income from selling certain listed equity shares and securities and profit from selling other listed equity shares and securities. In that case, only net gains are taxable at 15%. In addition, the taxpayer may deduct the net STCL under Section 111A of income tax act from the STCG and LTCG on the sale of shares, stocks, real estate, jewellery, a vehicle, or any other capital asset. The leftover loss may be carried forward for eight years.
Many people, like stay-at-home moms, retirees, young people, and professionals, make money by buying and selling securities, but they don’t know how this income is taxed. Everyone who deals with these earning strategies should be familiar with the Income Tax Acts. As was said above, this kind of income comes under section 111A of the Income Tax Act. You should take your time to read and understand how it works so that you can be sure you’re doing it right.