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Tax on Short Term Capital Gain (STCG) on Equity Shares & Mutual Funds
(Section 111A of The Income Tax Act)

When shares & mutual funds are sold/redeemed within 12 months of their holding, the gain on such sale/redemption is known as Short Term Capital Gain. The provisions relating to tax on Short Term Capital Gain on equity shares & equity oriented mutual funds are covered by Section 111A of The Income Tax Act. Accordingly Short Term Capital Gain on equity shares & equity oriented mutual funds is chargeable to tax at a concessional rate of 15%. Detailed provisions of the section 111A:
  • Section 111A is applicable when there is Short Term Capital Gain  on sale/redemption of Equity Shares & Equity Oriented Mutual Funds. Here clear emphasis is on Equity Shares & Equity Oriented Mutual Funds. Other Mutual funds like debt funds, Gilt funds, FMPs etc. are not covered by this section.
  • The transaction shall be chargeable to Securities Transaction Tax(STT). One can check the details of STT from the mutual fund transaction/redemption document.
  • If the above two conditions are met, short term capital gain will be taxable at a flat rate of 15%.

How to Calculate income tax when total income includes Short Term Capital Gain on Shares &/or Mutual Funds?

The total income of a person is taxable as per the applicable slab rate but STCG on equity shares & equity oriented mutual funds is taxable at a flat rate of 15%. Sometimes it creates a confusion in the mind of taxpayers.

The methodology to calculate tax when total income of a person includes STCG on shares & mutual funds is explained below:
  • Calculate tax on Short Term Capital Gain on Equity Shares & Equity Oriented Mutual Funds @ 15%.
  • Now calculate tax on balance income as per normal tax slab rate applicable as if it is the total income.
  • Add both the taxes calculated as above, & this is the total tax liability.
Important Points:
  • Benefit of Chapter VI A deductions(ie. Section 80C deductions relating to investments in PPF, LIC, PF etc.) is not available from STCG on Equity Shares & Equity Oriented Mutual Funds. Means if your only income is short term capital gain from shares, you will not be eligible for ny deduction under Section 80C fortax savings investments. 
  • In cases where total income(excluding STCG) is less than the exemption limit, STCG will be reduced by the amount by which total income falls short of exemption limit.
  • Though the benefit of setting off STCG to the exemption limit is given, but the STCG remaining after exausting the exemption limit will be taxable @ 15% & not @ 5% which is the applicable tax slab rate for AY 2018-19. Option (B) in the example below explains this situation.
Lets try to understand the taxability in different situations with the help of an example:


When total income is below taxable limit
(A)
When total income is slightly more than the exemption limit
(B)
When total income is reasonably higher than the exemption limit
(C)
When only STCG is the total Income
(D)
Suppose:
Gross Total Income excluding STCG is
200000 300000 1000000
STCG taxable u/s 111A 200000 200000 200000 300000
Investment U/s 80C -150000 -150000 -150000 150000
Net Total Income including STCG 250000 350000 1050000 300000
Exemption limit(for AY 2018-19 for individuals)
250000 250000 250000 250000
Tax calculation will be NIL  @ 15% on STCG of Rs. 100000  @15% on STCG of Rs. 200000 & at applicable slab rates on balance income of Rs. 600000
@ 15% on STCG of Rs. 50000
(No benefit of 80C investments is available from STCG on Shares & mutual funds)

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