The hardest thing in the world to understand is income tax
– Albert Einstein.
Income tax, with its myriad provisions, rules, clauses, exemptions, and exceptions, is a hard nut to crack. It’s paradoxical but true. The more you understand it, the more you realize how little you know of it. If Einstein had a tough time dealing with taxes, just imagine a common man’s plight!
For a stock market investor, it’s a double whammy. Apart from analyzing stocks and tracking & monitoring them, he should also be mindful of his tax liabilities. Otherwise, taxes can eat up a significant chunk of his gains.
Tax rates vary not only amongst asset classes but can differ depending upon the holding period of your investments. If equity shares listed on a recognized stock exchange are held for a period of fewer than 12 months, it’s called the short term. A holding period of 12 months & above is categorized as long-term for shares.
Equity securities are generally considered to be long-term investment vehicles. The longer you hold them, the higher the return you make and the lower the tax you pay. So efficient tax planning is pivotal to wealth creation. While you build wealth, do not forget to protect it and make it tax-efficient.
Accordingly, the profit that you make by selling equity shares is known as short-term capital gains (STCG) & long-term capital gains (LTCG), respectively. Before diving into taxation, it is important to know there are ways to postpone capital gains taxation by reinvesting, but this is another topic.
Section 111A deals with short-term capital gains, and for long-term capital gains, section 112A is applicable. It’s important not to get confused with the provisions of the two sections.
Section 111A of the Income Tax Act is applicable provided the following conditions are satisfied:
- Purchase and subsequent sale of equity shares or units of *equity-oriented mutual funds within a period of 12 months
- The shares are listed on a recognized stock exchange &
- Securities Transaction Tax (STT) is applicable on the above transaction
*Mutual fund schemes that invest at least 65% of their assets in the equity shares of domestic companies are called equity-oriented mutual funds.
What is the Applicable Tax Rate?
The short-term capital gains tax rate under section 111A is 15% (plus the applicable surcharge and cess).
Table of Contents
Scope of Section 111A
The following transactions come under the ambit of this section:
- Short-term capital gains arising from the sale of equity shares of a listed company through a recognized stock exchange on which STT is payable.
- Short-term capital gains arising from the sale of equity-oriented mutual fund units through a recognized stock exchange on which STT is payable.
- Short-term capital gains arising from the sale of units of a business trust
- Short-term capital gains arising from the sale of equity shares, sale of equity-oriented mutual fund units, or units of business trust through a recognized stock exchange located in the International Financial Services Center (IFSC) if the consideration is paid in foreign currency even if STT is not applicable
Adjustment of Unexhausted Basic Exemption Limit:
For Indian residents whose total income after claiming deductions is less than the basic exemption limit, the STCG on equity investments can be absorbed to the extent of a shortfall in the limit.
E.g., Mr. Rajiv, aged 45, from Chennai, has for the FY 2021-22:
- Salary income of Rs.75,000
- FD Interest Income of Rs.75,000
- STCG on sale of equity shares of Rs.5,00,000
Q: How do you determine the short-term capital gains tax payable by Rajiv?
A: Rajiv is an Indian resident. He is aged below 60. So the basic exemption limit is Rs.2,50,000. Excluding the STCG, his income is Rs.1,50,000 (75,000 + 75,000)
So the shortfall in basic exemption limit is Rs.1,00,000 (2,50,000 – 1,50,000) which can be adjusted against STCG.
Therefore the STCG amount that is taxable u/s 111A is Rs.4,00,000 (5,00,000 – 1,00,000)
Tax liability is 4,00,000 * 15% = Rs.60,000 (plus surcharge & cess)
Key Points To Consider:
- If the total income of the assessee after including STCG and claiming deductions is less than the basic exemption limit, his/her tax liability is Zero. Hence there shall be no liability for paying STCG tax.
- But if the total income of the assessee after including STCG exceeds the basic exemption limit, then an STCG tax of 15% is payable. (If total income does not exceed Rs.5,00,000, rebate u/s 87A can be claimed)
- Chapter VI-A deductions (Sections 80C-80U) cannot be claimed by the assessee against STCG referred to u/s 111A
- The cost of acquisition of shares and related transfer expenses like brokerage are deducted from sale consideration to arrive at the STCG amount.
- The benefit of adjusting the unexhausted basic exemption limit against STCG u/s 111A is not available for Non-resident assessees.
Exemptions under Section 111A of Income Tax Act:
The STCG tax u/s 111A would not be levied under the following circumstances:
- If the assessee can prove to the satisfaction of the IT department that he holds the equity securities as capital assets and not as stock-in-trade
- STCG is made on the transfer of shares through a recognized stock exchange in the International Financial Services Center (IFSC) – because STT is not applicable on such transactions
- Foreign institutional investors (FIIs) are also exempted as their security holding is deemed to be capital assets.
An overview of the purpose of Section 111A:
The primary objective of this section is to provide a concessional rate of tax (i.e.15%) if shares are sold through a recognized stock exchange, and the transaction is subject to STT. Otherwise, the gains are added to your income and taxed at the applicable slab rate, which may be as high as 30%.
So, this was a short adventure trip inside the scope and boundaries of Section 111A of the Income Tax Act. After a meticulous study, you would be able to apply the provisions and compute the tax liability. In case of any difficulty, do not hesitate to consult a good tax professional.
You can hate taxes, but you cannot ignore taxes. It is imperative to be tax-savvy to get money savvy.