Under India’s income tax law, the holding period is a key determinant of tax liability. For tax calculation purposes, the holding period is categorised into short-term holding period and long-term holding period. In case of income made through the sale of equity shares, tax is levied under Section 111A of the Income Tax Act if the holding period is less than 12 months. This is known as short-term capital gains tax on securities.
See also: How TDS on securities interest is deducted under Section 193?
Short-term capital gains tax on securities: Section 111A scope
The section provisions are applicable on the sale and purchase of the following:
- Equity shares
- Equity-oriented mutual fund units
- Sale of units of business trust
- Sale of equity shares, units of business trust or units of equity-oriented mutual funds through a recognised stock exchange located in an international financial service centre where the money is paid in foreign currency, even if Securities Transaction Tax (STT) is not applicable
Section 111A applies to transfers that take place through a recognised stock exchange. Such transactions attract STT.
Securities are excluded from Section 111A
This section does not cover:
- Gain on sale of shares not enlisted on recognised stock exchanges
- Profit on sale of shares that are not equity
- Profit on sale of debt-oriented mutual fund units
- Profit on sale of bonds, debentures and government securities
- Gain on sales of non-equity assets
Rate of tax under Section 111A
A tax rate of 15% is charged on the income made through the sale of equity shares, along with the applicable cess.
Deductions from STCG under Section 80C-80U
In cases where gains fall under the ambit of Section 111A, individuals cannot opt for deductions under Sections 80C to 80U.
Adjustment of STCG against basic exemption limit
In case the basic income is below the basic exemption limit (Rs 2.5 lakh per year), the person has the option to set off short-term capital gains made through the sale of equity shares against the shortfall in the basic exemption limit.
Only a resident individual or HUF can adjust the exemption limit against the STCG covered under Section 111A.
Let us understand this with an example:
Anurag Kumar, aged 67 years and a resident Indian, is a retired person. He purchased equity shares of SBI in March 2022 and sold the same in May 2022 at the Bombay Stock Exchange. STT was levied. His taxable STCG amounted to Rs 1,20,000. Apart from the gain on the sale of shares, he does not have any income.
His tax liability:
Basic exemption limit: Rs 3 lakh
In this case, the STCG of Rs 1.20 lakh is covered under Section 111A, hence, the adjustment of such gain against the exemption limit is allowed only to a resident. In this case, Kumar can adjust the STCG of Rs. 1.20 lakh against the exemption limit. Hence, his tax liability for 2022-23 would be nil.
FAQs
What is short-term capital gains tax on securities?
Section 111A defines short-term capital gains as profits relating to equity, units of equity-oriented mutual funds and business trusts listed on recognised Indian stock exchanges.
What are equity-oriented mutual funds?
Equity-oriented mutual funds are those that invest at least 65% of their assets in equity shares of domestic companies.
An alumna of the Indian Institute of Mass Communication, Dhenkanal, Sunita Mishra brings over 16 years of expertise to the fields of legal matters, financial insights, and property market trends. Recognised for her ability to elucidate complex topics, her articles serve as a go-to resource for home buyers navigating intricate subjects. Through her extensive career, she has been associated with esteemed organisations like the Financial Express, Hindustan Times, Network18, All India Radio, and Business Standard.
In addition to her professional accomplishments, Sunita holds an MA degree in Sanskrit, with a specialisation in Indian Philosophy, from Delhi University. Outside of her work schedule, she likes to unwind by practising Yoga, and pursues her passion for travel.
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