Tax on Short-Term Capital Gains Under Section 111A for 2023

If you have recently sold a property, you may be liable to pay taxes on the profit you made from the sale. Short-term capital gains are subject to tax under Section 111A of the Income Tax Act. This tax applies to any profit you make on the sale of a property that you have held for less than two years. In this article, we will discuss the basics of the tax on short-term capital gains under Section 111A and how it can affect you.

What is short-term capital gain?

Capital gains are profits that you make from the sale of an asset, such as a property or a share. Short-term capital gains are those that are made on the sale of an asset that has been held for less than two years. If you sell a property within two years of acquiring it, any profit you make from the sale will be considered a short-term capital gain.

What is Section 111A of the Income Tax Act?

Section 111A of the Income Tax Act was introduced in 2004 and applies to the tax on short-term capital gains made on the sale of equity shares or units of equity-oriented mutual funds. It was later amended in 2018 to include tax on short-term capital gains made on the sale of shares or units of a business trust.

How is short-term capital gain taxed under Section 111A?

Short-term capital gains made on the sale of equity shares or units of equity-oriented mutual funds are subject to a flat tax rate of 15%. This tax is deducted at source by the broker or the mutual fund company at the time of the sale. The tax is calculated on the total profit made from the sale of the shares or units, not on the entire sale price.

For example, if you sell shares worth Rs 1 lakh and make a profit of Rs 10,000, you will be liable to pay tax of Rs 1,500 (15% of Rs 10,000) on the profit.

It is important to note that the tax on short-term capital gains under Section 111A is only applicable to equity shares or units of equity-oriented mutual funds that are held for less than a year. If you hold these assets for more than a year, they will be considered long-term capital assets and will be taxed differently.

What are the exemptions available on short-term capital gains?

There are certain exemptions available on short-term capital gains. One of the most common exemptions is the set-off of short-term capital losses against short-term capital gains. If you have incurred a loss from the sale of equity shares or units of equity-oriented mutual funds within a year, you can set off this loss against any short-term capital gains made in the same financial year. This will reduce your taxable income and lower your tax liability.

What are the penalties for not paying tax on short-term capital gains?

If you fail to pay tax on short-term capital gains, you may be liable to pay penalties and interest. The penalty can be up to 200% of the tax amount due, depending on the severity of the offence. Additionally, interest will be charged at a rate of 1% per month on the unpaid tax amount.

FAQs:

1. What is the difference between short-term capital gains and long-term capital gains?

Short-term capital gains are profits made on the sale of an asset that has been held for less than two years. Long-term capital gains are profits made on the sale of an asset that has been held for more than two years. The tax rates and exemptions for short-term and long-term capital gains are different.

2. What is the tax rate for long-term capital gains?

The tax rate for long-term capital gains on the sale of equity shares or units of equity-oriented mutual funds is 10% for gains exceeding Rs 1 lakh in a financial year. If the gains are less than Rs 1 lakh, there is no tax payable.

3. Can short-term capital losses be carried forward?

Yes, short-term capital losses can be carried forward for up to eight years and set off against future capital gains.

4. Is tax on short-term capital gains applicable to all assets?

No, tax on short-term capital gains is not applicable to all assets. It is only applicable to equity shares or units of equity-oriented mutual funds that are held for less than a year.

5. How can I reduce my tax liability on short-term capital gains?

You can reduce your tax liability on short-term capital gains by setting off short-term capital losses against short-term capital gains in the same financial year. You can also invest in tax-saving instruments such as tax-saving mutual funds, public provident fund (PPF), National Savings Certificate (NSC), etc., which offer tax deductions under Section 80C of the Income Tax Act.

Conclusion:

In conclusion, if you have made a short-term capital gain on the sale of equity shares or units of equity-oriented mutual funds, you will be liable to pay tax under Section 111A of the Income Tax Act. The tax rate is a flat 15% and is deducted at source by the broker or the mutual fund company at the time of the sale. It is important to note that there are certain exemptions available on short-term capital gains, such as the set-off of short-term capital losses against short-term capital gains. However, if you fail to pay tax on short-term capital gains, you may be liable to pay penalties and interest. It is recommended to consult a tax expert to understand the tax implications of short-term capital gains and to ensure compliance with the Income Tax Act.