Investing in equity and mutual funds is a great way to make money. In growing markets, investing in good funds yields high returns.
After selling capital assets, an investor’s net profit, exceeding the purchase value, is denoted as a capital gain. The entire profit earned by the investor is classified as a taxable income in sections 111a and section 112a.
An investor who invests and sells capital stock in less than 12 months is called short-term capital gain (STCG) and falls under section 111a of the income tax act.
Investing in long-term assets and holding the equity to raise capital for more than 12 months is called long-term capital gain (LTCG), and tax is calculated as section 112a.
List of the short-term capital assets in the stock market
When you sell the following assets on the stock market, you are liable to pay income tax for the capital gain.
1) Equity Shares
A company accumulates money by offering equity shares to its investors in exchange for cash. Investors can buy or sell these shares in the stock market to earn a profit. Those who daily buy and sell shares make a profit when there is an increase of a minimal amount per share. These investors must pay STCG for section 111a of the income tax act.
2) Units of equity-oriented mutual funds
Companies offering units of equity-based mutual funds invest 65% Or more of their total fund value in equity shares. For selling units in less than a year, STCG is taxable by 15% per sec 111a of the income tax act.
3) Units of business trust
Like mutual fund companies, these trusts collect money from investors. There are two types of trusts – real estate trust and infrastructure trust. Their profit comes from investing in real estate and infrastructure projects. The profit they gain is distributed among investors. For earning a short-term profit,15% tax is applicable per 111a of the income tax act.
What are STT charges?
For every equity share, mutual fund, and business trust listed on the stock exchange, Securities Transaction Tax is levied when buying and selling. Investors and traders pay the central government tax, categorized as regulatory charges.
The only exemption of STT is for the stock listed on the stock exchange in the International Financial Services Centre (IFSC).
Example of STCG under section 111a of the income tax act.
Illustration 1:
Mr. Akash invested five lakhs in ABC mutual fund. After holding it for six months, he sold the mutual fund units for six lakhs. What will be the tax rate applicable to STCG?
Answer: In this case, Mr. Akash sold units of mutual funds in less than 12 months. So as per section 111a of income tax, 15% tax is applicable on his short-term capital gain.
Adjustment of section 111a against basic exemption limit
Only residential Indian – individuals or HUF can adjust the exemption limit against STCG.
Illustration 2:
Mr. Aryan is an investor. Earning from investing in the stock market is his only income source. He gained Rs. 2.5 lakhs from holding various short-term mutual funds for less than 12 months.
How much tax does he have to pay on STCG?
Answer: The Government provides a basic exemption limit in income tax of 2.5 lakhs. When you deduct STCG from the basic exemption of Rs. 2.5 lakh, Mr. Aryan doesn’t have to pay any tax on STCG being a resident individual or HUF.
He gets an exemption of Rs. 2.5 lakhs gained from STCG because this is his only earning.
Illustration 3:
Mr. Rakesh is working as a digital marketing executive in a well-known company and drawing a salary of Rs. 10 lakhs per annum. He is also a freelancer and helps small retail stores to build their identity on a digital platform, earning approximately Rs. Three lakhs annually.
Mr. Rakesh invested Rs. 11 lakhs in ABC Fund, bought shares of Rs. 5 lakhs of XYZ, and shares of Rs. 9 lakhs of JKL.
He sold ABC Fund at Rs. 13 lakhs after nine months, XYZ shares at Rs. 6 lakhs after six months, and JKL Shares at Rs. 10.5 lakhs after four months. His short-term capital gain from the stock market is Rs. 4.5 lakhs in total.
How much tax will Mr. Rakesh pay?
Answer:
| Source Of Income | Earnings | Tax calculation |
| Salary | Rs. 10 lakhs | For Resident Individual and HUF Rs. 2.5 lakhs Basic Exemption On total amount Rs.13 lakhs |
| Freelancer | Rs. 3 lakhs | |
| Total | Rs. 13 lakhs | Tax payable as per the slab on Rs. 10.5 lakhs |
| Short-term capital gain | Rs. 4.5 lakhs | Tax @ 15% as per section 111a |
Conclusion
Whenever you invest in a stock exchange, your profit is your capital gain and is taxable at 15% under section 111a of income tax. Pay STT at the time of purchase and sale of the units and shares as an extra cost. Only the stock exchange under IFSC is exempted from paying STT.
As described by the Indian Government, if earning from the stock market is the only source of income, there is an option for resident individuals or HUF to adjust STCG with a basic exemption limit of Rs. 2.5 lakhs. For the remaining amount, an individual or HUF must pay a tax of @15% per section 111a of the income tax act.
If a person has a regular income and earnings apart from STCG, then STCG is not included in the basic exemption limit and must pay a tax @ 15% rate per section 111a.
