Budget 2024 Updates

In the 2024 Budget, significant changes were made to the taxation of short-term capital gains (STCG) under Section 111A. The tax rate for short term capital gains on equity-related investments, such as listed shares and equity mutual funds, has been increased from 15% to 20%. This change applies to assets held for less than 12 months. Other financial and non-financial assets which are held for short term shall continue to attract the tax at slab rates. The budget aims to simplify the capital gains tax structure, making it more straightforward while also raising the tax rate to increase revenue​

 

Short Term Capital Gains (STCG) under Section 111A

Applicable on certain assets:

Short Term Capital Gains (STCG) under Section 111A of the Income Tax Act, 1961, are specifically applicable to the following assets:

1. Equity Shares: Gains arising from the sale of equity shares listed on a recognized stock exchange in India.
2. Units of Equity-Oriented Mutual Funds: Gains arising from the sale of units of mutual funds where more than 65% of the fund is invested in equity shares of domestic companies.
3. Units of Business Trust: Gains arising from the sale of units of business trusts like Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).

For these assets, the gains are considered short-term if the holding period is 12 months or less.

 

STCG Tax Rate on Shares (Section 111A)

Tax rate on short term capital gains (STCG) under Section 111A was historically taxed at a concessional rate of 15%, with applicable cess and surcharges.

However, as of July 23, 2024, the tax rate on STCG under Section 111A has been increased to 20%.

This change means that any short term capital gains from the sale of equity shares, equity-oriented mutual funds, or units of a business trust that were subject to the 15% rate will now be taxed at the higher rate of 20%, plus the applicable cess and surcharge.

 

Conditions for availing concessional rate under Section 111A

1. Transaction Through Recognized Stock Exchange:

• The sale transaction must be carried out through a recognized stock exchange in India.

2. Securities Transaction Tax (STT) Payment:

• STT must have been paid on both the purchase and sale of the equity shares or units of equity-oriented mutual funds. However, in certain cases like off-market transactions or transactions involving listed shares acquired in an IPO, STT may not be required on purchase, but it must be paid on sale.

3. Holding Period:

• The asset must be held for not more than 12 months from the date of acquisition.

 

Adjustment of Short Term Capital Gains under Section 111A against the Basic Exemption Limit:

For Indian Residents:

• Basic Exemption Limit: This is the threshold below which income is not taxable. For the financial year 2023-24 (Assessment Year 2024-25), the basic exemption limits are:
  • ₹2.5 lakhs for individuals below 60 years.
  • ₹3 lakhs for senior citizens (aged 60-79 years).
  • ₹5 lakhs for super senior citizens (aged 80 years and above).
• Adjustment Against Exemption Limit: If your total income (after all deductions under Chapter VI-A like Section 80C, 80D, etc.) is less than the basic exemption limit, you can adjust the shortfall against your STCG under Section 111A. Only the remaining STCG (after adjustment) will be taxed at the concessional rate of 15%.

Example:

• Suppose you are a resident individual aged 45, with a total income of ₹2 lakhs (after deductions) and STCG under Section 111A of ₹1 lakh.
• The basic exemption limit for you is ₹2.5 lakhs.
• You can adjust the shortfall of ₹50,000 (₹2.5 lakhs – ₹2 lakhs) against your STCG.
• The balance ₹50,000 of STCG will be taxed at 15% under Section 111A.

For Non-Residents:

• Non-residents are not allowed to adjust STCG under Section 111A against the basic exemption limit. Therefore, the entire amount of STCG under Section 111A is taxable at the rate of 15%, without any adjustment for the basic exemption limit.

Key Points:

• Residents: Can utilize the basic exemption limit to reduce the taxable portion of STCG under Section 111A.
• Non-Residents: No adjustment is allowed; they pay 15% on the entire STCG under Section 111A.

This provision helps resident taxpayers to minimize their tax liability by making full use of the basic exemption limit.

Points to be noted- 

Your understanding of how the tax liability on Short Term Capital Gains (STCG) works in conjunction with the basic exemption limits and rebates is correct. Here’s a brief breakdown:

1. Income Below Basic Exemption Limit:

• Old Regime (Basic Exemption Limit: Rs. 2.5 Lakh): If your total income, including STCG, is below Rs. 2.5 lakh, then your tax liability is nil. No tax will be levied on STCG as it is within the basic exemption limit.
• New Regime (Basic Exemption Limit: Rs. 3 Lakh): Similarly, under the new tax regime, if your total income including STCG is below Rs. 3 lakh, there is no tax liability.

2. Income Above Basic Exemption Limit:

• If your total income, including STCG, exceeds the basic exemption limit (Rs. 2.5 Lakh under the old regime or Rs. 3 Lakh under the new regime), then:
  • STCG is taxed at a flat rate of 15% under Section 111A.

3. Rebate under Section 87A:

• If your total income, after deductions, does not exceed Rs. 5 lakh, you are eligible for a rebate under Section 87A.
• This rebate is up to Rs. 12,500, which means if your tax liability (including the 15% on STCG) is Rs. 12,500 or less, you won’t have to pay any tax.
• If the liability exceeds Rs. 12,500, you will only pay the excess amount over Rs. 12,500.

Example:

• If your total income including STCG is Rs. 4.5 lakh, and your STCG portion is Rs. 1 lakh:
  • 15% of Rs. 1 lakh = Rs. 15,000 (Tax on STCG)
  • Total tax liability = Rs. 15,000
  • Since total income is below Rs. 5 lakh, you get a rebate of Rs. 12,500.
  • Final tax liability = Rs. 15,000 – Rs. 12,500 = Rs. 2,500

 

Set off & carry forward of losses

You’ve explained the concept of set off and carry forward of losses under the Indian Income Tax Act quite well. To summarize:

• Set Off of Losses: Short Term Capital Losses (STCL) can be set off against Short Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) from other capital assets in the same financial year. This helps in reducing the taxable income from capital gains.
• Carry Forward of Losses: If the STCL cannot be fully set off in the same financial year, the remaining loss can be carried forward for up to 8 years. It can only be set off against future STCG and LTCG during these years.

This provision allows taxpayers to optimize their tax liability by utilizing losses incurred on the sale of capital assets. Remember, the set off and carry forward of losses need to be claimed in the income tax return, and if the loss is to be carried forward, the return must be filed within the due date.

 

Calculation of STCG

The STCG on shares can be calculated as follows:

Particulars	Amount	Amount
Full value of consideration	xxx
Less: Expenses incurred wholly and exclusively for sale of shares (brokerage,comission,etc.)	(xxx)
Net sale consideration		xxx
Less: Cost of acquisition of shares	xxx
Short-term Capital Gains(STCG)		xxx

Example:

Mr. A purchased 2000 shares on June 2023 for Rs. 2,00,000 and sold the shares at Rs. 3,40,000 on December 2023 and paid Rs.10,000 as  brokerage. Calculate Capital gains.

Particulars	Amount	Amount
Full value of consideration	3,40,000
Less: Expenses incurred wholly and exclusively for sale of shares (brokerage,comission,etc.)	10,000
Net sale consideration		3,30,000
Less: Cost of acquisition of shares	2,00,000
Short-term Capital Gains(STCG)		130,000
Income tax liability on STCG on shares	(130,000 x 15%)

Key Takeways of STCG Covered Under Section 111A

The key takeaways of Short Term Capital Gains (STCG) covered under Section 111A of the Income Tax Act are:

1. Applicable Securities:
   • Equity Shares: STCG from the sale of equity shares of a listed company through a recognized stock exchange, where Securities Transaction Tax (STT) is paid.
   • Equity-Oriented Mutual Funds: STCG from the sale of units of equity-oriented mutual funds through a recognized stock exchange, with STT paid.
   • Units of Business Trusts: STCG from the sale of units of business trusts through a recognized stock exchange, where STT is paid.
2. Tax Rate: The gains are taxed at a concessional rate of 15% (plus applicable surcharge and cess).
3. International Financial Service Centre (IFSC):
   • STCG on the sale of equity shares, units of business trusts, or units of equity-oriented mutual funds through a recognized stock exchange located in an IFSC is also taxed at 15%, even if STT is not paid, provided the consideration is paid in foreign currency.
4. Conditions:
   • The securities or units must be sold through a recognized stock exchange.
   • STT must be paid for the tax concession to apply, except in the case of transactions in an IFSC.

In essence, Section 111A provides a preferential tax rate on STCG for specific securities and mutual funds, provided they meet the criteria of being traded through recognized stock exchanges with STT paid, or through an IFSC where different conditions apply.

 

Frequently Asked Questions

• Answer: Section 111A provides the tax treatment for short term capital gains arising from the sale of equity shares or equity-oriented mutual funds held for a period of 12 months or less, provided that the transaction is subject to STT.

2. What is the tax rate applicable under Section 111A?

• Tax rate on short term capital gains (STCG) under Section 111A was historically taxed at a concessional rate of 15%, with applicable cess and surcharges.
• However, as of July 23, 2024, the tax rate on STCG under Section 111A has been increased to 20%.

• No, the non-resident Indian (NRI) will not be eligible to get the benefit of the basic exemption limit for STCG under section 111A.