Short Term Capital Gain Tax on Shares : Section 111A

The income from capital gains is taxable at special rates under Income Tax. Income Tax on Equity Share Trading can be treated as Long Term Capital Gains or Short Term Capital Gains based on the period of holding. Section 111A of Income Tax Act covers provisions for tax on short-term capital gain on the sale of listed equity shares, equity mutual funds, and units of business trust on which STT (Securities Transaction Tax) is paid. Gain or loss from the sale of listed equity shares and other equity instruments held for less than 12 months is a Short Term Capital Gain. Such gain is taxable at 15% (plus surcharge and cess) under Section 111A.

What is Short Term Capital Gain Tax under Section 111A?

The profit or loss on the sale of a capital asset held for less than the specified holding period is a Short Term Capital Gain i.e. STCG or Short Term Capital Loss i.e. STCL. Section 2(42A) of the Income Tax Act defines a Short Term Capital Asset. Based on this definition, the period of holding in the case of listed equity shares and equity mutual funds is 12 months. Thus, if the listed equity share of a domestic company is sold within 12 months of purchase, the profit or loss is Short Term Capital Gain i.e. STCG, or Short Term Capital Loss i.e. STCL.

Section 111A of the Income Tax Act is the provision for taxation of STCG at a rate of 15% on the sale of:

Section 111A covers the following transaction even if STT is not paid on it:

  • STCG on the sale of equity shares, equity mutual funds, or units of business trust listed on a recognised stock exchange in an International Financial Services Centre (IFSC) and if the consideration is paid or payable in foreign currency.

STCG on sale of unlisted shares and securities, debt mutual funds, bonds, debentures, immovable property, motor vehicle, jewellery, etc is taxable at slab rates and not as per special rate u/s 111A.

Income Tax on Short Term Capital Gain under Section 111A

As per Section 111A of Income Tax Act, short term capital gain tax on equity shares and mutual funds is taxable at a special rate of 15%. Cess and Surcharge are additionally applicable.

Example

Mr. A, a resident in India, bought 10,000 equity shares of A Ltd in December 2021 at INR 100 per share. He sold the shares in April 2022 at INR 135 per share through BSE. He paid brokerage of INR 1 per share and STT of INR 1500. Mr. A also has a salary income of INR 8,40,000. What will be the tax liability of Mr. Ashok?

Mr. A sold the equity shares within 12 months and thus its a Short Term Capital Gain. Since it was a listed equity share with STT paid, STCG is taxable at 15% under Section 111A. Let’s calculate the short term capital gain tax on shares.

  Particulars Amount
  Full value of consideration or Sales consideration (10,000 * 135) 13,50,000
Less Transfer Expenses (10,000 * 1) (10,000)
  Net Sale Consideration 13,40,000
Less Cost of Acquisition (10,000 * 100) 10,00,000
  Short Term Capital Gains 3,40,000
  STCG Tax Liability (3,40,000 * 15%) 51,000

Salary Income is taxable at slab rates and tax liability = INR 80,500. Thus total tax liability = 80,500 + 51,000 = INR 1,31,500. Health and Education Cess of 4% is applicable on this tax liability.

Adjustment of STCG u/s 111A against Basic Exemption Limit

Taxpayers holding the status of Resident as per the rules to determine the residential status can take benefit of adjusting the special rate income against the basic exemption limit to reduce taxes. Thus, if your total taxable income is less than the basic exemption limit, you can adjust your special rate income such as STCG u/s 111A, LTCG u/s 112A, etc. against the shortfall in basic exemption limit and pay tax on the remaining income only.

In the above example, if Mr. A had income from capital gains and no salary income, the calculation of tax liability would be in the following manner:

Since Mr. A is a resident and the basic exemption limit is not utilised, he can take benefit of adjusting the special rate income against the basic exemption limit. Thus, taxable STCG = 3,40,000 – 2,50,000 = INR 90,000. Tax Liability = 90,000 * 15% = INR 13,500.

STCG on Shares – Reporting under Schedule CG of ITR

The ITR Form under which the taxpayer needs to report income from capital gains includes ITR-2 and ITR-3. Taxpayer must report income from capital gains in A2 under Schedule CG of the ITR. The taxpayer must report the following details:

  • Full value of consideration i.e. sales value
  • Deductions under Section 48
    • Cost of acquisition i.e. purchase value
    • Expenditure wholly and exclusively in connection with transfer i.e. transfer expenses
  • Short Term Capital Gain i.e. STCG on shares is automatically computed

Set Off & Carry Forward STCL under Section 111A of Income Tax Act

The loss on sale of listed equity shares and mutual funds held for up to 12 months is a Short Term Capital loss. A taxpayer can set off STCL from one capital asset against STCG and LTCG from another capital asset. As per the income tax rules for set off and carry forward of losses, STCL i.e. Short Term Capital Loss can be set off against both Short Term Capital Gains and Long Term Capital Gains in the current year. The taxpayer can carry forward the remaining loss for 8 years and set off against future STCG and LTCG only.

If the taxpayer has income from the sale of some listed equity shares and securities, and profit from other listed equity shares and securities, only net gains are taxable at 15%. Further, the taxpayer can set off the net STCL under Section 111A of income tax act against STCG and LTCG on the sale of shares, securities, property, jewellery, car or any other capital asset. The taxpayer can carry forward the remaining loss for 8 years.

FAQs

I sold equity shares on BSE at a profit of after holding them for 10 months. What is the applicable income tax rate?

If you have sold equity shares after holding them for upto 12 months, it is a Short Term Capital Gain. STCG on shares that are listed on a recognised stock exchange and on which the investor pays STT are taxable at 15% under Section 111A. Your Taxable STCG = Sell Value – Buy Value. Income Tax on STCG = 15% of Taxable STCG.

How can I save STCG on shares?

The Income Tax Act does not provide any specific exemption for STCG on sale of listed equity shares & equity mutual funds. However, here are some ways of saving STCG tax on shares:
1. STCL i.e. Short Term Capital Loss on sale of any capital asset can be adjusted against STCG from sale of equity shares and equity mutual funds
2. If you’re a resident in India and other taxable incomes are less than INR 2.5 lacs, you can adjust the STCG against basic exemption limit and pay tax at 15% on the remaining amount only.

Can I claim Chapter VI-A deductions from Section 80C to 80U from STCG u/s 111A?

The Income Tax Act does not allow claiming deduction from Section 80C to 80U against STCG taxable under Section 111A. However, the taxpayer can claim Chapter VI-A deductions on STCG other than those taxable under Section 111A.

Securities Transaction Tax – STT

STT i.e. Securities Transaction Tax is levied on the purchase and sale of securities listed on a recognized stock exchange in India. The STT Act has a list of securities on which STT is applicable. Such securities include equity, derivatives, and units of equity mutual fund. The STT rate is prescribed by the Government. STT should be paid by buyer or seller.

  • The recognized stock exchange collects STT from the buyer or seller
  • The recognized stock exchange deposits STT with the government on or before the 7th of the next month
  • Buyer or Seller can claim STT as a business expense against trading income

If the recognized stock exchange is unable to collect STT from the trader, it is still liable to deposit STT with the government to avoid interest and penalty.

Securities on which STT is levied

Securities Transaction Tax is charged on the Securities that are traded on a recognized stock exchange in India. Following is the list of securities on which STT is levied.

Securities Transaction Tax Rates

Transaction STT Rate Who pays? Value
Purchase of equity share (delivery based) or unit of business trust 0.1% Buyer Purchase Value
Sale of equity share (delivery based) or unit of business trust 0.1% Seller Sale Value
Purchase of equity mutual fund (delivery based) NIL Buyer Not Applicable
Sale of equity mutual fund (delivery based) 0.001% Seller Sale Value
Sale of equity share (intraday) and equity mutual fund (without actual delivery) 0.025% Seller Sale Value
Sale of Exchange Traded Funds (ETFs) 0.001% Seller Sale Value
Sale of Futures 0.01% Seller Sale Value
Sale of Options (option not exercised) 0.017% Seller Option Premium
Sale of Options (option is exercised) 0.125% Buyer Settlement Price
Sale of unlisted equity shares under an IPO which are later listed on a recognized stock exchange 0.2% Seller Sale Value

Income Tax on Securities with STT paid

The income tax rate for securities on which STT is paid is lower than the income tax rate for other assets. Here are the Income Tax rates for securities on which STT is paid.

Type of Security Period of Holding LTCG STCG
Equity Shares / Equity MF / ETF / ESOP / RSU 12 months 10% in excess of INR 1 lac 15%
Foreign Shares 24 months 10% without indexation slab rate

In the case of Equity Shares and Equity MF, the investor should calculate the cost of acquisition after applying the grandfathering rule to calculate the Long Term Capital Gain on shares.

A trader having income from trading in securities and reporting such income as Business Income can claim STT as a valid business expense. STT paid on trading transactions is a direct expense related to trading income. The trader can report it as an expense in the P&L Account while filing ITR-3 on the Income Tax Website.

FAQs

How is STT charged on Intraday Trading?

STT is charged on the sell value of the transaction at 0.025%. Here is an example:
Trader buys 100 shares of HDFC at Rs.1000 each at 11:30 AM on Monday & sells them off at Rs.1006 at 2:00 PM. STT will be Rs.25.13 calculated as Rs.1006*100*0.025% = Rs.25.15

How is STT charged on F&O Trading?

STT is charged on the sell value of the transaction at 0.01%. Here is an example:
A trader sells 1 lot of NIFTY on at 9000. His total volume comes to Rs.9000*75 = Rs.6,75,000. STT on this trade will be calculated as Rs.6,75,000*0.01% = Rs.67.5

How is STT different from CTT?

STT is Securities Transaction Tax and CTT is Commodity Transaction Tax. STT is levied on trading in securities such as equity delivery, equity intraday, equity F&O, ETFs, Mutual Funds etc. CTT is levied on trading in non-agri commodity derivatives.

Long Term Capital Gain Tax on Shares & Mutual Funds : Section 112A

Income Tax on Equity Share Trading can be treated as Long Term Capital Gains or Short Term Capital Gains based on the period of holding. Up to FY 2018-19, LTCG i.e. Long Term Capital Gain on shares and securities on which Securities Transaction Tax (STT) is paid was exempt under Sec 10(38) of the Income Tax Act. However, under Budget 2018, the exemption under Section 10(38) was removed. Further, a new Section 112A of Income Tax Act was introduced to levy a 10% income tax on Long Term Capital Gains on the sale of equity shares, equity mutual funds, and units of business trust in excess of Rs. 1 lac for a financial year. Section 112A was applicable from FY 2018-19 (AY 2019-20) onwards.

What is Long Term Capital Gain?

The profit or loss on the sale of a capital asset held for more than the specified holding period is a Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL).

Based on the period of holding, here is a summary of Capital Gain on the sale of Capital Assets. Eg: If the listed equity share of a domestic company is sold after 12 months of purchase, the profit or loss is Long Term Capital Gain or Long Term Capital Loss on shares.

Capital Asset Period of Holding
Equity Shares of Domestic Company listed on a recognized stock exchange 12 months
Equity Shares of Domestic Company not listed on a recognized stock exchange 24 months
Equity Shares of Foreign Company whether listed or not 24 months
Equity-Oriented Mutual Funds or ETFs (Exchange Traded Funds) 12 months
Debt-Oriented Mutual Funds or ETFs (Exchange Traded Funds) 36 months
Debentures or Bonds listed on a recognized stock exchange 12 months
Debentures or Bonds not listed on a recognized stock exchange 36 months
Immovable Property such as land, building, or house property 24 months
Movable Property such as jewelry, car, painting, work of art 36 months

Section 112A Grandfathering Rule to calculate Long Term Capital Gain on Shares

Traders who would have invested in equity markets with a view to earning tax-free income in the form of Long Term Capital Gains would now have to pay tax as per the new rule. The announcement of 10% LTCG was made on 1st February 2018. Thus, an investor who was holding an investment in equity shares and equity mutual funds as of 31/01/2018, should not be required to pay tax on entire capital gains. Hence, to ensure that LTCG on shares earned up to 31st January 2018 should not be taxed, the Capital Gains earned up to 31/01/2018 would be grandfathered using a formula.

For equity shares and equity mutual funds bought on or before 31/01/2018, the cost of acquisition should be calculated as follows:

  1. Lower of Fair Market Value as of 31st January 2018 or the Actual Selling Price
  2. Step 1 or Actual Cost Price whichever is higher

Section 112A of Income Tax Act – Calculation of Long Term Capital Gain Tax on Shares

The budget was announced on 01/02/2018 and so the provisions for tax on LTCG on shares are different based on the date of purchase.

Particulars

Up to 31/01/18 01/02/18 Onwards
Date of Purchase Shares bought on or before 31/01/2018 Shares bought on or after 01/02/2018
STCG (sold within 365 days) STCG @ 15% STCG @ 15%
LTCG (sold after 365 days) SP = price at which shares are sold SP = price at which shares are sold
CP = Follow these steps:

Higher of the following:

(i) Price as on 31.01.18 or Actual Selling Price whichever is less

(ii) Actual Cost
CP = price at which shares are bought
LTCG = SP – CP LTCG = SP – CP
Tax = 10% (LTCG – Rs.1,00,000) Tax = 10% (LTCG – Rs.1,00,000)

Examples for Grandfathering Rule

  Case I Case II
Purchase Date  1st Jan 2018 10th Feb 2018
Purchase Value 2,00,000 2,00,000
Sell Date  10th Jan 2020 10th Jan 2020
Sale Value 3,50,000 3,50,000
Grandfathering rule applicable Yes No
Actual Cost * 2,40,000 ** 2,00,000
LTCG
= Sale Value – Actual Cost
1,10,000 1,50,000
Exempt Exempt up to INR 1 Lakh Exempt up to INR 1 Lakh
Tax Liability 1,10,000 – 1,00,000= 10,000 * 10%
= 1,000
1,50,000 – 1,00,000= 50,000 * 10%
= 5,000

*Note: Actual Cost is the Cost of Acquisition to calculate capital gains 

**Calculation of Actual Cost using FMV (Case I)

  Condition Amount (INR) Qualifying Amount
Step 1 Lower of:

Actual Selling Price
or
FMV on 31st Jan 2018
Lower of:

3,50,000 or 2,40,000  

2,40,000
Step 2 Higher of:

Value in Step 1
or
Purchase Value
Higher of:

2,40,000 or 2,00,000

2,40,000
  Actual Cost   2,40,000

Income Tax on Long Term Capital Gain

The tax rate of a capital asset is determined on the basis of the nature of capital gain i.e. LTCG or STCG.

Capital Asset STT LTCG STCG
Listed equity share of a domestic company Yes 10% in excess of INR 1 lac u/s 112A 15% u/s 111A
Listed equity share of a domestic company No 10% without indexation slab rate
Unlisted equity share of a domestic company No 20% with indexation slab rate
Listed equity share of a foreign company Yes / No 10% without indexation slab rate
Unlisted equity share of a foreign company Yes / No 20% with indexation slab rate
Equity Mutual Fund or ETF (Exchange Traded Fund) Yes 10% in excess of INR 1 lac u/s 112A 15% u/s 111A
Debt Mutual Fund or ETF No 20% with indexation slab rate
Listed Debentures or Bonds No 10% without indexation slab rate
Unlisted Debentures or Bonds No 20% without indexation slab rate
Land, Building, House Property, Car, Jewellery, Paintings, Art of Work NA 20% with indexation slab rate

Long Term Capital Gain Tax on Shares – Equity Shares and Equity Mutual Funds

Date of Purchase Date of Sale Tax Treatment
On or before 31/01/2018 On or before 31/01/2018 Exempt u/s 10(38)
On or before 31/01/2018 Between 31/01/2018 and 01/04/2018 Exempt u/s 10(38)
On or before 31/01/2018 01/04/2018 onwards Calculate LTCG as per the above table
* LTCG up to 31/01/2018 exempt
* LTCG after 31/01/2018 – Tax at 10% in excess of Rs. 1 lac
On or after 31/01/2018 01/04/2018 onwards Calculate LTCG as per the above table
Tax at 10% in excess of Rs. 1 lac
Under Budget 2022, the surcharge on long term capital gains (LTCG) on listed equity shares, units, etc has been capped at 15%
Tip
Under Budget 2022, the surcharge on long term capital gains (LTCG) on listed equity shares, units, etc has been capped at 15%

LTCG on Shares – Reporting under Schedule 112A of ITR

The ITR Form under which the taxpayer needs to report income from capital gains includes ITR-2 and ITR-3. AY 2020-21 onwards, the ITR Forms comprised of reporting LTCG on shares and mutual funds under Schedule 112A. Under Schedule 112A of ITR, the taxpayer needs to provide scripwise reporting of long term capital gains on equity shares and equity mutual funds purchased on or before 1st February 2018. To calculate the LTCG as per Section 112A after considering the provisions of the grandfathering rule, reporting Schedule 112A is mandatory. The taxpayer needs to report the following details in ITR:

  • ISIN i.e. International Securities Identification Number
  • Name of the share or unit
  • Number of shares
  • Sales price per share or unit
  • Cost of Acquisition
  • FMV i.e. Fair Market Value as on 31/01/2018
  • Expenditure related to transfer

Set Off & Carry Forward LTCL under Section 112A of Income Tax Act

The loss on sale of listed equity shares and mutual funds held for more than 12 months is a Long Term Capital loss. A taxpayer can set off LTCL from one capital asset against LTCG from another capital asset. As per the income tax rules for set off and carry forward of losses, LTCL i.e. Long Term Capital Loss can be set off against Long Term Capital Gains only in the current year. The taxpayer can carry forward the remaining loss for 8 years and set off against future LTCG only.

If the taxpayer has income from sale of some listed equity shares and securities, and profit from other listed equity shares and securities, only net gains in excess of INR 1 lac are taxable at 10%. Further, the net LTCL under Section 112A of income tax act can be set off against LTCG on sale of shares, securities, property, jewellery, car or any other capital asset. The remaining loss can be carried forward for 8 years.

Exemption from LTCG on Shares

The taxpayer having income from the sale of a long term capital asset can claim capital gain exemption under Section 54 to 54GB of the Income Tax Act if he/she fulfills the conditions.

A taxpayer can claim the exemption by reinvesting the proceeds from the sale into a specified capital asset. Such exemption would lower the capital gains and save taxes on the same. However, the taxpayer must hold the new asset for the specified period as per the relevant section. However, if he/she sells the asset before the specified time period, he/she must report it as an income in the relevant financial year and pay tax at the applicable rate.

The taxpayer has an option to open an account under the Capital Gains Account Scheme and park the sale proceeds in it till the time they invest in the specified asset to claim the Capital Gains exemption.

FAQs

Are LTCG on sale of listed shares and securities taxable now?

Yes. Under Budget 2018, the exemption under Sec 10(38) was removed. Further, a new Section 112A of Income Tax Act was introduced to levy a 10% income tax on Long Term Capital Gains on the sale of equity shares, equity mutual funds, and units of business trust in excess of Rs. 1 lac for a financial year. Sec 112A was applicable to FY 2018-19 (AY 2019-20) onwards.

What is the new grandfathering rule introduced in Budget 2018?

Grandfathering rule is used to determine the cost of acquisition to calculate the long term capital gain tax on shares and securities that are listed and on which STT is paid.
To calculate the LTCG on the sale of equity shares and equity mutual funds bought on or before 31/01/2018, the cost of acquisition is lower of FMV as of 31/01/2018 or the actual selling price and higher of the earlier result and actual cost price.

How to determine FMV i.e. Fair Market Value of equity shares and mutual funds to calculate LTCG on shares under Section 112A?

FMV i.e. Fair Market Value is the highest price of an equity share or equity mutual fund quoted on a recognised stock exchange as on 31st January 2018. If the said share or mutual fund was not traded on 31st Jan 2018, FMV would be the highest price on the immediately preceding trading day. FMV of Equity Shares is available on the NSE website. Further, the FMV of Equity Mutual Funds is available on the AMFI website.