Section 111a of income tax: Short-Term Capital Gains (STCG)

Our life goes around creating wealth. Consequently, we invest money into buying assets. A few of them come under short-term investments. Selling them generates a valuable return, which is taxable as per Indian law. Being an Indian, it is our prime responsibility to pay duty on the return we earn.

Short-term capital gain can be on assets such as properties and securities.

The profit you earn by selling short-term securities on the stock exchange is discussed under section 111a of the income tax act.

What is short-term capital gain?

A person gains profit by selling short-term assets, which is considered a short-term capital gain. That person is liable to pay taxes on the yields.

Examples of short-term assets include buildings, land, patents, gold, trademarks, machinery, and investments in listed companies on the stock exchange using equity-based securities.

Taxes applicable to the profit gained by selling equities and equity-oriented mutual on the stock exchange come under 111a of the income tax act. The profit earned by selling shares or units of mutual funds for less than twelve months comes under short-term capital gain.

Here is a list of short-term capital assets in the stock market.

1) Equity shares: Buying shares of a company that are listed on the stock exchange and then holding it for less than a year and by selling if you earn a profit, then you have to pay STCG tax per sec 111a of the income tax act.

2) Units of equity-based mutual funds: Mutual funds listed on the stock market with more than 65% investment in equities also fall under short-term assets. The income tax on gains earned within twelve months from mutual funds applies the same here as above.

3) Units of business trust:  Investors who invest in equity-oriented business trusts that further invest in infrastructure or real-estate funds and earn significant profits within a year are taxable under section 111a of income tax.

Taxation under section 111a:

As per section 111a, an investor is liable to pay the tax of @15% on the earned amount from short-term capital gain on the stock market. Units transferred after October 1, 2004, are liable for Securities Transaction Tax; it is essential to get transferred through a recognized stock exchange.

For example, you are keen to earn passive income by investing in mutual funds. You started by investing Rs.3 lakh in ABC Mutual Fund. At Rs. 20 each, you purchased 15000 units. After eight months, the per-unit value became Rs. 28. You decided to sell and received Rs. 4,20,000. Here, the net profit is Rs. 1,20,000, upon which you must pay a tax of @15% under sec 111a of the income tax act.

Exemption to short-term capital gain under 111a of the income tax act:

Here are certain exemptions which do not fall under section 111a of short-term capital gain.

• When you purchase and sell securities such as equity shares or units of equity-based mutual funds through an unrecognized stock exchange, you get exempted from paying short-term capital gain on your profit. 
• Revenue earned on selling shares other than equity shares, section 111a of income tax is not applicable. In such cases, you are free from paying short-term capital gain tax. 
• There are mutual funds that are non-equity based. STCG on liquid funds, debt funds, infrastructure debt funds, and money market funds are exempted from section 111a.
• Another type of short-term capital gain is generated from investing in Government bonds, debentures, and securities. Money earned from selling them is free from the 111a income tax act.
• No deduction is allowed under chapter IVA mentioned in sections 80C to 80U on short-term capital gains referred to in section 111A. However, you can claim such deductions from Short-term Capital Gains other than as provided under section 111A.
• If you are a resident Indian or HUF, earning from investing in the stock market is your only source of income. You can adjust Short-Term Capital Gain against the basic exemption limit prescribed by the Indian Government as per your age. Below age 60, you can get an exemption of Rs.2.5 lakhs for age 60 to 80 Rs. Three lakhs and for age 80 and above Rs. 5 lakhs. 
• Compared to 15% tax on Short-term Capital Gain under section 111a, if you hold the stock for more than 12 months, you will have benefits of exceptions of Rs. 1 lakh, and on the remaining amount, you have to pay tax only @10%, which is lower.

Tips to avoid capital gain tax:

• The taxes are lesser for long-term capital gain tax. Hold your equity for more than 12 months and avoid paying 15% tax per section 111a.
• Using a tool for the tax-loss harvesting, an investor intentionally sells shares, mutual funds, or other equity-based securities at a loss to offset the impact of capital gain from other equity stocks. 

Conclusion:

A resident Indian and HUF is liable to pay short-term capital gain tax on selling securities like shares and equity-oriented mutual funds, which are recognized by stock exchanges. A taxpayer must pay @15% of the total profit amount as STCG according to section 111a of the Income Tax Act of 1961.

There are options by which you can get an exemption from paying tax under section 111a. You can also use the tax-loss harvesting tool wisely without washing out profit to avoid paying huge taxes on a short-term capital gain. You can also select an unrecognized stock market to buy and sell stocks or invest in government securities and bonds to avoid paying taxes under section 111a of the Income Tax Act. 

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