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Section 111A — Tax on STCG (Equity, STT-paid)

Think of it this way: you bought shares of Reliance Industries in January and sold them in September of the same year — that's a Short-Term Capital Gain (STCG). Most students assume it simply gets added to salary income and taxed at slab rates. Section 111A says: not if STT was paid on that transaction.

Two conditions must both be satisfied for Section 111A to kick in. First, the asset sold must be an equity share in a company, a unit of an equity-oriented fund (think equity mutual funds with 65%+ equity allocation), or a unit of a business trust — and it must have been held for 12 months or less to qualify as short-term. Second, the sale must happen on a recognised stock exchange with Securities Transaction Tax (STT) charged on it. Off-market transfers, private deals, and sales of delisted shares fail this second test and fall under normal slab taxation instead.

When both conditions are met, the gain is taxed at a flat rate of 20% — regardless of your income slab. (Important for May 2026: the Finance (No. 2) Act 2024 raised this rate from 15% to 20% for transfers on or after 23 July 2024. The bare Act still shows 15% — update your notes.) Three more rules the exam loves: (1) Chapter VIA deductions (80C, 80D, etc.) cannot be set off against Section 111A gains — they are allowed only against the balance income. (2) The rebate under Section 87A is computed on income excluding these special-rate gains. (3) There is a special basic exemption proviso for resident individuals and HUFs: if your income other than STCG is below ₹2,50,000 (basic exemption under old regime), you first fill up that unused exemption against the STCG, and tax only the remainder at 20%. This proviso is a high-frequency exam trap — students ignore it and lose marks. This section appears regularly as a 4–6 mark numerical in the Tax paper, either standalone or as part of a full income computation.

📊 Worked example

Example 1 — Standard case (no proviso)

Mr. Sharma (age 35, resident) has salary income of ₹6,00,000 and STCG under Section 111A of ₹1,50,000. Compute tax liability for AY 2026-27 (old regime).

| Step | Working | Amount |

|---|---|---|

| Tax on STCG u/s 111A | 20% × ₹1,50,000 | ₹30,000 |

| Balance income (salary) | ₹6,00,000 | — |

| Tax on balance — slab | Up to ₹2,50,000: Nil | ₹0 |

| | ₹2,50,001–₹5,00,000 @ 5% | ₹12,500 |

| | ₹5,00,001–₹6,00,000 @ 20% | ₹20,000 |

| Total tax before cess | ₹30,000 + ₹32,500 | ₹62,500 |

| Add: Health & Education Cess @ 4% | 4% × ₹62,500 | ₹2,500 |

Total Tax Payable = ₹65,000

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Example 2 — Basic exemption proviso (frequently tested!)

Ms. Iyer (age 28, resident individual) has no other income. Her only income is STCG under Section 111A of ₹3,50,000. Compute tax (old regime).

| Step | Working | Amount |

|---|---|---|

| Income other than STCG | Nil | ₹0 |

| Basic exemption limit | — | ₹2,50,000 |

| Shortfall (unused exemption) | ₹2,50,000 − ₹0 | ₹2,50,000 |

| Reduce STCG by shortfall | ₹3,50,000 − ₹2,50,000 | ₹1,00,000 |

| Tax on reduced STCG @ 20% | 20% × ₹1,00,000 | ₹20,000 |

| Add: Cess @ 4% | 4% × ₹20,000 | ₹800 |

Total Tax Payable = ₹20,800

(Without the proviso, tax would have been 20% × ₹3,50,000 = ₹70,000 + cess. The proviso saves ₹50,400 — never miss it!)

⚠️ Common exam mistakes

  • Applying slab rates to 111A gains. Students add STCG to salary and tax the whole amount at slab rates. Wrong — 111A gains always attract a flat 20% (not your marginal rate), computed separately from other income.
  • Using the old 15% rate. The Finance Act 2024 increased the rate to 20% for transfers on or after 23 July 2024. For AY 2026-27 (May 2026 exam), the rate is 20%. Writing 15% will cost you marks.
  • Claiming 80C / 80D deductions against STCG under 111A. Chapter VIA deductions are allowed only against the balance income (income other than 111A gains). You cannot reduce your ₹1,50,000 equity gain by ₹1,50,000 of PPF investment.
  • Forgetting the basic exemption proviso for individuals/HUFs. If a resident individual's non-STCG income is below ₹2,50,000, reduce the STCG first, then apply 20% on the remainder. This proviso does NOT apply to companies, firms, or non-residents.
  • Applying 111A to off-market or non-STT transactions. If shares are transferred via gift, inheritance, or private sale without STT, Section 111A does not apply. Normal slab rates apply in those cases. Always check the STT condition before using 111A.
📖 Bare Act text — Section 111A, Income Tax Act 1961 (click to expand)
(1) Where the total income of an assessee includes any income chargeable under the head "Capital gains", arising from the transfer of a short-term capital asset, being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust and— (a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and (b) such transaction is chargeable to securities transaction tax under that Chapter, the tax payable by the assessee on the total income shall be the aggregate of— (i) the amount of income-tax calculated on such short-term capital gains at the rate of fifteen per cent.; and (ii) the amount of income-tax payable on the balance amount of the total income as if such balance amount were the total income of the assessee: Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such short-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such short-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such short-term capital gains shall be computed at the rate of fifteen per cent. Provided further that nothing contained in clause (b) shall apply to a transaction undertaken on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in foreign currency. (2) Where the gross total income of an assessee includes any short-term capital gains referred to in sub-section (1), the deduction under Chapter VIA shall be allowed from the gross total income as reduced by such capital gains. (3) Where the total income of an assessee includes any short-term capital gains referred to in sub-section (1), the rebate under section 88 shall be allowed from the income-tax on the total income as reduced by such capital gains. Explanation.—For the purposes of this section,— (a) "equity oriented fund" shall, have the meaning assigned to it in the Explanation to clause (38) of section 10; (b) "International Financial Services Centre" shall have the same meaning as assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005); (c) "recognised stock exchange" shall have the meaning assigned to it in clause (ii) of the Explanation 1 to sub-section (5) of section 43.
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