Short Term Capital Gain on shares- An investor’s Perspective

Share market is booming these days and touching new highs in every trading session. It has generated interest of billions of small investors and they are investing in shares with the intentions of earning profits. Needless to say, the profits so earned on investment in shares is taxable according to Section 111A & 112A of the Income Tax Act, 1961. The gains derived on shares can be classified into two parts depending on the period of their holding as ‘Short Term’ or ‘Long Term’. Shares held for a period up to 12 months is classified as ‘Short-Term Capital Asset’ and gain on sale of such shares is known as ‘Short-Term Capital Gain’ taxable u/s 111A. This article explores the provisions of section 111A of the Income tax Act, 1961 detailing ‘Short-Term Capital Gain’ from investors’ perspective.

What is Short-Term Capital Gain in case of investment in shares

In case of investment in shares, if the period of holding such shares is up to 12 months, such shares will be classified as ‘Short-Term Capital Asset’ and the gain on sale of such shares shall be treated as ‘Short-Term Capital Gain’.

Whether all short-term capital gain on sale of shares is covered by section 111A

No, gain on sale of shares shall be covered u/s 111A only if the conditions prescribed under section 111A are satisfied.

What are the conditions to be fulfilled for taxability under section 111A

Following conditions should be satisfied for taxability u/s 111A of the Income Tax Act, 1961:

There must be a gain arising from sale of a specified investment (see next Q&A)
Such gain must be short-term i.e. period of holding not more than 12 months
The transaction of sale of share must be entered on or after 01-10-2004 and
Such sale transaction must be subject to securities transaction tax (STT)

Note: Share transaction is subjected to STT only when the sale of such share is made through recognised stock exchange situated in India.

Which are the specified investments covered for taxability as Short-Term Capital Gain under section 111A

Following specified investments (assets) shall be taxable under section 111A as below:

Equity Shares or
Units of an Equity Oriented Fund or
Units of a Business Trust

Note: Section 111A is not applicable to capital gains arising pursuant to buyback, open offer for sale, delisted shares, negotiated deals etc. because STT is not payable on such transfer of shares.

What is the rate of tax under section 111A on short-term capital gain on sale of shares

Short Term Capital Gain on sale of specified investments u/s 111A is taxable at the rate of 15% of the amount of gain so derived.

What are the adjustment provisions for calculating Short-Term Capital Gain in case of individual and HUF?

It is important to note that adjustment of Short-Term Capital Gain against ‘Basic Exemption Limit’ is available only to Resident individual and HUF.
Therefore, a non-resident individual or HUF is not eligible for adjustment of Short-Term Capital Gain against the Basic Exemption Limit.

Proviso to Section 111A:

“Provided that in the case of an individual or HUF, being a resident, where the total income as reduced by such short-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such short-term capital gains shall be reduced by the amount by which the total income as to reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such short-term capital gains shall be computed at the rate of 15%.”

Take an example:

Case-1: Mr. Ramesh has income from salary Rs. 2,00,000, interest income Rs. 80,000, short-term capital gain u/s 111A Rs. 50,000, eligible deduction for LIC u/s 80C Rs. 1,00,000. Calculate tax payable ignoring rebate u/s 87A.

Particulars	Amount
Income under head salary Add: Income from other sources: Interest income Less: Deduction u/s 80C	2,00,000 80,000 (1,00,000)
Total Income without including short-term capital gains	1,80,000
Shortfall available from Basic Exemption Limit of Rs. 2.50 Lakhs [250,000 – 180,0000]	70,000
Short Term capital gain of Rs. 50,000 is fully adjusted against shortfall available from basic exemption limit, therefore, tax payable on short-term capital gain is ‘Nil’

Case-2: Mr. Ramesh has income from salary Rs. 2,50,000, interest income Rs. 80,000, short-term capital gain u/s 111A Rs. 50,000, eligible deduction for LIC u/s 80C Rs. 1,00,000. Calculate tax payable ignoring rebate u/s 87A.

Particulars	Amount
Income under head salary Add: Income from other sources: Interest income Less: Deduction u/s 80C	2,50,000 80,000 (1,00,000)
Total Income without including short-term capital gains	2,30,000
Shortfall available from Basic Exemption Limit of Rs. 2.50 Lakhs [250,000 – 2,30,0000]	20,000
Short-Term capital Gain of Rs. 50,000 will be first adjusted against shortfall of Rs. 20,000 and remaining capital gain of Rs. 30,000 shall be liable for tax u/s 111A= 30,000* 15% = Rs. 4500.

Case-3: Mr. Ramesh has income from salary Rs. 3,50,000, interest income Rs. 80,000, Loss from business & profession Rs. 40,000, short-term capital gain u/s 111A Rs. 50,000, eligible deduction for LIC u/s 80C Rs. 1,00,000. Calculate tax payable ignoring rebate u/s 87A.

Particulars	Amount
Income under head salary Add: Income from other sources: Interest income Less: Set off loss under business & profession Less: Deduction u/s 80C	3,50,000 80,000 (40,000) (1,00,000)
Total Income without including short-term capital gains	2,90,000
There is no shortfall from basic exemption limit of Rs. 2,50,000 as total income without short-term capital gain is already Rs. 2,90,000.
Therefore, Tax payable will be: Tax on Short-Term Capital Gain: 50,000 * 15% = Rs. 7,500 Add: Tax on Total income other than income from short term capital gain u/s 111A = [290,000 – 250,000] * 5%	7,500 2,000
Total Tax due subject to rebate u/s 87A	9,500

What is the ‘Basic Exemption Limit’

Basic Exemption Limit is the limit of income up to which a taxpayer is not required to pay income tax. If the total income of the taxpayer falls below the basic exemption limit, no tax is chargeable thereon.

Basic Exemption Limit is as below:

Resident individual of the age 80 years or above: Rs. 5,00,000
Resident individual of age 60 years or above but below 80 years: Rs. 3,00,000
Other Individuals and HUF: Rs. 2,50,000

What are the eligible deductions from sales consideration for calculating short-term capital gains on shares

Any expenses incurred on sale of shares/units of mutual fund/units of business trust namely brokerage, stamp duty etc. are allowed as deduction from sales consideration for the purpose of calculating short-term capital gains u/s 111A.

Are deductions under section 80C to 80U allowed from short-term capital gains u/s 111A

It is specifically provided in the sub-section (2) of section 111A that no deductions under sections 80C to 80U [Chapter VI-A] of the Income Tax Act shall be allowed on short-term capital gains u/s 111A.
However, in case of short-term capital gains other than section 111A, deductions u/s 80C to 80U are allowable to the taxpayers.

What is Equity Oriented Fund for the purpose of section 111A

Explanation to Section 111A provides definition of ‘Equity Oriented Fund’. According to this explanation:

“Equity Oriented Fund means a fund set up under a scheme of a mutual fund specified under of section 10(23D) and-

(i) In a case where the fund invests in the units of another fund which is traded on a recognised stock exchange, -
(a) A minimum of 90% of the total proceeds of such fund is invested in the units of another fund; and
(b) Such other fund also invests a minimum of 90% of its total proceeds in the equity shares of domestic companies listed on a recognised stock exchange; and

(ii) In any other case, a minimum of 65% of the total proceeds of such fund is invested in the equity shares of domestic companies listed on a recognised stock exchange”

Author’s Note:

Section 111A is applicable to all assessees including companies, firm, LLP, non-residents and foreign institutional investors.
The benefit of section 111A is available in case of a transaction undertaken on a recognised stock exchange located in International Financial Services Centre and where the consideration is paid or payable in foreign currency, even if securities transaction tax is not paid on such transaction.
If the taxpayer is holding equity shares or units of equity-oriented funds or units of a business trust as stock-in-trade of business, income from sale of such stock-in-trade will be treated as ‘Business Income’ and hence section 111A shall not be applicable. However, in case of FIIs, these will be considered as a ‘capital asset’ and thus section 111A shall apply in case of short-term capital gain.
Short-term capital gain on securities such as debentures, preference shares, units of debt mutual funds, deep discount bonds does not fall within the ambit of section 111A.

Disclaimer: The article is based upon the personal opinion of the author and is meant only for informative purposes and does not hold any legal value. Readers are advised to act diligently and under professional consultation while applying the contents of the above article. ‘Taxwink’ is not responsible for any loss or damage caused due to application of the above information by the readers.

About Author: The Author of the article CA Naveen Goyal is a Chartered Accountant with an experience of more than 15 years in the field of Income Tax, International Taxation and Indirect Tax (GST)

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