If you have sold equity shares or mutual funds recently and noticed a higher-than-expected tax deduction, you may have come across Section 111A of the Income Tax Act. This section plays a key role in determining how short-term capital gains (STCG) from certain investments are taxed in India.
With recent changes in tax rates announced in the Union Budget 2024, it has become even more important for investors to understand how Section 111A affects their finances.
What Is Section 111A?
Section 111A specifically deals with short-term capital gains on listed equity shares, equity-oriented mutual funds, and units of business trusts. The rule applies only if two conditions are met:
- The asset is sold through a recognised stock exchange.
- Securities Transaction Tax (STT) is paid at the time of purchase and sale.
If these conditions are satisfied and the holding period is less than 12 months, the profit qualifies as STCG under Section 111A. Earlier, such gains were taxed at a flat 15%. However, effective from July 23, 2024, the rate has increased to 20%. This revision aims to simplify the capital gains tax structure and create a more equitable system.
When Does Section 111A Apply?
- Sale of listed equity shares on recognised exchanges such as NSE or BSE with STT paid.
- Sale of equity-oriented mutual fund units, where at least 65% of the fund is invested in equities.
- Sale of business trust units, including Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), with STT paid.
- Sale of listed equity or mutual fund units on IFSC exchanges, even if STT is not paid, provided the trade is settled in foreign currency.
On the other hand, gains from selling unlisted shares, debt mutual funds, property, or jewellery do not fall under this section. These are taxed either under regular income slabs or separate capital gains rules.
Examples to Simplify Section 111A
Let’s understand Section 111A with practical situations:
Example 1: Mr. A bought 1,000 shares of ABC Ltd. at ₹50 each and sold them five months later at ₹85. His profit of ₹35,000 qualifies as STCG under Section 111A. Tax at 20% amounts to ₹7,000 (excluding surcharge and cess).
Example 2: Ms. X invested in an equity-oriented mutual fund and sold her units within 10 months, earning a profit. Since the fund is equity-oriented and STT was paid, her gains are taxed at 20%.
Example 3: Mr. Y sold unlisted company shares after holding them for nine months. Although this results in STCG, it is not covered under Section 111A and will instead be taxed as per his income slab.
These examples highlight that not all short-term gains are taxed equally; eligibility matters.
Basic Exemption Limit Under Section 111A
Resident individuals and Hindu Undivided Families (HUFs) enjoy some flexibility when calculating taxes under Section 111A. If total income (excluding STCG) is below the basic exemption limit of ₹2.5 lakh, the shortfall can be adjusted against STCG.
For example, if your income from salary is ₹2 lakh and STCG under Section 111A is ₹2 lakh, you can adjust ₹50,000 against the exemption limit. Only the remaining ₹1.5 lakh will be taxed at 20%.
Deductions and Rebates Under Section 111A
One common misconception is that deductions under Sections 80C to 80U can be applied to STCG under Section 111A. In reality, these gains are taxed separately at the flat 20% rate, and deductions such as investments in PPF, life insurance, or ELSS cannot reduce this liability.
That said, resident individuals with total income below ₹5 lakh may still benefit from the rebate under Section 87A, which provides tax relief of up to ₹12,500. This can indirectly help offset part of the liability on STCG.
Exemptions Under Section 111A
- Gains from selling unlisted shares or debt-oriented mutual funds.
- Transactions where STT is not applicable, except those carried out through IFSC exchanges.
- Gains earned by Foreign Institutional Investors (FIIs), which are taxed differently under Indian law.
In such cases, STCG is taxed either as part of total income or under other capital gain rules.
Key Takeaways for Investors
- Section 111A applies only to short-term gains from equity shares, equity funds, and business trust units.
- The tax rate on such gains is now 20%, up from 15%, effective from July 23, 2024.
- If your total income is below the exemption threshold, part of your STCG can be adjusted.
- Deductions under Sections 80C to 80U cannot be applied to reduce this tax.
- Rebate under Section 87A may still help small taxpayers lower their tax outgo.
Conclusion
Section 111A of the Income Tax Act is central to how short-term capital gains from equities and equity-oriented funds are taxed in India. The recent increase in the STCG rate to 20% means investors need to be more mindful when redeeming their investments within a year.
By understanding the scope, conditions, and exemptions under Section 111A, taxpayers can make informed choices that align with their financial goals. For those keen on tax-efficient investing, balancing equity exposure with long-term products and tax-saving options such as ELSS can help manage both returns and liabilities.
FAQs
What is Section 111A of the Income Tax Act?
It defines how short-term capital gains from equity shares, equity mutual funds, and business trust units are taxed in India.
What is the current tax rate under Section 111A?
From July 2024, such gains are taxed at a flat 20%, up from 15%.
Does Section 111A apply to all short-term capital gains?
No, it applies only to specific assets like listed equity shares, equity mutual funds, and business trust units.
Can deductions under Section 80C reduce tax under Section 111A?
No, deductions under 80C to 80U cannot be applied to gains taxed under Section 111A.
Who benefits from the basic exemption adjustment under Section 111A?
Resident individuals and HUFs can adjust STCG against the basic exemption limit, but non-residents cannot.
