Short term capital gain tax on shares – Sec 111A – Made Easy

Short term capital gain tax on shares has been a widely discussed topic with the large number of traders and investors that have entered the stock market over the last few years. While the primary focus of such traders and investors has been on booking profits at the optimum time, the short term capital gain tax on such transactions cannot be overlooked and must be kept in mind for appropriate tax planning.

How to determine long term or short term capital gain tax on shares?

Whether the capital gain is long term or short term is determined by the period of holding of such assets. The period of holding of short term capital assets is as under:-

Capital Assets	Holding Period to qualify as short term capital asset
Shares/debentures of a company listed on a recognized stock exchange in India	12 months or less
Zero coupon bonds	12 months or less
Units of equity oriented mutual funds	12 months or less
Units of UTI	12 months or less
Shares of companies unlisted in India including shares of foreign companies listed on stock exchanges outside India	24 months or less
Immovable property, being land or building or both, located in India or in foreign country	24 months or less
Units of debt oriented mutual funds	36 months or less
Others	36 months or less

Section 48 – Method of computation of Capital Gains

As per section 48 of the Income Tax Act, the computation of capital gains has been given as under:-

Sale Consideration received/accrued on transfer of capital asset	XXX
Less : Cost of Acquisition	(XX)
Less : Cost of Improvement, if any	(XX)
Less : Expenditure incurred wholly and exclusively in connection with such transfer	(XX)
Capital Gains	XXX

Section 111 A – Short term Capital Gain Tax on shares

Section 111A will be applicable for gains arising from transfer of short term capital assets. Under this section the assessee will have to pay tax on such STCG @ 15%. This section will be applicable if all the following three conditions are fulfilled:-

• The assesse is a resident, FII or non-resident,
• The capital asset is an equity share in a company or a unit of an equity oriented fund or units of business trust and
• The transaction has been chargeable to STT. However, for transactions undertaken on recognized stock exchange located in International Financial Services Centre (IFSC), where the consideration for such transaction is payable in foreign currency, no STT is payable but the benefit of section 111A shall be available.

If all the above mentioned conditions are satisfied then the short term capital gain tax on shares of such assessee will be taxed u/s 111A @ 15%.

An important point to remember here is that no deduction under Chapter VI-A is allowed on STCG covered u/s 111A i.e. no deductions u/s 80C to 80U can be allowed on such STCG.

Securities not covered u/s 111A

Securities such as debentures, preference shares, deep discount bonds, units of debt mutual funds are not covered u/s 111A and thus the benefit of this section will not be available for capital gain on transfer of such assets.

STCG other than those covered u/s 111A will be chargeable to tax at the normal rates applicable to the assessee.

Benefit of slab rate for short term capital gain tax on shares

As we have mentioned above, Section 111A is applicable on residents, FIIs and non-residents. However, residents can avail the benefit of adjustment of basic exemption limit for computation of short term capital gain chargeable to tax. This basic exemption limit benefit is not available for non-residents and FIIs.

Example – Short term capital gain tax on shares

Mr. A, a resident of India (aged 40 years), is drawing a salary of Rs. 1,90,000 annually. In addition to this, Mr. A has earned a short term capital gain of Rs. 1,25,000 on sale of equity shares on which he has paid STT. What will be the tax implication of the STCG for Mr. A?

Let us first determine whether Mr. A will be covered u/s 111A or not. This will be determined on the basis of the three conditions detailed above. In this case, we can see that:-

• Mr. A is a resident,
• The capital asset is equity shares in a company and
• He has paid STT on such sale of shares.

Therefore, Mr. A will be covered under the purview of section 111A for the short term capital gain tax on shares.

Moreover, since Mr. A is a resident of India, he can avail the benefit of basic exemption limit for computation of the taxable amount.

Total Income = Rs. (1,90,000 + 1,25,000) = Rs. 3,15,000

Assuming basic exemption limit as Rs. 2,50,000,

His salary income will be fully adjusted i.e. Rs. (2,50,000 – 1,90,000) = Rs. 60,000 can be adjusted for the STCG amount of Mr. A.

Therefore, the STCG taxable u/s 111A will be Rs. (1,25,000 – 60,000) = Rs. 65,000.

Tax u/s 111A @ 15% will be payable on Rs. 65,000 along with cess of 4%.

Set off and Carry forward of short term capital loss

If an individual incurs a short-term capital loss (STCL) from selling a capital asset, they can use it to offset gains from selling another capital asset within the same financial year. Additionally, taxpayers can carry forward any remaining STCL for up to eight years, allowing them to offset it against future short term capital gain tax and long-term capital gains (LTCG). However, it is important to note that the carry forward applies only to losses from previous years, not the current year.

Overall, India’s tax laws offer a mechanism for individuals to offset capital gains with capital losses, which can help reduce their tax liability. Understanding the rules for setting off and carrying forward losses can be advantageous for taxpayers aiming to maximize their investments while minimizing their tax obligations.

FAQs

Will the benefit of indexation be available for short term capital gain tax on shares?

No, the benefit of indexation will not be available for short term capital gain tax on shares. The indexation benefit is available only on transfer of long term assets.

What is an equity oriented mutual fund?

Equity oriented mutual funds are a category of mutual funds specified u/s 10(23D) where 65% of its portfolio is invested in equity shares of domestic companies.

Refer Notification 8/2022 issued by CBDT in relation to “Computation of Capital Gain on Specified Unit linked Insurance Policy”.