Section 111A was inserted by the Finance (No. 2) Act, 2004, w.e.f. AY 2005–06 to promote participation in equity markets and to reduce the tax burden on short-term investors trading through recognized exchanges.

The objective was to:

• Encourage transparent, regulated equity trading.
• Compensate for the revenue loss due to exemption of long-term capital gains (until LTCG was later reintroduced via Section 112A).
• Establish a special concessional tax rate for short-term capital gains arising from specific equity transactions.

What Is Short-Term Capital Gain (STCG)?

STCG arises when a capital asset is sold within a specified period, which is:

Key Point: Only STCG from equity shares/mutual funds where STT is paid is covered under Section 111A.

Scope of Section 111A

Section 111A applies to STCG arising from:

✅Sale of equity shares in a company listed on a recognized stock exchange in India,
✅Sale of units of equity-oriented mutual funds, and
✅Sale of units of a business trust,
✅ Provided the transaction is subject to Securities Transaction Tax (STT) at the time of sale.

Applicability to Non-Residents

Non-residents can claim benefit under Section 111A only if STT is paid and the sale happens on a recognized stock exchange. Alternatively, they can avail the more beneficial tax treatment under an applicable Double Tax Avoidance Agreement (DTAA), subject to submission of:

• Tax Residency Certificate (TRC) (ii) Form 10F    (iii)  Self-declaration

Conditions for Applicability of Section 111A

Tax Rate Under Section 111A

• Flat 15% tax rate is applicable on such short-term capital gains.
• Surcharge and Health & Education Cess (4%) are applicable as per income slab.

🔶Note: If the total income excluding such STCG is below the basic exemption limit, the shortfall can be adjusted against STCG, and the balance only is taxed at 15%.

Tax Computation under Section 111A

Formula:

Short-Term Capital Gain = Full Value of Consideration – (Cost of Acquisition + Expenses on Transfer)

✅ No indexation benefit is allowed for short-term capital gains.

💡Example:

• Sale of listed equity shares within 8 months
• Sale price: ₹1,50,000
• Cost of acquisition: ₹1,00,000
• STCG = ₹50,000

If other income is ₹2,00,000 and you’re a resident individual (<60 years), your basic exemption limit is ₹2,50,000.

• ₹50,000 short-term capital gain will be partially adjusted against unused exemption limit (₹50,000). So, no tax on STCG.
• If STCG is ₹1,00,000 and other income is ₹2,00,000 → taxable STCG = ₹50,000 × 15% = ₹7,500 + cess.

Rebate and Exemption Rules

Deduction under Chapter VI-A (80C to 80U)

• Not available from STCG taxable under Section 111A.
• You can claim deductions from other income, but not from 111A income.

For example, if you have ₹5,00,000 salary income and ₹1,00,000 STCG:

• You can claim ₹1.5L under Section 80C from salary.
• But not from the ₹1L STCG.

Set-Off & Carry Forward of Capital Losses

Important: Losses can be carried forward only if return is filed within the due date under Section 139(1).

Reporting in ITR