STCG on equity mutual funds (Section 111A)

Short-term capital gains (STCG) on equity-oriented mutual funds are taxed under Section 111A of the Income Tax Act 1961 at a flat rate that is independent of the investor’s income-tax slab. The Finance Act 2024 raised the Section 111A rate from 15% to 20% with effect from 23 July 2024. Section 111A applies only where Securities Transaction Tax (STT) has been paid on the redemption transaction. Where STT has not been paid, the STCG is excluded from Section 111A and is added to total income at the applicable slab rate.

Tax advice disclaimer. This article is for educational reference only and does not constitute professional tax or financial advice. Tax law changes frequently and individual circumstances vary widely. Readers should consult a qualified Chartered Accountant or tax adviser before making any investment or tax-filing decision.

Scope of Section 111A

Section 111A applies to STCG arising from the transfer (including redemption) of:

• Units of an equity-oriented mutual fund where STT is paid at the time of transfer.
• Listed equity shares (covered separately).
• Units of a business trust as defined in Section 2(13A).

For mutual funds, “equity-oriented” means a fund that invests more than 65% of its total proceeds in equity shares of domestic companies, per Section 112A(10). Detailed classification criteria are in equity mutual fund taxation in India.

Holding period test

A unit is a short-term capital asset under Section 2(42A) if it has been held for not more than 12 months immediately before the date of transfer. The date of allotment is day one; the redemption date is the terminal date. In a SIP, the FIFO method assigns holding periods to each instalment lot independently.

Rate history

The Finance Act 2024 (clause 2, amending Section 111A) changed the rate from 15% to 20% effective 23 July 2024, the date the Finance Act received Presidential assent. Redemptions processed before that date at 15% are not retroactively revised.

Computation of STCG under Section 111A

STCG = Sale consideration -- Cost of acquisition -- Transfer expenses

• Sale consideration: The redemption NAV multiplied by the number of units redeemed.
• Cost of acquisition: The purchase NAV multiplied by the number of units (under FIFO or specific identification, as applicable).
• Transfer expenses: Brokerage or commission paid on redemption (if any; most direct-plan redemptions have nil transfer expenses).
• Indexation: Not applicable. Section 111A gains are never indexed.
• Grandfathering: Section 55(2)(ac) grandfathering applies only to LTCG under Section 112A. It does not apply to STCG.

Surcharge cap and effective rate

For STCG under Section 111A, the Finance Act 2023 capped the surcharge at 15% regardless of total income. This means the maximum marginal rate is:

• 20% tax + 15% surcharge on tax = 23% + 4% cess on 23% = approximately 23.92%.

Contrast this with slab-rate taxation at 30% + 37% surcharge + 4% cess = approximately 42.74% for the highest income bracket. The concessional rate is significant for high-income investors with substantial short-term equity-fund redemptions.

Set-off against capital losses

Under Section 70:

• STCG under Section 111A can be set off against STCG from any capital asset.
• STCG from other assets (taxed at slab rate) can also be set off against Section 111A gains.
• STCG cannot be set off against long-term capital losses.

Short-term capital losses from equity-oriented mutual funds can be set off against both STCG (including Section 111A gains) and LTCG, but only against capital gains; they cannot be set off against salary or other income heads.

Unadjusted STCG losses are carried forward for eight assessment years under Section 74, available for set-off against capital gains only.

Basic exemption offset

For resident individuals and HUFs, where total income other than Section 111A gains is below the basic exemption limit (Rs 3,00,000 for individuals below 60 under the old regime; higher for senior and super-senior citizens), the shortfall may be offset against Section 111A gains. This effectively reduces the taxable Section 111A base.

Example: An investor’s salary income is Rs 2,00,000 and Section 111A STCG is Rs 80,000. Total income is Rs 2,80,000. The basic exemption is Rs 3,00,000. The shortfall of Rs 20,000 is offset against STCG. Net taxable Section 111A gains: Rs 60,000. Tax: Rs 60,000 x 20% = Rs 12,000.

STT paid condition

Section 111A is available only where STT was paid on the transaction giving rise to the gain. For equity-oriented mutual fund redemptions through the BSE/NSE platform, STT is charged automatically. For off-platform or off-market transfers (e.g., gifts, inheritance, off-market settlements), STT is not charged and Section 111A does not apply. In such cases, the gain is taxed at slab rates.

The STT requirement also means that STCG from equity-oriented mutual fund units gifted and subsequently redeemed by the donee is eligible for Section 111A, provided the donee’s redemption is STT-paid, even though the original acquisition (the gift) did not involve STT.

Reporting

Section 111A gains are reported in Schedule CG of ITR-2 or ITR-3 in the row designated “Short-term capital gains on transfer of equity shares or units of equity oriented mutual fund on which STT is paid.” Reconciliation with fund-house capital gains statements and the Annual Information Statement (AIS) is essential; the AIS/TIS mapping article explains the process.

See also

• Section 111A
• LTCG on equity MFs (Section 112A)
• Equity mutual fund taxation in India
• Securities Transaction Tax
• SIP taxation and FIFO method
• Dividend stripping disallowance (Section 94(7))
• Capital gains tax in India
• ITR-2
• Annual Information Statement

References

1. Income Tax Act 1961, Section 111A (as amended by Finance Act 2024).
2. Finance Act 2024, clause amending Section 111A rate from 15% to 20%.
3. Income Tax Act 1961, Section 2(42A) – short-term capital asset definition.
4. Income Tax Act 1961, Section 70 – set-off of capital losses.
5. Income Tax Act 1961, Section 74 – carry-forward of capital losses.
6. Finance Act 2023, surcharge cap on Section 111A at 15%.