Section 112A of Income Tax Act: Taxation on Long-Term Capital Gains
What is Section 112A?
Section 112A of the Income Tax Act was announced in Budget 2018 to replace the exemption previously provided under section 10(38). This section applies to the sale of listed equity shares, equity-oriented mutual funds, and units of a business trust, and imposes a tax on long-term capital gains crossing Rs. 1 lakh at a rate of 10%. This provision became effective from the financial year 2018-19. Should an investor have sold some securities in the year, they will need to mandatorily fill in the details of the sale in the schedule for Section 112A of the IT form.
Before the Amendment of Section 112A
Before the Assessment Year 2018-19, Section 10(38) of the Income Tax Act, 1961 granted an exemption from the tax applicable on long-term capital gains resulting from the transfer of either of the following:
- equity shares
- units of equity-oriented funds
- units of business trusts.
After the Amendment of Section 112A
Post April 1, 2018, the provisions of Section 10(38) of the Income Tax Act do not apply to income generated from the sale of equity-oriented fund units, equity shares, and units of business trusts. Instead, income that is a result of the transfer of these assets are subject to the provisions of Section 112A of the Income Tax Act, and tax is calculated accordingly.
Exceptions to Section 112A of Income Tax Act
Below are the exceptions to Section 112A:
- Gains made from mutual funds are currently exempt from taxation.
- Section 112A of the Income Tax Act does not apply if Section 112 is applicable.
- Non-Resident Indians (NRIs) are not subject to this provision.
- Securities listed in the recognized Stock Exchange within the International Financial Service Center (IFSC) are not subject to Securities Transaction Tax (STT) when transferred.
- If an assessee can show that the securities they possess are capital assets and not stock-in-trade, they will not be subject to this provision.
- Foreign Institutional Investors (FIIs) are also exempt as the securities they hold are considered capital assets and the authorities do not need any proof of that.
Scope of Section 112A of Income Tax Act
According to Section 112A of Income Tax Act, 1961, when a long-term capital asset is transferred (sold/redeemed) and it yields long-term capital gains, it will attract a tax equivalent to 10% of the gains. These long-term capital assets include units in a business trust, units in a mutual fund that invests in equity, or equity shares in a company.
None of these long-term capital gains will not be regarded as taxable income and will not contribute towards the overall income. Also, if the long-term capital asset is among the aforementioned assets, and they are subject to securities transaction tax, the long-term capital gains resulting from their transfer or sale will attract a tax rate of 10% of the capital gains.
Applicability of Section 112A
Starting from April 1, 2018, Section 112A of the Income Tax Act, 1961 has been in effect. This provision applies to transactions involving the following transfers if they lead to capital gains:
- Equity share transfers
- Transfer of units of equity-oriented funds
- Transfer of units of business trusts
However, the application of section 112A is subject to the payment of Securities Transaction Tax (STT) at the time of acquisition and transfer of equity shares or units of equity-oriented funds.
Also Read
Long-Term Capital Gains under Section 112A
Section 112A defines the tax applicable on capital gains that are a result of the transfer of long-term capital assets. This includes units in a business trust, units in a mutual fund that invests in equity, or equity shares in a company. The investor must hold the assets longer than a year to avail of the concessional rate benefits under this section.
The tax payable on the total profit is 10% if it supercedes Rs.1 lakh, and a surcharge and education cess will be levied on the taxable gains. However, the taxation of a resident HUF or individual is subject to different rules. If the net income is reduced to a level below the exemption cap, then the Long-Term Capital Gain (LTCG) will be decreased by that amount.
Grandfathering Provisions Under Section 112A
To safeguard the interests of investors, the Central Board of Direct Taxes (CBDT) introduced grandfathering clauses. These clauses ensure that taxes are charged only on the gains made from the date of implementation and are prospective.
To implement this, the acquisition cost of equity-related or equity securities is calculated based on the formula below:
- LTCG = Value of sales – Acquisition cost – Transfer Expenses
- Liability of tax = 10% (Long-term capital gain – Rs.1 lakh)
The formula consists of two values – Value I and Value II. Here, value I is the lesser among the market valuation fair as of 31st January 2018, and the real selling rate and Value II is the higher among the real acquisition cost and Value I.
The Long-Term Capital Gain (LTCG) can be calculated as the difference between the value of sales and the acquisition cost, minus transfer expenses. The liability of tax is calculated at 10% of the long-term capital gain over Rs.1 lakh. This mechanism ensures that only the gains made after the implementation date are taxed and the acquisition cost is calculated fairly.
Reporting ITR Under Section 112A
Schedule 112A is included in the Income Tax Returns for the Assessment Year 2020-21 to facilitate the reporting of long-term capital gains, where grandfathering provisions are applicable, on a scrip-wise basis. This schedule necessitates the provision of information such as the ISIN code, scrip name, number of shares or units sold, sale price, purchase cost, and the fair market value as of January 31, 2018. These details are essential to ensure that the correct amount of long-term capital gains is computed in cases where grandfathering provisions are applicable.
Set off Long-Term Capital Loss Against Long-Term Capital Gain
If there is a net loss for any assessment year under any income type other than capital gain, the assessee is eligible to get that amount set off against their income from any other source under the same head/income type.
A short-term capital loss can be set off against both short-term or long-term capital gains whereas a long-term capital loss can be set off only against long-term capital gains.
Long-term capital gains yielded by the transfer of equity shares listed on a recognized stock exchange are taxed at 10%. Any long-term capital losses from the sale of such equity shares are allowed to be set off from other long-term capital gains of the assessee.
Final Word
Section 112A of the Income Tax Act, 1961 relates to the sale of listed equity shares, units of a business trust, and equity-oriented mutual funds, and taxes long-term capital gains over Rs. 1 lakh at 10%. The provision became effective from the financial year 2018-19 and lays down exceptions for mutual funds, NRIs, capital assets, FIIs, and securities listed in the IFSC. The section mandates that taxpayers must fill in the details of securities sold during the year in the Schedule for Section 112A of the income tax form. There are also grandfathering clauses that ensure taxes are only applicable on gains made from the date of implementation and are prospective.
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FAQs
Section 112A of Income Tax Act became effective from the financial year 2018-19, starting from April 1, 2018.
Exceptions to Section 112A of Income Tax Act include non-resident Indians (NRIs), securities listed in the recognized Stock Exchange within the International Financial Service Center (IFSC), securities held as capital assets, and foreign institutional investors (FIIs).
Section 112A pertains to the taxation of long-term capital gains on the transfer of long-term capital assets, such as equity-oriented fund units, equity shares, and units of business trusts.
The tax rate under Section 112A is 10% of the gains exceeding Rs. 1 lakh.
Yes, the TDS deduction will take place at a 10% rate for long-term capital gains earned by any non-resident Indian. However, capital gains calculation should be carried out as per the provisions of the Finance Bill of 2018.
No, you will not receive the benefit of indexation of the cost of acquisition while calculating your long-term capital gains on equity shares or other equity-oriented funds. The Income Tax Department has published a recent clarification in this regard.
In case the actual cost is lower than FMV of January 31 2018, then FMV will be the COA. But if the full value of consideration during transfer is lower than FMV, the full value of consideration or the actual cost, whichever is higher, is considered to be the COA of this investment.
You will have to fill up Schedule 112A while filing income tax returns for the assessment year 2020-21. This schedule will assist in scrip-wise reporting of your LTCG. Here, you will have to provide the ISIN code, name of script, total number of units sold, purchase cost, sale price, FMV as of January 31 2018.
Yes, you can set off a long-term capital loss. However, you can set off a long-term capital loss only against long-term capital gains. In case you face losses from certain securities and receive gains from the others, you are allowed to set off such losses against your gains. But, you cannot set off this loss for eight years following the assessment year in which the loss took place.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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