Section 111A of the Income Tax Act

Section 111A of the Income Tax Act, 1961, is the operative tax provision that governs short-term capital gains (STCG) arising from transfers of listed equity shares, units of equity-oriented mutual funds , and units of business trusts (REITs and InvITs), subject to the condition that Securities Transaction Tax (STT) has been paid on both acquisition (with prescribed exceptions) and sale. The section was inserted by the Finance Act, 2004 alongside Section 10(38) (the now-repealed LTCG exemption), and operates as the structural counterpart to Section 112A for short-term holdings. As of the post-23 July 2024 regime introduced by the Finance (No. 2) Act, 2024, STCG under Section 111A is taxed at 20 per cent, with no exemption threshold and no indexation, applicable to gains on listed equity and equity-oriented MF held for up to 12 months.

The 2004 introduction of Section 111A was part of the broader Finance Act 2004 package that established the modern Indian equity-market tax architecture: STT was introduced as a transaction-level levy in lieu of LTCG, Section 10(38) provided the LTCG exemption (subsequently repealed in 2018), and Section 111A provided the concessional STCG rate (15 per cent at introduction). The 15 per cent rate stood for 20 years from 2004 to 22 July 2024, providing a structurally lower STCG rate than the slab-rate that would have otherwise applied. The Finance (No. 2) Act, 2024, raised the rate to 20 per cent effective 23 July 2024 as part of the broader capital-gains regime harmonisation that also raised the Section 112A LTCG rate from 10 per cent to 12.5 per cent.

Section 111A operates alongside Section 112A as the two principal provisions governing the equity-and-equity-MF tax framework. The two provisions share the same STT condition and the same listed-equity-and-equity-MF scope; they differ only in the holding-period threshold (12 months) and consequent rate. The Section 111A STCG framework is treated in the STCG equity mutual fund Section 111A reference for the equity-MF specific application, with the broader capital gains tax in India framework providing the umbrella reference.

Statutory framework

Insertion and amendments

Section 111A was inserted into the Income Tax Act, 1961 by the Finance (No. 2) Act, 2004 with effect from assessment year 2005-06 (financial year 2004-05). The text was substantially amended by the Finance (No. 2) Act, 2024 to update the rate from 15 per cent to 20 per cent. The principal statutory anchors are:

Section 111A operates alongside Section 112A (LTCG on the same asset class) and Section 112 (other capital assets).

Text and structure

Section 111A is structured as a single substantive section with four sub-sections:

The 20 per cent rate is prescribed in the substantive provision. Section 111A does not have its own exemption threshold; the Rs 1.25 lakh annual exemption that applies under Section 112A for LTCG does not extend to STCG under Section 111A.

Charging provision

Scope of applicability

Section 111A applies to short-term capital gains arising from the transfer of:

1. Equity shares listed on a recognised stock exchange in India, on which STT has been paid on both acquisition and transfer.
2. Units of equity-oriented funds (defined as funds investing at least 65 per cent of investible assets in equity shares of domestic listed companies). The category covers SEBI Large Cap, Mid Cap, Small Cap, Multi Cap, Flexi Cap , Focused, Value or Contra, ELSS , Sectoral or Thematic, Dividend Yield, Large and Mid Cap funds, Aggressive Hybrid , and Arbitrage funds where the equity threshold is met.
3. Units of business trusts (REITs and InvITs), under specified conditions, with the holding-period threshold harmonised at 12 months under the Finance (No. 2) Act, 2024.

Short-term holding requirement

The asset must be held for up to 12 months to be classified as a short-term capital asset under Section 2(42A) read with Section 111A. The 12-month threshold is consistent with the Section 112A LTCG threshold; assets held for more than 12 months become long-term and fall under Section 112A rather than Section 111A. For assets acquired through inheritance or gift, the previous owner’s holding period is included in the computation under Section 49(1).

STT condition

A key condition for Section 111A applicability is that Securities Transaction Tax (STT) must have been paid on:

• Both acquisition and sale, in the case of equity shares (with exceptions notified by the CBDT under Section 112A(4)).
• The sale, in the case of equity-oriented MF units (since STT is not levied on MF subscription; only on equity-MF redemption).

The STT condition mirrors Section 112A’s gateway test. Where STT has not been paid (typically because the acquisition or sale was off-market), the gain falls under Section 112 (for long-term holdings) or under slab-rate STCG (for short-term holdings) rather than under Section 111A.

Exceptions to the STT-on-acquisition requirement

The Section 111A STT-on-acquisition condition is subject to the same exceptions as Section 112A, prescribed through CBDT Notification No. 60/2018 dated 1 October 2018 and subsequent updates. The exceptions cover acquisitions where STT could not have been paid by design:

• IPO allotment: Shares acquired through an initial public offering.
• FPO allotment: Shares acquired through a follow-on public offer.
• Rights and bonus issue: Shares received pursuant to corporate actions on existing holdings.
• ESOP exercise: Shares received through employee stock option scheme exercise.
• Scheme of amalgamation, demerger, reconstruction: Shares received under court- or NCLT-approved schemes.
• Inheritance and gift from specified relatives: Shares received through transmission or gift under Section 47 transactions.
• Mutual fund switch: Units acquired through an intra-AMC switch.

Tax rate

Post-23 July 2024 regime

Under the Finance (No. 2) Act, 2024, effective for sales on or after 23 July 2024:

• STCG rate: 20 per cent (raised from 15 per cent).
• No exemption threshold: Unlike Section 112A , Section 111A does not provide an annual exemption.
• No indexation: Section 111A does not allow indexation of cost of acquisition (short-term holdings do not generally benefit from indexation under any provision).
• Flat rate: Section 111A STCG is taxed at the flat 20 per cent rate; it is not added to the taxpayer’s other income for the purpose of slab-rate computation.

Pre-23 July 2024 regime

For sales before 23 July 2024 (during financial year 2024-25 up to 22 July 2024 and earlier years from financial year 2005-06):

• STCG rate: 15 per cent.
• All other terms (STT condition, no exemption threshold, flat rate) unchanged.

Surcharge and cess

The Section 111A STCG is subject to applicable surcharge (based on the taxpayer’s total taxable income) and Health and Education Cess at 4 per cent. The effective tax rate for the highest surcharge bracket is approximately:

• Pre-23 July 2024: 15 per cent base + 15 per cent surcharge + 4 per cent cess = approximately 17.94 per cent.
• Post-23 July 2024: 20 per cent base + 15 per cent surcharge + 4 per cent cess = approximately 23.92 per cent.

The surcharge structure under the post-2024 regime preserved the differential rates for high-income taxpayers.

Basic exemption limit set-off

Section 111A(3) provides a specific benefit for resident individual taxpayers: where the taxpayer’s other income (excluding Section 111A STCG) falls below the basic exemption limit applicable under Section 87A (Rs 3 lakh for the FY 2024-25 default regime, Rs 2.5 lakh for the older regime), the unutilised basic-exemption-limit gap may be applied against the Section 111A STCG. The provision effectively reduces the Section 111A tax for low-income resident individuals.

For non-resident individuals (NRIs), HUFs, and other entities, the basic-exemption-limit set-off does not apply.

No Chapter VI-A deductions

Section 111A(2) provides that no deduction under Chapter VI-A of the Income Tax Act (which includes Sections 80C, 80D, 80G, 80TTA, 80TTB, and similar provisions) is permitted against the Section 111A STCG. The taxpayer’s regular income remains eligible for these deductions, but the Section 111A income is computed and taxed on a stand-alone basis.

Computation

Step-by-step computation

The Section 111A STCG computation proceeds as follows:

1. Determine the holding period: Confirm the asset was held for up to 12 months from acquisition to transfer.
2. Confirm STT condition: Verify that STT was paid on both acquisition (with exceptions) and sale.
3. Compute full value of consideration: The sale price received, excluding STT and brokerage.
4. Determine cost of acquisition: The actual purchase price including brokerage paid (but excluding STT). No indexation applies to short-term holdings.
5. Compute the gain: Sale consideration minus cost of acquisition.
6. Aggregate across all Section 111A transactions in the financial year.
7. Apply the rate: 20 per cent on the aggregate STCG.
8. Apply the basic-exemption-limit set-off (resident individuals only) if other income falls short of the basic exemption limit.
9. Add surcharge and cess: As applicable to the taxpayer’s income level.

Worked examples

Example 1: Equity sale, post-2024

An investor purchased 1,000 shares of a listed company on 15 March 2024 at Rs 500 per share (total cost Rs 5,00,000). The investor sold all 1,000 shares on 10 September 2024 at Rs 650 per share (sale consideration Rs 6,50,000). Holding period: approximately 6 months (short-term).

Example 2: Equity-MF redemption, pre- and post-2024 split

An investor redeemed equity-MF units in two tranches during financial year 2024-25:

• Tranche 1, redeemed 1 July 2024 (pre-23 July 2024): STCG of Rs 1,00,000.
• Tranche 2, redeemed 15 October 2024 (post-23 July 2024): STCG of Rs 80,000.

Both tranches are aggregated in Schedule 111A but the tax computation applies the rate applicable to each tranche’s transaction date.

Example 3: SIP redemption with FIFO mixed long-term and short-term

An investor ran a monthly SIP of Rs 10,000 in an equity-MF for 30 months from January 2022 to June 2024. In August 2024 the investor redeemed 50 per cent of the units. Under the FIFO (first-in-first-out ) rule, the first 15 months’ units (January 2022 to March 2023) are deemed redeemed first.

The first 15 months’ units were acquired during January 2022 to March 2023:

• The earliest 9 months’ units (January to September 2022) were held for more than 12 months at redemption: long-term, Section 112A applies.
• The next 6 months’ units (October 2022 to March 2023) were held for less than 12 months: short-term, Section 111A applies.

The Section 111A short-term gain is computed on the second cohort at 20 per cent (post-July-2024 rate, since the redemption was in August 2024).

Example 4: Resident individual with basic exemption limit set-off

A resident individual’s other income for FY 2024-25 is Rs 1,50,000 (well below the Rs 3,00,000 basic exemption limit under the default regime). The individual has Section 111A STCG of Rs 2,00,000 (post-July 2024).

The set-off is available only for resident individuals; NRIs and entities cannot avail it.

Reporting in the income tax return

Schedule 111A

Section 111A transactions are reported in Schedule 111A of ITR-2 or ITR-3 . Schedule 111A requires aggregate reporting (rather than the scrip-wise disclosure required for Schedule 112A):

For sales straddling the 23 July 2024 rate-change date, the Schedule 111A reporting separately captures the pre-and post-July-2024 components.

The e-filing portal’s pre-filled return data populates Schedule 111A automatically using:

• Stock-exchange-sourced reporting through broker capital gains statements .
• RTA-sourced reporting for mutual fund redemptions through the CAMS-KFin capital gains statement and the mutual fund ITR capital gains statement .
• AIS reconciliation data .

Loss set-off

Short-term capital losses under Section 111A may be set off against:

• Any other capital gain (short-term or long-term) in the same year (under Section 70).
• Future capital gains, with carry-forward for up to 8 years (under Section 74).

This is broader than the Section 112A long-term loss treatment, which can be set off only against future long-term gains. The asymmetric treatment reflects the structural framework’s general approach of being more permissive with short-term loss set-off.

Loss harvesting strategies

Investors with both Section 111A STCG and other capital gains in the same year may strategically realise Section 111A losses to offset the gains. The wash-sale-like considerations under the General Anti-Avoidance Rule (GAAR) limit the artificial use of this strategy; genuine portfolio rebalancing producing Section 111A losses is generally permissible.

Anti-abuse provisions

Bonus stripping and dividend stripping

The bonus stripping anti-abuse rule under Section 94(8) and the dividend stripping rule under Section 94(7) apply to Section 111A transactions in the same way they apply to Section 112A. The mechanisms close artificial-loss-creation routes that involve buying shares before a corporate action and selling at a Section 111A short-term loss after the ex-action date.

Cross-section ascertainability

Section 111A applies only where the holding period is up to 12 months. Conversion of a long-term holding into a Section 111A short-term gain through artificial intermediate transactions is addressed under GAAR. The CBDT FAQ guidance clarifies that the holding period is computed continuously from acquisition to transfer; intermediate operations like dividends, bonus issues, and rights issues do not reset the holding period.

Specified persons and special cases

Foreign portfolio investors

Foreign portfolio investors registered under the SEBI (Foreign Portfolio Investors) Regulations, 2019, are subject to the same Section 111A framework. TDS under Section 195 may apply at the time of redemption or sale.

Non-resident Indians

NRIs investing in Indian listed equity or equity-oriented MF are subject to Section 111A on STCG. TDS deducted under Section 195 at the time of redemption applies the Section 111A rate. The 2024 update raised the TDS rate from 15 per cent to 20 per cent for STCG. DTAA relief may be available depending on the NRI’s country of residence and the treaty terms.

REIT and InvIT units

Units of business trusts (REITs and InvITs) listed on a recognised stock exchange with STT paid on transfer fall under Section 111A for short-term gains. The 12-month holding-period threshold was harmonised across REIT and InvIT units under the Finance (No. 2) Act, 2024.

Inherited and gifted holdings

For shares or equity-MF units received through inheritance or gift, the previous owner’s holding period is included for purposes of determining short-term versus long-term classification under Section 49(1) read with Section 2(42A). A unit-holder who received units through inheritance from a holder who held them for 6 months would, on selling within the next 6 months, fall under Section 111A (the cumulative 12-month threshold).

Comparison with Section 112A

Section 111A (STCG) and Section 112A (LTCG) are the two principal provisions governing the equity-and-equity-MF tax framework:

Comparison with slab-rate STCG

For assets not covered by Section 111A (unlisted equity, debt instruments, immovable property held short-term), STCG is taxed at the taxpayer’s slab rate rather than at the Section 111A concessional 20 per cent. The slab-rate STCG can reach 30 per cent (plus surcharge and cess) for high-income individuals, making the Section 111A rate materially favourable for listed equity short-term trading.

This comparative concessional rate is one of the principal tax-policy arguments for the STT-paid-listed-equity framework: the broad-based STT and the Section 111A and Section 112A concessional rates together produce a structurally favourable tax framework for listed equity that has been a key driver of retail equity participation since 2004.

Legislative history

2004 introduction

Section 111A was inserted by the Finance (No. 2) Act, 2004 alongside Section 10(38) (LTCG exemption) and the Securities Transaction Tax. The original 2004 rate was 10 per cent, raised to 15 per cent in 2008 by the Finance Act, 2008. The 15 per cent rate stood for 16 years from 2008 to 22 July 2024.

The original framework was designed as a structural choice: replace the prior slab-rate STCG with a flat concessional rate, in exchange for the broad-based STT and the parallel LTCG exemption under Section 10(38). The framework was politically popular because it produced lower effective rates for retail equity investors while maintaining government revenue through the STT.

2018 Section 112A reintroduction

The Finance Act, 2018 reintroduced LTCG on listed equity through Section 112A , repealing Section 10(38). Section 111A was not amended at the time; the 15 per cent STCG rate continued. The 2018 framework therefore produced an asymmetric structure where LTCG was 10 per cent (above Rs 1 lakh) while STCG remained 15 per cent.

2024 rate harmonisation

The Finance (No. 2) Act, 2024, effective 23 July 2024, raised the Section 111A rate from 15 per cent to 20 per cent. The change was justified by the government on revenue and rate-harmonisation grounds:

• The 5-percentage-point gap between Section 111A STCG (15 per cent) and Section 112A LTCG (10 per cent) was viewed as too narrow for the holding-period-based differentiation.
• The post-2024 structure restores a more meaningful gap: STCG 20 per cent vs LTCG 12.5 per cent, a 7.5-percentage-point holding-period premium for long-term holding.

The rate increase was contemporaneous with the Section 112A rate update from 10 per cent to 12.5 per cent and the threshold increase from Rs 1 lakh to Rs 1.25 lakh.

Recent developments

Post-2024 reform implementation

Implementation of the Finance (No. 2) Act, 2024 amendments to Section 111A produced operational issues for sales straddling the 23 July 2024 effective date. The CBDT issued clarificatory circulars in late 2024 addressing the principal interpretive questions:

• The applicable rate is determined by the date of the sale transaction, not the date of the underlying acquisition.
• TDS under Section 195 for NRIs was updated to 20 per cent for STCG transactions post-23 July 2024.
• The aggregate reporting in Schedule 111A separately captures pre-and-post-July-2024 tranches.

AIS integration

The Annual Information Statement (AIS) framework captures Section 111A STCG at the per-transaction level for both broker-sourced equity transactions and RTA-sourced MF redemptions. The pre-filled Schedule 111A in the income tax return draws from the AIS dataset.

Tax-planning impact

The 33 per cent relative increase in the STCG rate (from 15 per cent to 20 per cent) has produced increased investor focus on holding-period management. Investors close to the 12-month threshold have stronger incentives to extend holdings to the long-term band, where the Section 112A rate (12.5 per cent) is 7.5 percentage points lower. The behavioural effect of this incentive is a partial validation of the policy rationale for the rate change.

Loss-harvesting platforms

Direct-plan platforms including Kuvera and ET Money have updated their automated tax-loss-harvesting tools to incorporate the post-July-2024 Section 111A rate. The 20 per cent rate makes Section 111A losses correspondingly more valuable as offsets against other STCG, increasing the economic incentive for active tax-loss harvesting.

REIT and InvIT clarification

The Finance (No. 2) Act, 2024 included clarificatory amendments confirming that listed REIT and InvIT units fall within Section 111A treatment under prescribed conditions, with the 12-month holding-period threshold harmonised. The clarification closed an interpretive gap that had existed under the original Section 111A formulation.

Criticism and debates

Rate increase impact

The 33 per cent relative increase in the STCG rate has been argued by industry to discourage short-term equity trading and to reduce market liquidity. The counter-argument is that 20 per cent remains modest in international comparison (the US short-term capital gains rate is the taxpayer’s marginal income tax rate, which can be up to 37 per cent federal plus state) and that the rate increase serves the legitimate policy purpose of incentivising longer holding.

No exemption threshold

The absence of an exemption threshold under Section 111A (unlike Section 112A’s Rs 1.25 lakh exemption) has been argued to be inequitable for small-scale traders whose annual STCG may not justify a separate flat-rate treatment. The counter-argument is that the basic-exemption-limit set-off under Section 111A(3) for resident individuals provides a functionally similar relief mechanism.

Asymmetry with Section 112A on loss set-off

Section 111A losses can be set off against any capital gain (short-term or long-term), while Section 112A losses can be set off only against future LTCG. The asymmetric treatment has been argued to produce inefficient outcomes in some configurations of investor losses and gains. The asymmetry has been preserved through subsequent reforms.

Section 111A versus slab-rate STCG anomaly

The 20 per cent flat Section 111A rate can be higher than the slab-rate STCG for low-income taxpayers whose marginal rate is in the 5-per-cent or 10-per-cent band. The asymmetry is partially addressed by the basic-exemption-limit set-off but not fully resolved.

See also

• Section 112A (LTCG companion)
• STCG equity mutual fund Section 111A
• LTCG equity mutual fund Section 112A
• Capital gains tax in India
• Grandfathering rule for LTCG
• Annual Information Statement (AIS)
• Securities Transaction Tax
• Mutual fund
• Mutual fund industry in India
• SEBI scheme rationalisation circular 2017
• Mutual fund stamp duty
• STT mutual fund equity
• SIP taxation FIFO
• NRI MF TDS Section 195
• Flexi Cap mutual fund in India
• ELSS mutual fund in India
• Aggressive Hybrid mutual fund
• Arbitrage mutual fund in India
• SEBI debt mutual fund tax 2023
• ITR-2
• ITR-3
• CAMS-KFin capital gains statement
• Mutual fund ITR capital gains statement
• Zerodha ITR capital gains statement
• SEBI Investment Management Department
• Kuvera
• ET Money

References

1. Income Tax Act, 1961, Section 111A, as inserted by Finance (No. 2) Act, 2004 and amended by Finance (No. 2) Act, 2024.
2. Income Tax Act, 1961, Sections 45, 48, 49, 70, 74, 87A, 94(7), 94(8), Section 2(42A), Section 112A.
3. Finance (No. 2) Act, 2004, Sections 47 and 48, insertion of Section 111A, Section 10(38), and the STT framework.
4. Finance Act, 2008, amendment of Section 111A rate from 10 to 15 per cent.
5. Finance (No. 2) Act, 2024, Section 50, amendment of Section 111A rate from 15 to 20 per cent.
6. CBDT Notification No. 60/2018 dated 1 October 2018, exceptions to STT-on-acquisition requirement.
7. CBDT FAQ on Capital Gains Tax, Central Board of Direct Taxes, post-2024 updates.
8. CBDT clarificatory circulars on Section 111A and Section 112A operation, 2024.
9. SEBI Master Circular on Mutual Funds, SEBI/HO/IMD/IMD-PoD-1/P/CIR/2024/137, 27 May 2024.
10. SEBI (Foreign Portfolio Investors) Regulations, 2019.