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Investing in listed shares can be a good way to make money, but it is important to know what the tax rules are when you sell the shares for a profit. Indian law sets out specific rules for how to tax profits from listed shares held as investments in sections 111A and 112A of the Income Tax Act. 

In this article, we’ll discuss the computation of short-term capital gain (STCG) from listed equity under provisions of Section 111A of the Income-tax Act 

Short-Term Capital Gains (STCG) u/s 111A:

When you sell listed shares within a short period of time, i.e within one year (up -to 12 months), any profit generated is considered short-term capital gains. 

The tax rate applicable to short-term capital gains (STCG) on listed shares is currently 15% in cases where the securities transaction tax (STT) has been paid on sale of such shares. 

However, the condition of payment of security transactions tax is not applicable where the listed equity shares are sold in recognized stock exchanges located in International Financial Services Centres (IFSC) where consideration for such transactions is paid or payable in foreign currency. 

Further, if total income, after reducing the short-term capital gains, falls below the maximum amount not chargeable to income tax (the basic exemption limit), then the short-term gains are adjusted up-to the basic exemption limit to cover such a shortfall before applying the 15% tax rate.

Let’s understand with examples for better understanding:

(1) Example under the Old Tax Regime

Facts :

• Total Income = Rs 10,00,000/-
• Short-term gains included in the total income = Rs 8,00,000/-
• Basic Exemption Limit = Rs 2,50,000/-

Computation of Taxable STCG:

• After excluding STCG, the total Income works out to Rs 2,00,000/- [Rs 10,00,000 (-) Rs 8,00,000] 
• Total income after excluding STCG is Rs 2,00,000/-, which is below the basic exemption limit of Rs 2,50,000/-  
• Hence, STCG of Rs 50,000/- out of Rs 8,00,000/- is adjusted to the basic exemption limit and the balance of Rs 7,50,000/- becomes taxable.

Tax Calculation on STCG:

• Taxable Short-term Gains = Rs 7,50,000/-
• Tax payable on short-term gains (15%): 15% of Rs 7,50,000 = Rs 1,12,500/-

Total Tax Liability (excluding cess and surcharge):

(A) Tax on total income, including STCG of Rs 50,000/- = Nil 

(B) Tax on short-term gains = Rs 1,12,500/-

Tax on total income of Rs 10,00,000/- = [(A) + (B)] = Rs 1,12,500/-

(2) Example Under the New Tax Regime

Facts :

• Total Income = Rs 10,00,000/-
• STCG included in the total income = Rs 8,00,000/-
• Basic Exemption Limit = Rs 3,00,000/-

Computation of Taxable STCG:

• After excluding STCG, the total Income works out to Rs 2,00,000/- [ Rs 10,00,000 (-) Rs 8,00,000] 
• Total income after excluding STCG is Rs 2,00,000/-, which is below the basic exemption limit of Rs 3,00,000/-  
• Hence, STCG of Rs 1,00,000/- out of STCG of Rs 8,00,000/- is adjusted to the basic exemption limit and balance of Rs 7,00,000/- becomes taxable.

Tax Calculation:

• Taxable Short-term Gains = Rs 7,00,000/-
• Tax payable on short-term gains (15%): 15% of Rs 7,50,000 = Rs 1,05,000/-

Total Tax Liability (Excluding cess and surcharge):

(A) Tax on total income, including STCG of Rs 1,00,000/- = NIL 

(B) Tax on short-term gains = Rs 1,05,000/-

Tax on total income of Rs 10,00,000/- [(A) + (B)] = Rs 1,05,000/-

Conclusion

It is important that investors understand the taxation of short-term capital gains from listed shares. The primary insight is that 15% STCG is imposed on listed shares sold within a one-year period, assuming payment of the securities transaction tax (STT). In contrast, STT is not obligated to sell these shares on internationally recognized stock exchanges in Financial Services Centers (IFSC) for foreign currency consideration. Furthermore, in the event that the aggregate income excluding STCG is lower than the threshold for the basic exemption, the deficit can be offset against the STCG prior to the 15% tax rate being applied. This guarantees that investors are capable of efficiently overseeing their tax obligations under both the previous and revised tax systems.

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Disclaimer:

The article is only for educational purposes and is not to be construed as tax advice. The relevant provisions of the Income-tax Act may be referred to, for complete understanding.