Last Updated on May 24, 2022 by
You may be involved in trading securities that you have held for less than a year. If you profit from the transfer of such a security, you are said to have a short-term capital gain. Such gains are mentioned separately under various Sections of the Income Tax Act.
Let us get into the details of short-term capital gains and how they are taxed under Section 111A of Income Tax Act.
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What is short-term capital gain?
Short-term capital gain is the earning on the sale of any investment that you have held for less than a year. One example of this is the profit earned from the sale of stocks. Gain on equity shares held for less than 12 month is considered a short-term capital gain.
As is the case with any other income, you must pay tax on such earnings. The taxation rules depend on whether the stocks come under Section 111A of the Income Tax Act or not.
Let us see the applicable provisions.
Provisions under Section 111A of Income Tax Act
According to Section 111A, tax on short term capital gain is applicable if the following conditions are met:
- The transaction involves purchasing or selling equity shares or equity-oriented mutual funds. For this purpose, equity-oriented mutual funds are those in which 65% of the investment is in equity shares of domestic companies.
- It also includes the transfer of units of business trust.
- The securities must be traded on a recognised stock exchange.
- Security Transaction Tax (STT) must be applicable on such transactions.
- The securities must be held for a period that is less than one year (12 months).
The investments that fulfil these conditions attract a short-term capital gain tax. The tax rate on such gains is 15%.
Let us see a few examples of where this is applicable.
Illustrations of STCG under Section 111A of Income Tax Act
Case 1: Where equity shares are traded
You sell a listed company’s equity shares that you have held for 5 months, on a recognised stock exchange and profit from it. Moreover, STT is levied on this transaction. Such a profit is considered a short-term capital gain as your holding period is less than a year. Therefore, as per the provisions of Section 111A, you are liable to pay 15% tax on the STCG.
Case 2: Gain on equity-oriented mutual funds
You earn a profit from a mutual fund that you held for 7 months. In this, 70% of the corpus is invested in equity. This makes it an equity-oriented mutual fund. Moreover, the transaction takes place via NSE, which is a recognised stock exchange. STT is applicable to the transaction. In this situation, you must pay 15% tax on your short-term capital gain as per Section 111A of Income tax Act.
Case 3: Where units of a business trust are transferred
You earn a profit by selling the units of a business trust. You held these units for a period of 11 mth. Since it comes under Section 111A, the profit will be taxed at 15%.
Case 4: Where other securities are traded
You transfer debentures that you have held for 3 mth and gain a profit. This transaction will not come under Section 111A as transfer of debentures is not included. The profit earned will be taxed as per your tax slab.
The Income Tax Act allows you to adjust the short-term capital gain according to the basic exemption limit.
Let us see how this can be done.
How to adjust STCG under Section 111A with the basic exemption limit?
If your total income is less than Rs. 2.5 lakh, you do not qualify for paying income tax.
In such a situation, if you have a short-term capital gain, you can adjust it with your income. When you add the amount of STCG to your income, it may exceed the exemption limit of Rs. 2,50,000. Only the amount that goes beyond this limit is taxable.
Let us understand this better with an example.
Assume that your total income is Rs. 1.5 lakh, and you have a short-term capital gain of Rs. 3 lakh from the sale of equity shares. 15% tax is payable on this gain. However, you may adjust your gain with your total income. Adding this Rs. 3 lakh to Rs. 1.5 lakh gives you Rs. 4.5 lakh. This exceeds the exemption limit by Rs. 2,00,000, which is taxed at 15%.
This provision helps you save tax. Otherwise, the entire amount of gain, in this case of Rs. 3 lakh would be taxable.
Moreover, if your income plus the amount of short-term capital gain is less than Rs. 2.5 lakh, no tax is levied provided the amount remains within the exemption limit.
However, you cannot claim a deduction under Sections 80C to 80U on such transactions. But you may claim a deduction if the transaction related to short-term capital gain does not come under Section 111A of Income Tax Act.
In conclusion
Section 111A mentions the rules and provisions regarding short-term capital gains. These are limited to gains on equity shares, equity-oriented mutual funds, and business trust units. Keep the rules in mind to make sure you pay the required tax. You may also benefit from certain provisions that help you minimise your tax liability.
