Section 112A of Income Tax Act: Provisions for long-term capital gains tax on shares

Capital gains refers to any profit received through the sale of a capital asset. The profit received falls under the income category. Thus, a tax must be paid on this income, which is known as the capital gains tax. Section 112A deals with long-term capital gains tax on the sale of equity shares and equity-related instruments. In this article, we will discuss the provision given under Section 112A of Income Tax (I-T) Act 1961.

See also: Tax on short-term capital gains under Section 111A

What is Section 112A of Income Tax Act?

Section 112A was introduced by the Finance Act 2018, which relates to tax on long-term capital gains from sale of listed equity shares, equity-oriented mutual fund units and units of business trust. The rate of long-term capital gains tax applicable on these listed securities is 10% for the gains above the threshold limit of Rs 1 Lakh.

The Income Tax Return (ITR) form includes Schedule 112A for furnishing scrip-wise details about these listed securities sold in one financial year. Taxpayers having long-term capital gains under Section 112A are required to provide details in Schedule 112A.

Previously, Section 10(38), permitted capital gains exemption from sale of listed equity shares, units of mutual fund and business trust. Section 10(38) was removed and Schedule 112A was introduced to tax gains, earlier exempted until FY 2017-18 (AY 2018-19).

Section 112A: Conditions to tax capital gains

Tax is applicable only on long-term capital gains as per Section 112A. The following conditions must be fulfilled when availing the tax benefits on capital gains under Section 112A.

• The long-term capital assets must be securities.
• The sale must be of listed equity shares, mutual fund units and units of business trust.
• Transactions relating to purchase and sale of equity shares are subject to Securities Transaction Tax (STT). In case of equity mutual fund units or business trust, the transactions of the sale are liable to STT.
• Deductions as per Chapter VI-A cannot be availed in respect of such gains.
• A rebate under Section 87A cannot be claimed from such gains.

Long-term capital gains under Section 112A

The holding period of the securities must be over one year to qualify for long-term capital gain. The tax rate applicable is 10% above the set income tax exemption threshold of Rs 1 Lakh. That is, the long-term capital gains under Section 112A are taxable at 10% only above Rs 1 Lakh, in addition to education cess and surcharge as applicable.

For example, a taxpayer has annual long-term capital gains under Section 112A of Rs 1.70 Lakh. The applicable tax will be 10% of Rs 70,000 (1,70,000 – 1,00,000).

In case, the total income of a resident individual or HUF is below the basic exemption limit, after reducing long-term capital gains, the long-term capital gains stand reduced by such shortfall.

Example:

Let us suppose, the total income of a taxpayer is Rs 4,00,000 and net long-term capital gains under Section 112A is Rs 2,00,000. The balance income after reducing the capital gains is Rs 2,00,000, which is lower than the basic exemption limit. The basic exemption limit is Rs. 2,50,000.

The amount by which the reduced net income falls short of the basic exemption limit will be Rs 50,000 (Rs 2,50,000 – Rs 2,00,000). Thus, the taxable long-term capital gains will be Rs 1,50,000 (Rs 2,00,000 – Rs 50,000).

Section 112A: How to set off long-term capital loss?

The loss, if any, on sale of long-term listed equity shares or units refers to long-term capital loss. The assessee can set off the loss against long-term capital gains as per Section 112A. In case of losses incurred from a few securities and gains on others, one can set-off the losses from gains. The net gains are taxed if total earnings exceed Rs 1,00,000. One can carry forward the long-term capital loss, which cannot be set-off for a period of eight years succeeding the assessment year when the loss is incurred.

Grandfathering provisions under Section 112A

The grandfathering provisions were introduced under the Finance Act, 2018 to exempt long-term capital gains earned until January 31, 2018. To calculate the cost of acquisition in case of specified securities bought before February 1, 2018, we first consider the lower of fair market value as on January 31, 2018, and the sale consideration. The result will be compared with the purchase price and the higher of the two is considered.

Example: Calculation of capital gains under Section 112A

As per the example, the taxpayer can set-off losses from gains and arrive at long-term capital gain taxable, using the grandfathering mechanism, which is Rs 3,60,000. He must pay tax only on gains exceeding Rs 1,00,000, which is Rs 2,60,000.

Fair Market Value

• Fair Market Value (FMV) of listed securities refers to the highest price of the security quoted on a recognised stock exchange.
• If no trading in the security has taken place on January 31, 2018, the FMV will be the highest price of the security quoted on a date immediately preceding January 31, 2018 when the security had traded on the recognised stock exchange.
• In case of unlisted units as on January 31, 2018, the net asset value of units as on January 31, 2018, is the FMV.
• In case of equity share listed after January 31, 2018, or acquired under a merger or other transfer as per Section 47, FMV = Purchase cost * cost inflation index for FY 2017-18 / cost inflation index of the year of the purchase or FY 2001-02.

see also about: Section 112A of Income Tax Act

How to report ITR under Section 112A of Income Tax Act?

The ITR filing for AY 2020-21 includes Schedule 112A, which allows a scrip wise reporting of long-term capital gains for an assessee, where grandfathering provisions are applicable. Scrip-wise details required will include name of the scrip, ISIN code, number of units/ shares sold, sale price, purchase cost and FMV as on January 31, 2018. These details are essential for arriving at the correct value of long-term capital gains where the grandfathering provisions are applicable.

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