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TMI Blogtaxation of short-term capital gains (STCG) : Clause 196 of the Income Tax Bill, 2025 Vs. Section 111A of the Income-tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the buying and selling of equity shares, units of equity-oriented funds, and units of business trusts. The legal framework governing short-term capital gains taxation has evolved over the years, reflecting changes in market dynamics, policy objectives, and the government's approach to capital market development. This commentary provides a comprehensive analysis of Clause 196, elucidating its objectives, key provisions, and practical implications. It further juxtaposes Clause 196 with the existing Section 111A, highlighting both continuity and divergence, and assesses the impact of recent legislative changes, particularly the rate enhancement effective from July 2024. Objective and Purpose The legislative intent behind both Claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off-market or unregulated transactions. Interpretation: The focus on STT ensures that only transactions routed through formal exchanges benefit from the concessional regime, reinforcing market integrity and reducing tax arbitrage opportunities. 2. Tax Rate and Computation Clause 196(1)(i) prescribes a flat tax rate of 20% on such short-term capital gains, a change from the earlier 15% rate u/s 111A (prior to July 2024). The total tax payable is the sum of: * Tax on the specified STCG at 20%; * Tax on the balance of the total income, computed as if such balance were the total income. Interpretation: The use of a flat rate, regardless of the taxpayer's marginal slab, simplifies computation but increases the tax burden compared ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or investments, insurance, etc.) are not set off against STCG eligible for concessional taxation, thereby preserving the integrity of the special regime. 6. Definition of Equity-Oriented Fund Clause 196(5) refers to the definition of "equity oriented fund" as assigned in section 198 of the Bill, ensuring consistency of terminology. Practical Implications 1. For Taxpayers (Individuals, HUFs, Companies, and Others) - Higher Tax Outgo: The move to a 20% rate for STCG (from 15%) increases the tax burden for all taxpayers earning such gains, effective for transfers on or after July 23, 2024. - Continued Compliance Complexity: Taxpayers must continue to segregate STCG eligible for special rate from other capital gains, track STT co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 15% for transfers before 23 July 2024 and 20% thereafter. * Clause 196: Directly prescribes a 20% rate, reflecting the updated legislative intent. Analysis: The main substantive change is the increase in the applicable rate, leading to greater tax outgo for the same class of transactions. This may impact investor behavior and portfolio management strategies, particularly for high-frequency traders and short-term investors. 2. Scope and Applicability * Both provisions apply to STCG from equity shares, units of equity-oriented funds, and units of business trusts, provided the transaction is chargeable to STT. * Section 111A specifically refers to transactions entered into on or after the commencement date of Chapter VII of the Fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsistency across the legislative framework. 7. Procedural and Structural Differences * Section 111A is part of the Income-tax Act, 1961 with a long history of amendments, transitional provisions, and explanatory notes. * Clause 196 is part of a new Bill, and may be accompanied by updated definitions, cross-references, and streamlined language. Analysis: While the substantive content is similar, the new Bill may offer greater clarity and coherence, eliminating legacy ambiguities. Key Differences Tabular Form Aspect Section 111A (pre-July 23, 2024) Section 111A (post-July 23, 2024) / Clause 196 STCG Tax Rate 15% 20% Reference to Deduction Chapter Chapter VI-A Chapter VIII (presumably analogous) Definition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... broader strategy to position India as a global financial services hub, a feature not commonly found in other jurisdictions. Conclusion Clause 196 of the Income Tax Bill, 2025, continues the broad contours of the special tax regime for short-term capital gains established by Section 111A of the Income-tax Act, 1961. The primary change is the increase in the tax rate from 15% to 20%, reflecting a policy recalibration in response to fiscal and market considerations. The structure, relief mechanisms, and exclusions remain largely intact, ensuring continuity and predictability for taxpayers. Stakeholders must adjust to the higher rate and ensure compliance with the procedural requirements, particularly regarding the segregation of eligible S ..... X X X X Extracts X X X X X X X X Extracts X X X X
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