Section 111A of the Income Tax Act, 1961 deals with the taxation of short-term capital gains arising from the sale of equity shares, units of equity-oriented mutual funds, and units of business trusts. This section was introduced in the Finance Act, 2004 and has undergone various amendments since then. In this blog, we will discuss the provisions of section 111A in detail, along with an example.
Provisions of Section 111A:
- Applicable to equity shares, units of equity-oriented mutual funds, and units of business trusts – Section 111A applies to short-term capital gains arising from the sale of equity shares, units of equity-oriented mutual funds, and units of business trusts. It is important to note that this section is not applicable to long-term capital gains.
- Rate of tax – The tax rate for short-term capital gains under section 111A is 15%. This rate is applicable irrespective of the income slab of the taxpayer.
- Holding period – In order to qualify for short-term capital gains, the holding period of equity shares, units of equity-oriented mutual funds, and units of business trusts should not exceed 12 months from the date of acquisition.
- Securities Transaction Tax (STT) – Section 111A is applicable only if the sale of equity shares, units of equity-oriented mutual funds, and units of business trusts have been subject to STT. STT is a tax levied on the purchase and sale of securities listed on recognized stock exchanges in India.
Example:
Let’s say Mr. A purchased 100 shares of XYZ Ltd. on 1st January 2022 for Rs. 500 per share. He sold these shares on 1st November 2022 for Rs. 700 per share. The sale of shares was subject to STT. In this case, the holding period of the shares is less than 12 months, and hence the gains will be considered as short-term capital gains.
The calculation of short-term capital gains tax will be as follows:
Sale price per share = Rs. 700 Purchase price per share = Rs. 500 Profit per share = Rs. 200
Total profit = Rs. 200 x 100 shares = Rs. 20,000
Tax liability = 15% of Rs. 20,000 = Rs. 3,000
Therefore, Mr. A will have to pay a short-term capital gains tax of Rs. 3,000 on the sale of these shares.
- Exemption limit: Section 111A provides an exemption limit of Rs. 1 lakh to taxpayers on the gains arising from the sale of equity shares, units of equity-oriented mutual funds, and units of business trusts. This means that if the short-term capital gains do not exceed Rs. 1 lakh, then no tax liability arises. However, if the gains exceed Rs. 1 lakh, then the entire amount is taxable at the rate of 15%.
- Deductions and set-off: The gains arising from the sale of equity shares, units of equity-oriented mutual funds, and units of business trusts cannot be reduced by any deductions or set-offs. This means that no deduction for expenses or losses can be claimed against these gains.
- Multiple transactions: If a taxpayer sells shares or units of mutual funds in multiple transactions during the financial year, then the gains or losses from each transaction must be calculated separately. The gains or losses cannot be netted off against each other.
- Impact of changes in STT: The rate of STT is subject to change from time to time. In case there is a change in the STT rate during the financial year, then the effective tax rate for short-term capital gains under Section 111A would change accordingly.
- Calculation of gains: The gains or profits arising from the sale of equity shares, units of equity-oriented mutual funds, and units of business trusts must be calculated based on the actual sale price, and not on the face value or the purchase price of the securities.
In conclusion
Section 111A of the Income Tax Act, 1961 provides a tax benefit to taxpayers who have short-term capital gains arising from the sale of equity shares, units of equity-oriented mutual funds, and units of business trusts. Taxpayers should ensure that they comply with the provisions of this section to avoid any tax-related issues or penalties.
Read more useful content:
- section 234e of income tax act
- section 286 of income tax act
- section 90a of income tax act
- section 40a(7) of income tax act
- section 226(3) of income tax act
- section 24 of income tax act
Frequently Asked Questions (FAQs)
Q. What is Section 111A of the Income Tax Act, 1961?
Section 111A of the Income Tax Act, 1961 is a provision that provides for the taxation of short-term capital gains arising from the sale of equity shares, units of equity-oriented mutual funds, and units of business trusts. This section was introduced in the Finance Act, 2004 and has undergone various amendments since then.
Q. What is the tax rate under Section 111A?
The tax rate for short-term capital gains under Section 111A is 15%. This rate is applicable irrespective of the income slab of the taxpayer.
Q. What is the holding period for short-term capital gains under Section 111A?
In order to qualify for short-term capital gains, the holding period of equity shares, units of equity-oriented mutual funds, and units of business trusts should not exceed 12 months from the date of acquisition.
Q. Is Section 111A applicable to long-term capital gains?
No, Section 111A is not applicable to long-term capital gains. It is applicable only to short-term capital gains arising from the sale of equity shares, units of equity-oriented mutual funds, and units of business trusts.
Q. What is the exemption limit under Section 111A?
Section 111A provides an exemption limit of Rs. 1 lakh to taxpayers on the gains arising from the sale of equity shares, units of equity-oriented mutual funds, and units of business trusts. This means that if the short-term capital gains do not exceed Rs. 1 lakh, then no tax liability arises.
Q. Is STT mandatory for Section 111A to apply?
Yes, Section 111A is applicable only if the sale of equity shares, units of equity-oriented mutual funds, and units of business trusts have been subject to Securities Transaction Tax (STT). STT is a tax levied on the purchase and sale of securities listed on recognized stock exchanges in India.
Q. Can deductions and set-offs be claimed against gains under Section 111A?
No, the gains arising from the sale of equity shares, units of equity-oriented mutual funds, and units of business trusts cannot be reduced by any deductions or set-offs. This means that no deduction for expenses or losses can be claimed against these gains.
Q. How are gains calculated under Section 111A?
The gains or profits arising from the sale of equity shares, units of equity-oriented mutual funds, and units of business trusts must be calculated based on the actual sale price, and not on the face value or the purchase price of the securities.
