written by khatabook | November 11, 2022

A Brief of the 111A of the Income Tax Act - Meaning and Instances

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Table of Content


In India, the Income-tax Act, 1961 (hereinafter referred to as "the Act") is the charging statute for the income tax levy. Section 111A of the income tax act provides for the levy of tax on long-term capital gains arising from the transfer of a long-term capital asset, not an equity share in a company or a unit of an equity-oriented fund or a unit of a business trust.

To stimulate investments in equity shares and units of equity-oriented mutual funds, as well as units of business trust, long-term capital gains deriving from their transfer were chosen to be exempt. However, to prevent misuse of these exemptions and the creation of shell companies, it was decided to levy tax on long-term capital gains arising from the transfer of any other long-term capital asset at the rate of 10% (plus surcharge and cess, as applicable). The long-term capital asset, for this section, means any asset held by an assessee for not less than 36 months immediately preceding the date of transfer.

Did You Know? Section 111A requires an assessor to file a tax at the rate of 15% on capital gained on short-term capital assets described in Section 2 (42A) of the Income Tax Act of 1961.

Meaning of Capital Gains

When it comes to your taxes, “capital gains” refers to any profit you’ve earned from selling a capital asset. These could be stocks, bonds, mutual funds, real estate, or even collectables. If you sold the asset for more than you paid, you have a capital gain. And that gain is taxable.

There are two types of capital gains: short-term and long-term. Short-term gains occur when you sell an asset you’ve held for a year or less, and long-term gains occur when you sell an asset you’ve held for more than a year. The tax rate on long-term capital gains is lower than that on short-term capital gains.

When you have a capital gain, you’ll need to report it on your tax return. You’ll also need to pay taxes on the gain. The amount of tax you’ll owe depends on your tax bracket and the type of gain you have. If you have any general questions about capital gains or your taxes, you should speak with a tax professional. They can help you understand the rules and make sure you’re following them correctly.

Also Read: Everything About Income Tax Slabs for FY 2021-22 (AY 2022-23)

Meaning of Capital Asset

A capital asset is an asset with long-term usefulness or a long-term investment value. Capital assets, such as land, buildings, machinery, vehicles, or equipment, can be physical. They can also be intangible, such as patents, copyrights, or goodwill. Capital assets are usually not bought or sold in the ordinary course of business. Instead, they are acquired and held for the long term to generate profits or provide services.

The meaning of capital assets can vary depending on the accounting method used. For example, capital assets are recorded at their original cost under the historical cost method. This cost is not updated for inflation or other changes in market value. Under the current value method, capital assets are recorded at their current market value, and this value is updated periodically to reflect changes in market conditions.

Capital Asset in India is defined to include:

a) Any property held by an assessee, whether or not connected with the business or profession of the assessee. 

b) Any securities held by an FII that has invested in such securities per the regulations made under the SEBI Act, 1992.

Capital assets are subject to capital gains taxes when sold for a profit. The tax rate on capital gains is generally lower than the tax rate on ordinary income, and this incentivises investors to hold onto capital assets for the long term.

The concept of capital assets is essential for businesses and investors to understand. Capital assets can generate profits and provide services over the long term. They are subject to special tax rules, which can encourage or discourage their sale.

Short-term Capital Gain Tax as Under Section 111A

Short-term capital gain is a gain realised from the sale of an asset held for one year or less. Short-term capital gains are taxed at the same rate as your ordinary income. Short-term capital gains can be generated from selling stocks, bonds, mutual funds, and other investments. The asset must have been held for less than 12 months to qualify as a short-term capital gain.

Short-term capital gains are taxed at your marginal tax rate. This is the rate you pay on the last dollar you earn. For most people, this is their ordinary income tax rate. The tax rate on short-term capital gains can be higher than on long-term capital gains. This is because short-term capital gains are taxed as ordinary income, while long-term capital gains are taxed at a lower rate.

If you have a short-term capital gain, you will need to report it on your income tax return. You will also need to pay taxes on the gain. Short-term capital gains can have a significant impact on your tax bill. If you have a short-term capital gain, consult with a tax professional to determine the best way to minimise your tax liability.

Also Read: How to Get the Income Tax Rebate Under Section 87A?

Instances of STCG Covered Under Section 111A

Four types of STCG are covered under section 111A of the Income Tax Act of 1961. These are:

1. Short-term capital gain on shares or units of equity-oriented mutual fund - Short-term capital gain on shares or units of the equity-oriented mutual fund is exempt from tax if the shares or units are sold on a recognised stock exchange and the gain is equal to or less than ₹ 1 lakh.

2. Short-term capital gain on units of a business trust - Short-term capital gain on units of a business trust is exempt from tax if the units are sold on a recognised stock exchange and the gain is equal to or less than ₹ 1 lakh.

3. Short-term capital gain on units of specified mutual fund - Short-term capital gain on units of the specified mutual fund is exempt from tax if the units are sold on a recognised stock exchange and the gain is equal to or less than ₹ 1 lakh.

4. Short-term capital gain on zero coupon bonds - Short-term capital gain on zero coupon bonds is exempt from tax if the bonds are held for at least three years and the gain is equal to or less than ₹ 1 lakh.

Also Read: Income Tax Refund Status Online - Learn How to Check ITR Refund Status Online

Conclusion

The income tax act was enacted in 1961, and section 111A of the income tax act was inserted in later years. This section deals with the deduction of tax at source from the income of non-residents. The provision under this section is that the payer shall deduct tax at source at the time of payment or credit of revenue to the non-resident. The payer is liable to pay the tax so removed from the credit of the Government. The amount of tax to be deducted is mentioned in the second schedule of the Income Tax Act. The income tax act provides various tax deduction rates at source for different kinds of income. The primary purpose of the deduction of tax at source is to collect taxes from non-residents easily and conveniently.

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FAQs

Q: Can I deduct Chapter VI-A amounts from Sections 80C to 80U of the STCG under Section 111A?

Ans:

The Income Tax Act prohibits claiming Section 80C to 80U deductions on STCG taxable under Section 111A. However, the taxpayer can claim Chapter VI-A deductions on STCG other than those taxable under Section 111A.

Q: What is Income Tax Act Section 111A?

Ans:

Section 111A applies to STCG from the transfer of equity shares via a recognised stock exchange where the transaction is subject to the securities transaction tax. Section 111A-covered STCG is taxed at a rate of 15%. (plus surcharge and cess as applicable).

Q: What is the short-term capital gain exemption limit on shares?

Ans:

Short-term capital gains on stocks are not tax-free. However, within specific income thresholds, people are free from paying income tax on short-term capital gains on their stock investments. A resident's income must not exceed ₹ 5 lakh per year and must be at least 80 years old.

Q: How do you avoid short-term capital gains?

Ans:

There are several ways you can minimise the taxes you pay on capital gains:

  • Wait to sell assets.
  • Invest in tax-free or tax-deferred accounts.
  • Don't sell your home too quickly.

Q: Is basic exemption available on STGC 111A?

Ans:

A resident individual or HUF can adjust the short-term capital gain as provided under section 111A against the basic exemption limit. However, such adjustment is feasible only after completing the adjustment of other income.

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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.