Section 112A of Income Tax Act: All you need to know

Equity trading income is taxed differently based on whether profits were realised over a long or short period of time. According to Section 10(38) of the Income Tax (IT) Act of 1961, Long-Term Capital Gains (LTCG) on shares and securities for which Securities Transaction Tax (STT) is paid were exempt until the end of the 2018–19 fiscal year. The fiscal year ended with this clause still in effect. However, the Section 10(38) exemption is no longer in effect as a result of amendments made in Budget 2018.

Additionally, under the recently passed Section 112A of Income Tax Act, long-term capital gains on the sale of equity shares, equity mutual funds, and business trust units exceeding Rs 1 lakh for a financial year are now subject to a 10% income tax. Tax filings must detail these profits. The Finance Act of 2018’s addition of Section 112A led to the determination of LTCG. Gains on specific assets held for a long time are subject to this rate.

The application of Provision 112A of the Income Tax Act is examined in this article, along with thoroughly examining each element that makes up the tax computation under this section.

What did Section 112A come into effect?

Section 112A was made effective from FY 2018-19, starting April 1, 2018.

See also: What is capital gains tax?

Section 112A of Income Tax Act: What is capital gain?

When an investor sells a capital asset for a profit over the cost at which they originally bought it, they are said to have realised a capital gain. The Income Tax Act states that capital gains are included in taxable income. For instance, an assessee may be qualified for a capital gains tax exemption when they sell property that has been utilised for agricultural purposes because of a special requirement that only pertains to this kind of transaction. The earnings or gains that occur from the transfer of a capital asset are referred to as “capital gains.”

The asset may be related to the assessee’s business or area of activity in some manner, but this is not guaranteed. Examples include, among others, lands, automobiles, buildings, machines, jewellery, and commercial and residential real estate. People with rights in or relating to an Indian company are listed on this list.

Section 112A of Income Tax Act: Varieties of capital gains

Based on how long the owner has owned the asset, gains on investment can frequently be divided into the following groups:

Short-term capital gain: Profits realised through the sale of an asset that was acquired less than a year ago are referred to as short-term capital gains. For instance, short-term capital gains are considered to exist when an asset is sold fewer than 12 months after the asset was first acquired. The taxation of these profits is different from that of long-term capital gains. However, the length of ownership for different asset types might differ significantly from one another.

Long-term capital gain: The profit from the sale of an asset held for more than three years and six months is referred to as a long-term capital gain. As of the end of March 2017, the prior immovable property holding term of 12 months was expanded to 24 months. However, among other sorts of investments, this restriction does not apply to moveable assets like jewellery or debt-oriented mutual funds. Additionally, certain assets are considered short-term capital assets if they are held for less than a year. The list of assets that are taken into consideration in line with the earlier-presented regulation is as follows:

• Shares of ownership in any business that is exchanged on an Indian stock exchange that is recognised by the government.
• On any of India’s stock exchanges, securities like bonds, debentures, and other comparable debt obligations are listed.
• Whether they are priced or not, Unit Trust of India (UTI) units are included.
• Gain, whether or not the funds are listed, on capital invested in equity-oriented mutual funds.
• No-coupon interest bonds.

Any of the aforementioned assets that are kept for a period of time longer than a year are classified as long-term capital assets.

Section 112A of Income Tax Act: Long-term capital gain definition

Under Section 112A, taxes are only levied on gains on assets held for a period of time more than a year. The property must be kept for a period of time more than a year in order to be liable to taxation under Section 112A. Any sum beyond the Rs 1 lakh exemption level is subject to a 10% tax rate. As a result, Section 112A-covered long-term capital gains are free from taxation up to a maximum of Rs 1 lakh each fiscal year. Gains over Rs 1 lakh are subject to taxes at a rate of 10%, plus the applicable education cess and surcharge.

For instance, if a taxpayer has an annual (net) long-term capital gain of Rs 1,50,000 as defined by Section 112A, the tax of Rs 50,000 as defined by Section 112A is determined. (Rs 1,50,000 – Rs 1,00,00).

A resident person or HUF whose total income is less than the basic exemption level after subtracting long-term capital gains; in this instance, the long-term capital gains are subject to a reduction equivalent to the income discrepancy.

Section 112A of Income Tax Act: Long-term capital gain tax computation

If the above four conditions are satisfied, the following elements will be used to calculate the amount of tax required on the long-term capital gain:

• Over Rs 1 lakh, long-term capital gains are subject to a 10% tax.
• If the gain on the sale of an asset held for more than a year is less than Rs 1 lakh, it is free from taxes.
• The excess amount will be liable to taxes at a rate of 10% (+ surcharge + 4% health and education cess) if the gain exceeds Rs 1 lakh.
• The 10% rate applies whether the assessee is a business or a person.

Section 112A of Income Tax Act: What it says

If the value of the profits exceeds Rs 1,000,000, an assessor is required to pay income tax at the rate of 10% under Section 112A on capital gains on long-term capital assets as defined in Section 2 (29A) of the IT Act, 1961. This tax is due after the assessor has concluded that the taxpayer is responsible for it and all of the requirements in this section have been satisfied. This section applies to all securities, whether or not listed, including shares, debentures, business trust units, and other securities.

The deductions offered by Chapter VI-A are not covered by Section 112A. The exclusions set out in Section 10(38) will not be applicable if the prerequisites are not satisfied.

Section 112A of Income Tax Act: Exceptions

Following are some of the areas where Section 112A does not apply:

• Profits from mutual fund investments are not subject to taxation.
• Section 112A is irrelevant if Section 112 is applicable.
• This deal is not available to non-resident Indians (NRIs).
• The International Financial Service Centre (IFSC) is one place that qualifies for shares that are not subject to Securities Transaction Tax (STT) at the time of transfer. These shares do not need to be listed on a stock market to qualify.
• Foreign institutional investors (FII) are also excluded since there is no need to provide proof that the securities they own are capital assets.
• If the auditors can demonstrate that the securities he owns are capital assets rather than stock in trade.

Section 112A Income Tax Act: Grandfathering provisions 

Until the financial year 2017-18, the long-term capital gains that came from equity shares and equity-linked sale units of mutual funds were exempted according to section 10(38) of the income tax act. As per the grandfathering clauses in Budget 2018, gains are exempted till January 31, 2018.

For securities bought before February 1, 2018, the cost of acquisition is calculated as

• Take into consideration the lower of the fair market value and the sale consideration.
• Take into consideration the higher value calculated as per above mentioned step and the purchase price.

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