Section 112: Tax on (LTCG) Long Term Capital Gain

Important Keyword: Capital Gains, LTCG, Section 112.

Section 112: Tax on Long Term Capital Gain

Capital gains, the income or loss from selling a capital asset, are subject to taxation. When this gain stems from the sale of a long-term capital asset, it’s termed Long-Term Capital Gain (LTCG). The Income Tax Act delineates provisions for LTCG taxation, primarily under Section 112 and Section 112A.

Section 112 of the Income Tax Act governs the taxation of LTCG on assets not covered by Section 112A. This section outlines the tax treatment for long-term capital gains from assets other than those specified under Section 112A.

What is Section 112 of the Income Tax Act?

Section 112 of the Income Tax Act is a key provision governing the taxation of long-term capital assets. It encompasses a wide range of taxpayers, including individuals, Hindu Undivided Families (HUFs), partnership firms, companies, residents, non-residents, and foreign companies. This section specifically addresses capital gains arising from the sale of various long-term capital assets.

Long-term capital assets covered under Section 112 include:

1. Securities (other than units) listed on a recognized stock exchange in India
2. Units of the Unit Trust of India
3. Zero-coupon bonds
4. Securities not listed on a recognized stock exchange in India
5. Immovable property, such as land or buildings, or both
6. Any other capital asset

However, Section 112 does not apply to capital gains on the sale of certain long-term capital assets covered under Section 112A, which include:

1. Listed equity shares where Securities Transaction Tax (STT) is paid on acquisition or transfer
2. Units of equity-oriented mutual funds where STT is paid on transfer
3. Units of business trusts where STT is paid on transfer

Income tax on long-term capital gains under Section 112 is determined based on the nature of the asset and the holding period.

Classifying Capital Assets: Long-Term vs. Short-Term

Asset Type	Long-Term (Holding Period)	Short-Term
Equity mutual funds	12 months or more	Less than 12 months
Zero-coupon bonds	12 months or more	Less than 12 months
Listed equity shares	12 months or more	Less than 12 months
Unlisted equity shares	24 months or more	Less than 24 months
Immovable property	24 months or more	Less than 24 months
Other assets	36 months or more	Less than 36 months

Note: From FY 2024–25 onwards, the classification system has been streamlined:

• The 36-month threshold has been removed for simplification.
• Listed securities: Long-term if held for 12+ months
• All other assets: Long-term if held for 24+ months

Tax Rates on Long-Term Capital Gains Under Section 112

Section 112 of the Income Tax Act prescribes specific tax rates on long-term capital gains (LTCG), depending on the type of asset and the category of the taxpayer. Below is a detailed breakdown of applicable tax rates:

Asset Type	Tax Rate
Listed securities (STT not paid)	10% (without indexation) or 20% (with indexation), whichever is lower
Zero-coupon bonds	10% (without indexation) or 20% (with indexation), whichever is lower
Unlisted shares (non-residents/foreign cos.)	10% (without indexation or currency adjustment)
Immovable property & other assets	20% (with indexation)

How to Calculate LTCG Under Section 112

Basic Formula:

LTCG = Sale Consideration – Indexed Cost of Acquisition – Indexed Cost of Improvement – Expenses on Transfer

Where:

• Indexed Cost = Original Cost × (CII of Sale Year ÷ CII of Purchase Year)
• CII (Cost Inflation Index) for FY 2024-25 is 363

Example:

Suppose you bought a house in FY 2014–15 for ₹30,00,000 and sold it in FY 2024–25 for ₹80,00,000.

• CII for 2014–15: 240
• CII for 2024–25: 363

Indexed Cost of Acquisition = ₹30,00,000 × (363 ÷ 240) = ₹45,37,500
LTCG = ₹80,00,000 – ₹45,37,500 = ₹34,62,500

Tax Payable = 20% of ₹34,62,500 = ₹6,92,500 (plus cess and surcharge if applicable)

LTCG u/s 112 – Reporting in Schedule CG of ITR

Reporting LTCG under Section 112 in the Income Tax Return (ITR) involves detailing various aspects in Schedule CG of ITR-2 or ITR-3. Taxpayers need to furnish information such as the full value of consideration (sales value), deductions under Section 48, indexed cost of acquisition and improvement, as well as expenditure related to the transfer.

Regarding the set-off and carry forward of Long-Term Capital Loss (LTCL) under Section 112, taxpayers can offset LTCL against LTCG from another capital asset in the same year. Any remaining loss can be carried forward for up to 8 years to set off against future LTCG.

Exemption from LTCG Tax under Section 112

Taxpayers may also qualify for exemptions from LTCG tax under Section 112 by investing in specified assets. These exemptions are available for various types of capital assets, such as listed securities without STT, zero-coupon bonds, immovable property, and unlisted securities. Sections 54EE and 54F provide exemptions for investment in specified funds or residential house property, respectively. Taxpayers must reinvest the proceeds from the sale into the specified asset and adhere to the specified holding period to claim these exemptions. Alternatively, they can utilize the Capital Gains Account Scheme to temporarily hold the sale proceeds until reinvestment.

Section 112, Section 112A, and Section 111A of the Income Tax Act delineate distinct tax provisions concerning capital gains, particularly long-term and short-term gains on specific assets.

Here’s a breakdown of each section:

1. Section 112:
   • Applicability: Applies to all long-term capital assets as defined under Section 2(29AA) of the Income Tax Act.
   • Tax Rates: Prescribes different tax rates for long-term capital gains on various assets, excluding those covered under Section 112A.
2. Section 112A:
   • Applicability: Applies specifically to long-term capital gains arising from the sale of specified assets, including equity shares, equity mutual funds, and units of business trust, provided Securities Transaction Tax (STT) is paid on the transaction, and they are listed on a recognized stock exchange in India.
   • Overrides Section 112: Section 112A supersedes Section 112 concerning long-term capital gains on specified assets. It provides a distinct tax treatment for such gains.
3. Section 111A:
   • Applicability: Applies to short-term capital gains resulting from the sale of equity shares, equity mutual funds, and units of business trust, subject to the condition that STT is paid on the transaction, and they are listed on a recognized stock exchange in India.
   • Focus: Primarily addresses short-term capital gains tax implications for transactions involving specified securities.

Planning Tips

1. Utilize Exemptions under Sections 54, 54EC, and 54F by reinvesting in residential property or specific bonds.
2. Plan the sale date of assets acquired before July 23, 2024, to take advantage of indexation before the benefit is entirely phased out.
3. Recalculate holding period based on asset type to ensure correct classification as long-term or short-term.

In essence, while Section 112 encompasses long-term capital gains on all qualifying assets, Section 112A and Section 111A offer specific tax treatments for long-term and short-term gains, respectively, arising from the sale of specified securities listed on recognized stock exchanges. These sections play a crucial role in defining the taxation framework for capital gains in India, ensuring clarity and consistency in tax treatment across different asset classes and holding periods.

Read More: Cost Inflation Index: CII Income Tax

Web Stories: Cost Inflation Index: CII Income Tax

Official Income Tax Return filing website: https://incometaxindia.gov.in/