If you own certain assets, like stock options, units of equity-oriented mutual funds, or units of business trusts, you may have to pay taxes on long-term capital gains (LTCG). Section 112A of Income Tax Act, 1961 speaks about this. As part of the Finance Act, 2018 this section was added. It wants to tax long-term gains from these assets in a certain way taking away the exemptions that were in place before under Section 10(38).
What is Long-Term Capital Gain (LTCG)?
Long-term capital gain refers to the profit earned from the sale of an asset that has been held for more than 36 months. In the case of equity shares and mutual funds, the holding period is more than 12 months to be classified as a long-term asset.
LTCG arises when you sell a long-term asset at a price higher than the price you paid to acquire it. The profit from such sales is considered taxable, but Section 112A introduces a special tax treatment for these gains.
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Key Conditions for Section 112A of Income Tax Act
Section 112A applies only if specific conditions are met:
1. Equity Shares or Mutual Funds: The capital gains should arise from the transfer of:
Equity shares in a listed company.
Units of equity-oriented mutual funds.
Units of business trusts.
2. Securities Transaction Tax (STT): STT must be paid on the purchase and sale of equity shares. For mutual funds and business trusts, STT must be paid at the time of transfer.
3. Holding Period: The asset must be held for more than 12 months to qualify as a long-term capital asset.
4. Recognized Stock Exchanges: A recognised stock exchange must be used for the transaction. This makes sure that the transaction process is clear and regulated.
Tax Rate under Section 112A of Income Tax Act
Long-term capital gains over ₹1,00,000 in a financial year are subject to a tax rate of 10% under Section 112A. It is less than the tax rate that applies to short-term capital gains, which is usually higher.
To prevent long-term investors from being overtaxed, a provision was introduced. The ₹1,00,000 tax rate is only applied to gains over that amount in a given year. Any LTCG up to ₹1,00,000 in a financial year is tax-free.
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Grandfathering Clause
The grandfathering clause is an important part of Section 112A. This keeps people who bought things before February 1, 2018, from having to pay taxes on the gains they made before that date. Investors won't have to pay taxes on gains made before the law change because of this provision. The cost of acquisition for such assets is considered to be the higher of:
The actual cost of acquisition, or
The fair market value (FMV) of the asset on January 31, 2018.
Exemptions for Transfers in IFSC
Section 112A also provides an exemption for transactions that take place in International Financial Services Centres (IFSCs). If an asset is transferred on a recognized stock exchange in an IFSC, and the payment is made in foreign currency, then the STT requirement does not apply. This is to encourage investment in these specialized financial zones.
Set-Off and Carry Forward of Losses
Section 112A allows for the set-off of long-term capital losses. If you incur losses from the sale of long-term assets, these can be set off against other long-term capital gains. If there are any unutilized losses, they can be carried forward for up to 8 years and offset against future long-term capital gains.
How to Report in the Income Tax Return
If you earn long-term capital gains under Section 112A, you must report these in your Income Tax Return (ITR). This ensures that your tax is calculated correctly and you claim the right exemptions and deductions. The ITR form requires you to provide specific details such as:
The name of the asset.
The ISIN code (International Securities Identification Number).
The sale price, purchase cost, and FMV (for grandfathering purposes).
Details of the Securities Transaction Tax (STT) paid.
Deductions Under Chapter VI-A
Chapter VI-A of the Income Tax Act allows certain deductions, such as those under Sections 80C, 80D, and more. If your gross total income includes LTCG under Section 112A, you can still claim these deductions. However, the deductions are applied to your income after excluding the LTCG.
Rebate Under Section 87A
If, after taking out the LTCG, your total income is less than the maximum amount that you don't have to pay income tax on you may be able to get a rebate under Section 87A. The goal of this rebate is to make taxes easier for people who make less money.
Example of Tax Calculation
Let’s take an example to better understand how Section 112A works:
Sale of Equity Shares:
Sale price: ₹5,00,000
Purchase price: ₹2,00,000
FMV on 31st January 2018: ₹2,50,000
LTCG Calculation:
Deemed cost of acquisition (FMV as of 31st January 2018) = ₹2,50,000
Long-term capital gain = ₹5,00,000 - ₹2,50,000 = ₹2,50,000
Tax Calculation:
Exemption limit: ₹1,00,000
Taxable LTCG = ₹2,50,000 - ₹1,00,000 = ₹1,50,000
Tax payable = ₹1,50,000 × 10% = ₹15,000
In this case, the individual would pay ₹15,000 as tax on the LTCG.
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Summary
Section 112A of Income Tax Act provides a straightforward tax structure for long-term capital gains arising from the sale of equity shares, mutual fund units, and business trust units. With a 10% tax rate on gains above ₹1,00,000 and special provisions like grandfathering and exemptions for IFSC transactions, the law aims to benefit long-term investors and encourage the growth of the capital markets.
Investors need to be aware of the STT requirements, the grandfathering clause, and how to calculate and report their capital gains for tax purposes. By following the provisions of Section 112A, taxpayers can ensure compliance while optimizing their tax liabilities.
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Section 112A of Income Tax Act, 1961 FAQs
Q1. What is Section 112A of Income Tax Act?
Section 112A provides for the taxation of long-term capital gains (LTCG) on equity shares, mutual funds, and business trusts. It levies a 10% tax on LTCG above ₹1,00,000 in a year.
Q2. Which assets are subject to Section 112A?
It is applicable to long-term capital gains on the sale of equity shares of a listed company, units of equity-oriented mutual funds, and units of business trusts.
Q3. What is the tax rate on LTCG under Section 112A of Income Tax Act?
LTCG in excess of ₹1,00,000 is charged 10%. upto ₹1,00,000 of gains in a year are exempted from tax.
Q4. What is the grandfathering provision in Section 112A of Income Tax Act?
The grandfathering provision ensures that assets purchased prior to February 1, 2018, are taxed on the fair market value (FMV) on January 31, 2018, instead of the purchase price.
