Short term capital gain - How it is taxed?

Gains from equity shares listed on a recognised stock exchange having a holding period of less than 12 months are considered as short term capital gains.

Section 111A is applicable in the case of STCG on the purchase or sale of-

Equity shares or equity-oriented mutual fund units 

Transferred through a recognised stock exchange 

Such transaction is liable to securities transaction tax (STT)

Please note that equity-oriented mutual funds are those that invest at least 65% of their assets in the equity shares of domestic companies.

If the conditions mentioned above are satisfied, then the transfer of the stocks will be considered as ‘Short term capital gains under section 111A. 

Short-term capital gain under section 111A is taxed at a flat tax rate of 15% with applicable cess.

If you are an Indian resident as per income tax and your total income post various deductions is lower than the basic exemption limit, then you are entitled to set off your short-term capital gains and long-term capital gains on equity investments; and long-term capital gain on investments other than the equity investments, against the shortfall in your basic exemption limit (i.e. now Rs.2.5 lakhs).

Let us understand this by an illustration –

Joy has a taxable salary income of only Rs 1 lakh and a short-term capital gain on the sale of equity shares of Rs 4 lakh. He also has Rs 50,000 as Income from Other Sources. Calculate STCG Tax applicable.

You have to add income from other sources of Rs 50,000 to the total taxable salary thereby making it Rs 1.5 Lakh. As there is a shortfall in the absorption of the basic income tax exemption limit of Joy by Rs 1 lakh, short-term capital gain on the sale of equity can be adjusted to the extent of Rs 1 lakh.

Tax will be applicable on a short-term capital gain of Rs 3 lakh (Rs 4 lakh – Rs 1 Lakh) at a flat rate of 15%.

Points to be noted- 

If your total income including STCG after applicable tax deductions is below Rs 2.5 Lakh, then your total tax liability is nil and also no liability will arise us/ 111A as deduction up to the basic tax exemption limit is allowed.

However, If your total income including STCG is more than Rs 2.5 Lakhs, then a flat 15% on STCG will be levied. (However rebate u/s 87a will be available if total income is less than 5 lakhs i.e up to Rs 12,500 of tax liability as per current income tax regime)

Income tax Laws do not allow any deduction under section 80C to 80U from the short term capital gains referred to section 111A.

However, the investor can claim such deduction on short term capital gains other than those covered under section 111A.

Illustration of STCG under Section 111A

JOY sold equity shares of XYZ Ltd (Indian company) on BSE at a profit after holding them for a period of 8 months. What will be the rate applicable on the STCG?

As the holding period is less than 12 months gains are classified as short term capital gains.  The equity shares are transferred through a recognised stock exchange (STT being paid ),  this case is covered under Section 111A.  STCG will be charged at 15% (plus surcharge and cess as applicable).