Section 111A of ITA, 1961 : Section 111A: Tax On Short-Term Capital Gains In Certain Cases

Explanation using Example

Imagine Mr. Sharma, a resident individual, sells equity shares of a company on a recognized stock exchange in India. These shares are short-term capital assets as he held them for less than 12 months. The sale happened after the enactment of Chapter VII of the Finance (No. 2) Act, 2004, and the transaction was subject to securities transaction tax (STT).

Mr. Sharma earned short-term capital gains of ₹50,000 from the sale. His other income for the year (excluding the capital gains) is ₹2,00,000, which is below the maximum amount not chargeable to income tax for individuals.

As per Section 111A of the Income-tax Act, 1961, the tax on his short-term capital gains will be calculated at 15%. However, since his total income excluding the capital gains is less than the taxable limit, the short-term capital gains will be reduced by the amount his income falls short of the taxable limit. Assuming the taxable limit is ₹2,50,000, his taxable short-term capital gains will be ₹50,000 - (₹2,50,000 - ₹2,00,000) = ₹0.

Therefore, Mr. Sharma's short-term capital gains will effectively not be taxed since his other income is below the taxable limit, and the capital gains are adjusted against this shortfall.