Capital Gains from Equity and Mutual Funds: Special Considerations Under Section 111A & 112A

 Income tax laws have distinct rules for the taxation of equity shares and mutual funds. To promote investment in capital markets and support financial inclusion, taxation is subsidised under Section 111A and Section 112A of the Income Tax Act, which govern short-term and long-term capital gains, respectively.

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In this blog, we will explore the key tax treatments under these sections and explain how holding periods impact tax rates on equity shares and mutual funds. We will also discuss the available exemptions and deductions that investors can leverage to optimise their tax liabilities and plan strategically for better financial outcomes.

• What is the difference between Section 111A & Section 112A?

Section 111A applies to short-term capital gains, while Section 112A applies to long-term capital gains. If the holding period is less than 12 months, the gains are classified as short-term; otherwise, they are considered long-term.

• Which assets are covered under these sections?

These sections cover gains from the sale of capital assets such as listed equity shares, units of equity-oriented mutual funds, and units of a business trust, provided that Securities Transaction Tax (STT) is paid and the transaction is executed on a recognized stock exchange.

However, the rule mandating the payment of Securities Transaction Tax (STT) is waived for transactions conducted on recognized stock exchanges within International Financial Services Centres (IFSCs), provided the transactions are carried out in foreign currency.

• What are the tax rates in such case?

Tax rates for Short term capital gains are:

•  Before July 23, 2024: 15%.
• On or afterJuly 23, 2024: 20%.

Tax rates for Long-term capital gains are:

• Before July 23, 2024: 10%.
•  On or afterJuly 23, 2024: 12.5%.

However, there is an exemption on long-term capital gains up to ₹1,25,000, which was increased from ₹1,00,000 effective from July 23, 2024.

• Can we claim deductions and rebates on these gains?

Deductions under Chapter VI-A (Section 80C, 80G, etc.) are allowable from the gross total income after reducing short term and long term capital gains. This means:

1. While short term and long term capital gains are taxed at a specified rate, you can still claim deductions from other incomes.
2. If the total income, excluding long-term capital gains (LTCG), falls below the taxable threshold, the chargeable LTCG will be reduced by the shortfall amount.
3. The rebate under Section 87A applies to the tax on the total income, after deducting Income from Capital Gains.

Example:

Priya invests in both equity shares and mutual funds. She buys equity shares of Company XYZ and units of Mutual Fund ABC  of ₹8,00,000. After holding these investments for varying periods, she decides to sell some of her holdings. Priya’s other incomes are ₹1,85,000.

1. Short-term Capital Gains (Section 111A):

   • Priya sells her equity shares in Company XYZ within 11 months from the date of purchase at a profit of ₹5,000.
   • Tax Implications : The profit is classified as short-term capital gains and taxed at 15%, if sold before July 23, 2024). However, if such sale is made on or after July 23, 2024, any similar gains would be taxed at 20%.

2. Long-term Capital Gains (Section 112A):

   • Priya sells her units in Mutual Fund ABC after 13 months, realising a gain of ₹2,00,000.
   • Tax Implications : The profit exceeds the exemption limit of ₹1,25,000,Hence the portion of gains exceeding the limit will be taxed at the rate of 12.5% if such sale is made on or after July 23, 2024 orelse the rate would be 10%..

3. Asset Coverage:

   • Both transactions involve assets covered under these sections: listed equity shares and units of equity-oriented mutual funds. STT is paid at the time of purchase as well as sale, thus qualifying these transactions for the respective tax treatments.

4. Deductions and Rebates:

   • Priya’s total income, excluding these capital gains is ₹1,85,000, falls below the taxable threshold of ₹2,50,000. Therefore, her chargeable long-term capital gains are reduced by the shortfall amount below the threshold, i.e., long term gain taxable would be ₹10,000 and total taxable capital gains would be ₹15,000 (long term capital gain of ₹10,000 & short term capital gain of ₹5,000).
   • She can claim deductions under Chapter VI-A on her other income of ₹1,85,000, reducing her overall taxable income. Additionally, the rebate under Section 87A reduces her tax liability on the total income minus the capital gains tax, i.e., no benefit of rebate under Section 87A would be eligible to Priya

This scenario demonstrates how Sections 111A and 112A aim to promote investment in the capital markets by offering subsidised taxation on gains from equity shares and mutual funds. The clear distinction between short-term and long-term holdings encourages both active trading and long-term investment, with tax benefits tailored to each approach.

 Conclusion:

Understanding Short-Term Capital Gains (STCG), Long-Term Capital Gains (LTCG), tax rates, and various exemption limits is crucial for accurately reporting capital gains in your ITR. By knowing how to categorise your assets, calculate gains or losses, and take advantage of available exemptions, you can reduce your tax burden.

Staying informed about current tax rules will empower you to make better financial decisions. A qualified financial advisor can assist in correctly reporting your capital gains. To optimise your taxes, download the 1 Finance app and book a consultation with a qualified financial advisor for a seamless, hassle-free tax planning experience.