When you sell equity shares listed on a stock exchange — or redeem units of an equity mutual fund — within 12 months, the profit is a Short-Term Capital Gain (STCG). Section 111A says: don't apply your normal slab rate here. Instead, pay a flat 20% on these gains (Finance Act 2024 raised it from 15%, effective 23 July 2024). This is tested almost every exam, either as a standalone 4-marker or baked into a full capital gains computation.
The section applies only when three conditions are met: (1) the asset is an equity share, a unit of an equity oriented fund (65%+ invested in equity), or a unit of a business trust; (2) the transaction happens on a recognised stock exchange; and (3) Securities Transaction Tax (STT) is paid. No STT, no 111A — the gain then gets taxed at slab rates instead. Exception: transactions on IFSC exchanges settled in foreign currency don't need STT but still qualify.
Two rules students always miss: First, Chapter VIA deductions (80C, 80D, 80G, etc.) cannot be set off against 111A STCG. They reduce only your other income. Second, there's a proviso for resident individuals and HUFs — if your non-STCG income falls below the basic exemption limit (₹2,50,000), the shortfall is first absorbed from the STCG, and only the remainder is taxed at 20%. This is the examiner's favourite trick question. Always check: does other income cover the exemption limit fully? If not, the STCG carries part of that burden before the 20% kicks in.