If you have recently sold mutual funds or shares and noticed a sudden tax charge, you’ve likely encountered Section 111A of the Income Tax Act. This section plays a major role in how short-term capital gains (STCG) are taxed in India, especially when it comes to listed equity shares, equity mutual funds, and business trust units.
As of July 23, 2024, tax rates for capital gains have gone up. STCG under Section 111A, which was previously taxed at 15%, is now taxed at 20%. Meanwhile, long-term capital gains (LTCG) over Rs. 1,25,000 are now taxed at 12.5%, instead of the earlier 10%.
In this article, we’ll break down what Section 111A really means, who it applies to, and how it affects your taxes on short-term gains from investments like mutual funds and stocks.
As tax rules tighten, choosing the right investment products becomes even more important. Equity mutual funds are directly impacted by Section 111A, making it essential to plan your redemptions and withdrawals smartly. Compare Mutual Fund Options Now!
What is section 111A of the Income Tax Act?
Section 111A outlines how short-term capital gains are taxed when you sell certain financial assets. It mainly applies to three types of investments:
Listed equity shares on Indian stock exchanges like NSE or BSE
Equity-oriented mutual funds that invest mostly in shares
Units of business trusts such as REITs or InvITs
If you sell any of these within 12 months of buying them, and if Securities Transaction Tax (STT) is paid on the transaction, your gains fall under Section 111A.
In that case, the tax rate is a flat 20% on the profit. It’s important to note that Section 112A covers long-term capital gains on these same assets, but with a different set of rules.
Section 111A is especially relevant for active investors who trade frequently and need clarity on how their short-term profits will be taxed. With mutual fund investments now facing updated STCG tax rates, aligning your investment strategy with the latest tax landscape is key to preserving net returns. Explore Top-Performing Mutual Funds!
Income Tax Budget 2024: What’s happened on the short-term capital gains tax front?
The 2024 Union Budget brought a notable change for investors. The government increased the STCG tax rate under Section 111A from 15% to 20%. This change applies only to specific assets like:
Equity shares
Equity-oriented mutual funds
Units of business trusts
The main reason for the hike was to balance the tax burden. Earlier, the 15% rate was seen as too generous, especially for high-income investors who were gaining disproportionately from it. By raising the rate to 20%, the government aims to make the tax system more equitable.
That said, this new rate still applies only to those specific assets under Section 111A. Other short-term capital gains (like from selling property or debt funds) continue to be taxed according to their respective rules.
What is short-term capital gain tax under Section 111A?
To understand how the short-term capital gain (STCG) tax under Section 111A works, there are two main conditions to keep in mind:
The asset must be sold on a recognised stock exchange
Securities Transaction Tax (STT) must be paid at the time of both purchase and sale
When both these conditions are met, your STCG will be taxed at a flat rate of 20%.
However, there are a few exceptions where STT is not required. For example, if you sell equity shares, mutual fund units, or business trust units on an International Financial Services Centre (IFSC) exchange and the transaction is settled in foreign currency, Section 111A still applies even without STT.
It’s equally important to understand what doesn’t fall under this section. STCG from the sale of assets like property, debt funds, unlisted shares, jewellery, or vehicles does not qualify. These are taxed based on your income slab or other applicable rates.
Section 111A of Income Tax Act example
Let’s simplify things with a few real-life scenarios:
Situation 1:
Mr. A bought 1,000 listed shares of ABC Ltd. at Rs. 50 each in February 2024. He sold them in July 2024 at Rs. 85. His profit is Rs. 35,000, and since the transaction meets Section 111A conditions, he pays 20% tax on it, which amounts to Rs. 7,000 (excluding cess and surcharge).
Situation 2:
Mr. X invests in an equity-oriented mutual fund. When the NAV rises, he books profit by selling the units within a year. Since over 65% of the fund is invested in equities and STT is paid, the gain is taxed under Section 111A.
Situation 3:
Mr. Y sells unlisted shares of his company after retirement. Even though the transaction results in STCG, it is not covered under Section 111A because the shares were unlisted. These gains will be taxed as per normal income tax rules.
Bonus example:
Mrs. Z earns Rs. 2 lakh from salary and Rs. 3 lakh from STCG. Since her income (excluding STCG) is below the basic exemption limit of Rs. 2.5 lakh, she can use Rs. 50,000 from the STCG to cover the gap. The remaining Rs. 2.5 lakh of STCG is taxed at 20%.
While Section 111A increases tax liability on short-term gains, investors can still save taxes smartly with options like ELSS funds. These offer deductions up to Rs. 1.5 lakh under Section 80C and can help balance your tax outgo. You can explore tax-saving ELSS mutual funds if you're looking for growth with tax efficiency.
Instances of short-term capital gains (STCG) covered under Section 111A
Section 111A only applies to specific situations. Here are the major ones:
Gains from selling listed equity shares through recognised Indian stock exchanges, where STT is paid
Gains from equity-oriented mutual fund units sold via stock exchanges, again with STT paid
STCG from units of business trusts like REITs and InvITs
STCG from selling listed equity or mutual fund units on IFSC stock exchanges, even without STT, provided the transaction is in foreign currency
These are the primary instances where Section 111A taxation rules apply. If your gains don’t fall into these categories, they are likely taxed under standard income slabs or other sections of the Income Tax Act.
Exemptions under Section 111A of the Income Tax Act
While Section 111A covers many short-term capital gains, there are also some key exemptions. It does not apply in the following scenarios:
When your short-term gains are from assets other than equity shares or equity-oriented mutual funds
If the Securities Transaction Tax (STT) is not charged on shares traded on an IFSC stock exchange
When Foreign Institutional Investors (FIIs) earn gains from their holdings, which are treated as capital assets and not taxed under Section 111A
In such cases, short-term capital gains are taxed at the normal income tax rates instead of the special flat rate mentioned in Section 111A.
To avoid surprises during tax filing, it’s important to structure your investments with full awareness of exemptions. If you're just getting started, you can start investing or SIP with just Rs. 100 and gradually build a portfolio aligned with your risk appetite and taxation comfort.
Does Section 111A allow basic exemption limit adjustment for STCG?
Yes, but only for some taxpayers. If you're a resident individual or part of a Hindu Undivided Family (HUF), you can adjust your short-term capital gains under Section 111A against your basic exemption limit. The process works like this:
Your regular income gets adjusted first
Then, other short-term gains (not under Section 111A)
Lastly, gains under Section 111A
Let’s say your total income, excluding STCG, is below Rs. 2.5 lakh. In that case, you can use a portion of your STCG to bridge the shortfall and avoid tax on that amount.
However, non-resident individuals and HUFs do not get this benefit for gains under Section 111A. They can only apply the basic exemption to their regular income and other capital gains.
Deductions from short-term capital gains under Section 111A
Under Section 111A, your short-term capital gains are not eligible for most deductions under Sections 80C to 80U. However, a few important costs can still be subtracted before calculating your taxable gain:
The cost of acquiring the asset
Transfer-related expenses like brokerage fees or service charges
Once your net gain is calculated, you cannot apply deductions like ELSS contributions or insurance premiums (under 80C) to reduce your tax further.
There is a small benefit under Section 88, which allows a rebate of up to 20% for contributions toward life insurance or annuity plans. However, this applies to overall income and may not reduce the STCG tax under Section 111A directly.
Can deductions under 80C to 80U be adjusted against STCG referred to in Section 111A?
This is a common confusion among taxpayers. The answer is no — deductions under Sections 80C to 80U cannot be used to reduce short-term capital gains (STCG) that fall under Section 111A. These gains are taxed at a flat rate and are treated separately from regular income.
Let’s take an example. If you invest in equity-oriented mutual funds and earn STCG, and also have an FD investment eligible for 80C, you cannot use that 80C deduction to lower your tax on STCG under Section 111A. However, if the STCG is from other assets like debt mutual funds, you can apply such deductions against those gains.
To balance tax efficiency with long-term planning, you might consider diversifying into mutual fund options that qualify for deductions under 80C. ELSS funds, for instance, offer a dual benefit of growth and tax savings. You can start investing or SIP with just Rs. 100 and build your portfolio while staying compliant.
When is Section 111A of the Income Tax Act applicable?
Section 111A applies to short-term gains when certain conditions are met:
You’re selling listed equity shares or equity-oriented mutual fund units
The sale happens on a recognised stock exchange
Securities Transaction Tax (STT) is paid
Or, the sale happens on an IFSC exchange and is paid in foreign currency
This section ensures uniform taxation at a flat 20% for such gains, making the rules clear and predictable for investors.
It does not apply to gains from unlisted shares, real estate, or debt-oriented mutual funds, which follow different tax rules.
Things to remember while considering Section 111A of the Income Tax Act
Before making investment decisions, keep these points in mind:
If your total income (including STCG) is under Rs. 2.5 lakh, you won’t owe any tax
If it’s above that, your STCG under Section 111A will be taxed at 20%
For income under Rs. 5 lakh, you may qualify for a rebate under Section 87A (up to Rs. 12,500)
You can adjust unused exemption limits using STCG and LTCG, which can reduce your tax burden
Tax planning isn’t just about minimising liability it’s about aligning your investments with future needs. Open your mutual fund account today and explore equity and ELSS options to start building wealth while staying within the tax-efficient bracket.
Adjustment on unused basic exemption limit on ST gains under Section 111A
Let’s break this down with an example. Say you’re under 60 and have a basic exemption limit of Rs. 3 lakh. Your total income is only Rs. 2 lakh. If you earn Rs. 2 lakh as STCG, you can use the unused Rs. 1 lakh from the exemption limit to offset the capital gain.
After the adjustment, you’re left with Rs. 1 lakh of STCG, which will be taxed at the special 20% rate under Section 111A. This adjustment helps reduce your overall tax outgo.
Just remember, this benefit applies only to resident taxpayers, not non-residents.
Conclusion
Section 111A plays a crucial role in determining how short-term capital gains from equity and mutual fund investments are taxed. With the updated 20% tax rate, it becomes even more important for investors to plan their investments and exits wisely.
If your income is below the exemption threshold or qualifies for Section 87A rebates, you may be able to reduce your tax liability significantly. Understanding the conditions, exemptions, and limitations around Section 111A can empower you to make better tax-efficient decisions when investing in equities and mutual funds.
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