Section 112A Of Income Tax Act: Tax On Long-Term Capital Gains, Calculation And How To File ITR
Section 112A of the Income Tax Act levies long-term capital gains tax on transferring of units of business trust, equity-oriented funds, and the sale of listed equity shares. This section was introduced in Finance Bill, 2018 to prevent significant loss of revenue due to exemption from long-term capital gain tax.
If you are planning to sell long-term capital assets, here’s everything you need to know about Section 112A of the Income Tax Act. Read on!
What is Section 112A of the Income Tax Act?
Section 112A of the Income Tax Act imposes long-term capital gains tax on returns earned from the sale of listed shares and units of mutual funds and business trusts. The tax rate stands at 10% for any gain that is beyond a maximum limit of Rs. 1 lakh. The income tax return form includes Schedule 112A, where one needs to fill in scrip-wise details of securities.
The Government of India brought in Section 112A of the Income Tax Act to impose a tax on certain gains that were tax exempted till FY 2017-18. Prior to the introduction of this section, Securities Transaction Tax (STT) payable on income earned from the sale of listed equity shares, units of business trust, and mutual funds was exempt under Section 10(38).
Conditions Necessary for Section 112A of the Income Tax Act
These are the conditions necessary for levying long-term capital gain tax under Section 112A:
- The securities have to be long-term capital assets.
- There has to be a sale of listed shares or units of a business trust/mutual fund.
- The purchase or sale of equity shares will be liable to Securities Transaction Tax. For units of mutual funds or business trusts, the sale transactions will also be liable to STT.
How to Calculate LTCG under Section 112A of the Income Tax Act (Examples)
Section 112A deals with the taxation of long-term capital gains made by an investor. The taxation rate is 10% of the total gains exceeding Rs. 1 lakh. However, the holding period has to be more than one year to be eligible for taxation under this section.
Let’s take an instance for a better understanding. If you have an annual LTCG of Rs. 1,50,000 then as per Section 112A of income tax act, the taxation would take place on Rs. 50,000 (Rs. 1,50,000 – Rs. 1,00,000).
Now, let’s take another example to find out how LTCG calculation and taxation take place if the total income without the LTCG goes below the exemption limit. In such a situation, the LTCG amount will be reduced by the shortfall amount.
Let’s say your total income for 2020-2021, along with the LTCG, stands at Rs. 4,00,000. The total long-term capital gain is Rs. 2,00,000. Now, the exempted income limit is Rs. 2.5 lakh. Your balance income after removing LTCG is Rs. 2,00,000 (4,00,000 – 2,00,000). This is less than the basic exemption limit.
So, your reduced income falls short of Rs. 50,000 from the basic exemption limit. Thus, your taxable long-term capital gain would finally stand at Rs. (2,00,000- Rs. 50,000) or Rs. 1,50,000.
What is Grandfathering Clause in Section 112A?
The rollout of Section 112A abolished tax exemption on long-term capital gains earned from the sale of shares or units of mutual funds. However, the Central Board of Direct Taxes (CBDT) included the Grandfathering Clauses to ensure that the tax is levied only on the gains from the date the Section 112A was initiated.
For securities bought prior to February 1 2018, COA (Cost of Acquisition) calculation would include the following steps:
- First, take the lower of the FMV (Fair Market Value) as of January 31 2018, with the sale consideration.
- Compare the result with the purchase price and then consider the higher among the two.
To calculate COA (Cost of Acquisition), check this formula:
Value A: Fair Market Value as of 31st January 2018 or actual selling price (whichever is lower).
Value B: Value A or actual purchase price (whichever is higher)
Long-Term Capital Gain (LTCG) = Sales value – COA (as per Grandfather clause) – Transfer Expenses
Tax Liability = 10% * (LTCG – Rs. 1 lakh)
How to Report ITR under Section 112A?
Schedule 112A of the Income Tax enables scrip-wise detailed reporting of the long-term capital gains. Details such as the number of shares sold, sale price, purchase cost, name of the scrip, ISIN code, and FMV (31st January 2018) are included to calculate the correct amount of gains where grandfather provisions are applicable. To file your ITR, you can go to any e-filing platform, and upload your stock statement and Schedule 112A.
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Final Word
Section 112A of the Income Tax Act offers provisions for the taxation of long-term capital gains. If you are a taxpayer with income from the sale of listed shares and mutual fund units, make sure to refer to this section for details about the taxation of your long-term capital gains.
FAQs on Section 112A of the Income Tax Act
Ans: 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.
Ans: 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.
Ans: 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.
Ans: 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.
Ans: 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.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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