Section 111A of Income Tax Act

Section 111A of the Income Tax Act is related to the taxation of short-term capital gains (STCG) arising from the sale of certain specified assets. These assets include listed equity shares, units of mutual funds primarily investing in equity shares, and business trust units.

As of 23^rd July 2024, the tax rates for capital gains have changed. Short-term capital gains (STCG) under Section 111A, which previously had a tax rate of 15%, are now taxed at 20%. Moreover, long-term capital gains (LTCG) exceeding Rs. 1,25,000, which fall under Section 112A, are now taxed at 12.5%, an increase from the previous rate of 10%.

These changes result in higher taxes on both long-term and short-term capital gains. In this article, let’s study Section 111A of Income Tax Act in detail and check out some of its key provisions. 

What is section 111A of the Income Tax Act?

Section 111A of the Income Tax Act governs the taxation of short-term capital gains (STCG) on specific capital assets. It applies to:

1. Equity shares listed on recognised stock exchanges, such as NSE and BSE.
2. Equity-oriented mutual funds that invest primarily in:
   • Equity shares
   • Equity-related instruments
3. Units of business trusts, including:
   1. Real Estate Investment Trusts (REITs)
   2. Infrastructure Investment Trusts (InvITs)

Short-term capital gains under Section 111A arise when the above assets are sold within 12 months of purchase. Such gains are taxed at a concessional rate of 15% if the Securities Transaction Tax (STT) has been paid during the transaction.

For long-term capital gains (LTCG) on these assets, taxation is governed by Section 112A of the Income Tax Act, which applies different provisions.

This concessional tax rate makes Section 111A particularly beneficial for investors looking for clarity and favorable tax treatment on short-term equity investments.

Also read: Income Tax vs Capital Gains Tax

Income Tax Budget 2024: What’s happened on the short-term capital gains tax front?

In the Income Tax Budget 2024, a significant change has been proposed for short-term capital gains (STCG) on certain investments. The tax rate for STCG under Section 111A has been increased from 15% to 20%. This tax rate applies to equity investments such as:

• Equity shares
• Units of equity-oriented mutual funds
• Units of a business trust (where Securities Transaction Tax (STT) has been paid)

This adjustment is made because the previous 15% rate was considered too low and primarily benefited high-net-worth individuals. In the new budget, the government addressed this imbalance by raising the tax rate to 20%. However, this increase only applies to STCG on these specific investments. Other types of short-term capital gains will continue to be taxed at their respective applicable rates.

Also read: Long Term Capital Gain Tax on Property

What is short-term capital gain tax under Section 111A?

As mentioned above, section 111A of the Income Tax Act lays out specific rules for taxing STCG earned from the sale of certain securities. However, it is applicable only when the following conditions are met:

Condition I: The securities must be sold through a recognised stock exchange.

Condition II: Securities Transaction Tax (STT) must be paid both at the time of purchase and sale of the securities.

If the above two conditions are fulfilled, the STCG will be taxed at a special rate of 20%. However, as an exception to Condition II, there are a few circumstances where section 111A is applicable even if STT is not paid. Let us study them:

• The equity shares, equity mutual funds, or units of business trust are listed on a recognised stock exchange in an International Financial Services Centre (IFSC)
  and
• The consideration is paid or payable in foreign currency.

Furthermore, it is essential to note that STCG arising from these assets is not taxed under section 111A:

• Immovable property
• Debt mutual funds
• Bonds and debentures
• Motor vehicles
• Unlisted shares and securities
• Jewellery

Their taxation follows the regular tax brackets rather than the flat 20% rate specified in Section 111A.

Section 111A of Income Tax Act example

To understand this section better, let us look at some practical situations:

Situation 1

Mr. A purchased 1,000 listed equity shares of ABC Ltd. on 24th February 2024 at Rs. 50 per share. Owing to recent market developments, the stock price surged to Rs. 85 per share. Mr. A decided to lock in profit and sold all his holdings on 20th July 2024.

While doing so, Mr. A earned a short-term capital gain of Rs. 35,000 [1,000 shares x (Rs. 85 - Rs. 50)]. This gain is taxable under sec 111A of the Income Tax Act at 20%. Mr. A will be required to pay Rs. 7,000 (Rs. 35,000 x 20%) as tax, plus applicable cess and surcharge.

Situation 2

Mr. X invested in a mutual fund that primarily invests in equity shares (around 65% of the corpus is invested in equities). Thanks to efficient fund management, the NAV of the mutual fund scheme increased, and Mr. A decided to book profits. The STCG arising from such a sale will be taxable under sec 111A.

Situation 3

Mr. Y is a senior director of XYZ Ltd. and holds 5,000 unlisted equity shares of the company. On his retirement, he decided to transfer his unlisted equity shares to Mr. C. and earned an STCG of Rs. 2,00,000. This gain will not be taxable under Sec 111A of the Income Tax Act as it specifically covers listed equity shares.

Example

• Mrs. Z has a taxable salary of Rs. 2,00,000
• She also earned Rs. 3,00,000 from selling shares, which falls under short-term capital gains.
• Mrs. Z can claim deductions from her taxable income up to a maximum of Rs. 2,50,000.
• However, her taxable salary is only Rs. 2,00,000.
• This leaves a deficit of Rs. 50,000 (Rs. 2,50,000 - Rs. 2,00,000)

Now, Mrs. Z can utilise her STCG to cover this deficit. This means she can adjust Rs. 50,000 from her STCG to fill this gap. After this adjustment, her remaining STCG for taxation would be Rs. 2,50,000 (Rs. 3,00,000 - Rs. 50,000), which will be taxed at 20%, as per section 111A.

Also read: Section 74 of Income Tax Act

Instances of Short-Term Capital Gains (STCG) covered under Section 111A

1. STCG arising from the sale of equity shares of a listed company through a recognised stock exchange, subject to Securities Transaction Tax (STT).
2. STCG from the sale of units of equity-oriented mutual funds via a recognised stock exchange, provided STT is applicable.
3. STCG generated from the sale of units of business trusts.
4. STCG on the sale of equity shares, units of business trusts, or units of equity-oriented mutual funds through a recognised stock exchange located in an International Financial Services Centre (IFSC), where the consideration is paid in foreign currency, even if STT is not applicable.

Exemptions under section 111A of the Income Tax Act

It is pertinent to note that section 111A of the Income Tax Act does not apply to short-term capital gains in certain scenarios. Let’s study them:

• If the gains arise from holding capital assets other than stocks.
• When Securities Transaction Tax (STT) is not charged on the transfer of shares listed on the Stock Exchange in the International Financial Service Center (IFSC).
• The holdings of FIIs are considered capital assets rather than stocks. Hence, section 111A does not apply to them.

In all these cases, short-term capital gains will be taxed according to the standard income tax rates rather than the special rate under section 111A.

Also read about: What is direct tax code

Does Section 111A allow basic exemption limit adjustment for STCG?

The basic exemption limit refers to the maximum income amount that is not subject to tax. For individuals, this limit is INR 2.5 lakhs. For senior citizens (60 years or older but under 80), it is INR 3 lakhs, and for super senior citizens (80 years or older), it is INR 5 lakhs. Income within these limits is not taxable.

Resident individuals and HUFs (Hindu Undivided Families) can adjust Short-Term Capital Gains (STCG) under section 111A against the basic exemption limit. However, this adjustment can only be done after adjusting for other income. The order of adjustment follows this sequence:

1. Income other than STCG.
2. STCG other than section 111A (such as income from the sale of property or debt-oriented funds).
3. STCG under section 111A.

Non-resident individuals and HUFs can adjust income as per points (1) and (2), but not STCG under section 111A.

Deductions from short-term capital gains under Section 111A

As per the Income Tax Act, Chapter VI-A deductions are allowed from the gross total income after reducing capital gains under section 111A. When calculating STCG from the sale of shares, the following deductions are allowed:

• Cost of acquisition: This is the original purchase price of the shares.
• Transfer expenses: These include costs directly associated with the sale, such as brokerage fees.

Additionally, taxpayers can benefit from income tax rebates under section 88 if their total income includes any STCG. Section 88 provides a tax rebate of up to 20% for amounts deposited towards life insurance or annuity plans and helps reduce the overall tax liability.

Also read: Section 10(5) of the Income Tax Act

Can deductions under 80C to 80U be adjusted against STCG referred to in section 111A?

No, deductions under sections 80C to 80U cannot be adjusted against Short-Term Capital Gains (STCG) referred to in section 111A (STCG from equity shares and equity-oriented mutual funds). However, these deductions can be applied to STCG not covered under section 111A.

Examples:

1. If you earn STCG from the sale of equity-oriented mutual funds and have invested in a Fixed Deposit (FD), the deduction for FD under section 80C cannot be adjusted against the STCG from the sale of equity funds under section 111A.
2. However, if the STCG comes from debt-oriented funds instead of equity funds, you can adjust the 80C deduction against such STCG.
3. In another example, Mr. D, a resident aged 59, sold shares of XYZ Ltd. on the NSE in March 2020, leading to an STCG of Rs. 1.5 lakh (subject to STT). He has no other income and has invested Rs. 1.5 lakh in the Public Provident Fund (PPF), seeking a deduction under section 80C. Since the STCG falls under section 111A, he cannot claim the deduction against this gain. However, he can adjust the income against the basic exemption limit.

When is section 111A of the Income Tax Act applicable?

Section 111A of the Income Tax Act applies to short-term capital gains (STCG) in the following situations:

• STCG arising from the buying and selling of stocks or equity-based fund units.
• Transferring shares via a recognised stock exchange.
• The STT must be paid on the sale of equity shares or equity-based mutual funds.
• STCG on selling units of a business trust.
• STCG from selling units of a mutual fund or business trust, and shares via a stock exchange in an International Financial Services Centre (IFSC), even if STT is not paid, provided the transaction is in foreign currency.
• It is worth mentioning that in all the above cases, the STCG is taxed at a special rate of 20%
  

Also read about: Difference Between Income Tax Act and Direct Tax Code

Things to remember while considering section 111A of the Income Tax Act

Let us look at the various tax implications of section 111A:

• No tax liability below Rs. 2.5 lakh
  • If your total earnings, including STCG, is less than Rs. 2.5 lakh after tax deductions, you will not have any tax liability
  • This also means you don't have to pay any tax even under section 111A
• Taxation above Rs. 2.5 lakh
  • If your total income, including STCG, exceeds Rs. 2.5 lakh, then the STCG will be taxed at a rate of 20% as per section 111A
• Rebate under section 87A
  • If your total income, including STCG, is below Rs. 5 lakh, you can avail of a tax rebate under section 87A
  • This rebate reduces your tax liability by up to Rs. 12,500
  • It is noteworthy that both the old and new tax regimes provide this rebate

STCG adjustment as per the exemption limit

All the Indian residents with income after tax deductions below the exemption limit can use the following to offset against the deficit in your exemption limit:

• STCG on equity investments
• LTCG from equity investments
• LTCG from Investments other than equity

By setting off these gains against the exemption limit, you effectively reduce the taxable amount, minimising your tax liability.

Adjustment on unused basic exemption limit on ST gains under section 111A

As per the Income Tax Act, 1961, taxpayers can adjust their capital gains against the basic exemption limit, which are (as per new regime):

• For individuals below 60 years of age and NRIs: Rs. 3 lakhs
• For senior citizens (60-80 years): Rs. 3 lakhs
• For super senior citizens (80 years and above): Rs. 5 lakhs

According to section 111A of the Income Tax Act, if your total annual income is below the basic exemption limit, you can reduce your tax liability by using your capital gains to fill the gap up to the exemption limit. Let us understand this better through a hypothetical example:

• Mr. H's total income is Rs. 2 lakh.
• He is below 60 years of age and enjoys a basic exemption limit of Rs. 3 lakh.
• Mr. H earns an additional short-term capital gain of Rs. 2 lakh by selling shares.

Now, we can observe that there is a shortfall of Rs. 1 lakh (Rs. 3 lakh - Rs. 2 lakh) in Mr. H's income to reach the exemption limit. To fill this gap, Mr. H can use his capital gains worth Rs. 1 lakh.

Post-application, Mr. H is left with a capital gain of Rs. 1 lakh, which will be taxed at 20% under section 111A.

Also read: Section 59 of Income Tax Act

Conclusion

Section 111A of the Income Tax Act deals with the taxation of STCG from the sale of listed equity shares, mutual funds that invest in equity shares, and units of business trusts. These gains are taxed at a flat rate of 20%, provided certain conditions like paying the Securities Transaction Tax (STT) are met.

If an individual's income, including STCG, is below the exemption limit, they can offset their gains to minimise tax liability. The basic exemption limits vary for different age groups, and a rebate under section 87A can further reduce tax liability for incomes below Rs. 5 lakh.

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