Important Keyword: Section 112A, Capital Gains, Equity Trading, LTCG, Mutual Fund, Schedule 112A, Section 112A, STT, Trading Income.
Table of Contents
Section 112A: Tax on Long Term Capital Gain on Shares
Before the financial year 2018-19, investors enjoyed a tax exemption on long-term capital gains from equity shares and mutual funds under section 10(38) of the Income Tax Act. However, the landscape changed significantly with the introduction of a new provision in the 2018 Budget by the Finance Minister. The previous exemption was revoked, and a new regime was implemented, impacting the Indian equity market.
Under the current tax structure, long-term capital gains arising from the sale of equity shares, equity mutual funds, and units of business trusts are now taxable under section 112A of the Income Tax Act. These gains are subject to taxation if they exceed the specified threshold.
This amendment marked a significant shift in the taxation of equity investments, compelling investors to reassess their investment strategies and tax planning approaches.
What is Section 112A?
Section 112A of the Income Tax Act deals with the taxation of long-term capital gains resulting from the transfer of specified assets such as equity shares, equity mutual funds, and units of business trusts. Under this provision, investors are liable to pay a flat tax rate of 10% on such gains. However, this tax is applicable only if the total capital gains amount exceeds INR 1 lakh in a financial year.
This section introduced a uniform tax rate for long-term capital gains on specified assets, simplifying the tax regime and providing clarity to investors regarding their tax liabilities.
Section 112A: Grandfathering Rule to Calculate LTCG on Shares
Traders who previously benefited from tax-free Long Term Capital Gains in equity markets now encounter a 10% LTCG tax introduced on February 1, 2018. To mitigate this impact, a grandfathering formula is implemented to exempt capital gains earned until January 31, 2018, for investors holding equity shares and mutual funds at that date.
For equity shares and equity mutual funds acquired on or before 31/01/2018, the cost of acquisition is computed as follows:
- Determine the Lower of Fair Market Value as of January 31, 2018, or the Actual Selling Price.
- Select the higher value between Step 1 and the Actual Cost Price.
EXAMPLE
| Particulars | Case I | Case II |
| Purchase Date | 1st Jan 2018 | 10th Feb 2018 |
| Purchase Value (INR) | 2,00,000 | 2,00,000 |
| FMV as of 31st Jan 2018 (INR) | 2,40,000 | 2,40,000 |
| Sell Date | 10th Jan 2020 | 10th Jan 2020 |
| Sale Value (INR) | 3,50,000 | 3,50,000 |
| Grandfathering rule applicable | Yes | No |
| Actual Cost * | 2,40,000 ** | 2,00,000 |
| LTCG = Sale Value – Actual Cost (INR) | 1,10,000 | 1,50,000 |
| Exempt | Exempt up to INR 1 Lakh | Exempt up to INR 1 Lakh |
| Tax Liability (INR) | 1,10,000 – 1,00,000= 10,000 * 10% = 1,000 | 1,50,000 – 1,00,000= 50,000 * 10% = 5,000 |
*Note: The Actual Cost is utilized to calculate capital gains.
**Calculation of Actual Cost using Fair Market Value (FMV) (Case I)
Condition | Amount (INR) | Qualifying Amount (INR) | |
| Step 1 | Lower of Actual Selling Price OR FMV on 31st Jan 2018 | Lower of 3,50,000 or 2,40,000 | 2,40,000 |
| Step 2 | Higher of Value in Step 1 OR Purchase Value | Higher of 2,40,000 or 2,00,000 | 2,40,000 |
| Actual Cost | 2,40,000 |
Income Tax on Long Term Capital Gain
The tax rate for the investor is based on the nature of capital assets which are:
| Capital Asset | Period of Holding | LTCG |
| Equity Shares, Equity MF, ETFs, and Bonds of a Domestic Company listed on a recognized stock exchange in India | 12 Months | 10% over INR 1 lakh u/s 112A |
| Equity Shares of Domestic & Foreign Companies not listed on a recognized stock exchange | 24 Months | 20% with indexation |
| Debt Mutual Fund ( If purchased before 1st April 2023) | 36 Months | 20% with indexation |
| Immovable property such as land, building or house property | 24 Months | Immovable property such as land, building, or house property |
| Car, Jewellery, Paintings, Art of Work | 36 Months | 20% with indexation |
LTCG on Shares – Reporting under Schedule 112A of ITR
Taxpayers must report income from capital gains using ITR-2 and ITR-3 forms. Long-term capital gains on shares and mutual funds are reported under Schedule 112A of the ITR Forms. This schedule necessitates tradewise reporting of LTCG on equity shares and equity MF acquired on or before 1 February 2018. To calculate the LTCG according to the provisions of the grandfathering rule, reporting Schedule 112A is compulsory. Taxpayers can report this information in the Income tax utility under Schedule 112A as outlined below:
Set Off & Carry Forward LTCL u/s 112A of Income Tax Act
The loss incurred from the sale of listed equity shares and mutual funds held for more than 12 months qualifies as a Long Term Capital Loss (LTCL). Taxpayers can offset LTCL from one capital asset against LTCG from another capital asset. According to income tax regulations for setting off and carrying forward losses, LTCL can only be set off against LTCG in the current year. Any remaining loss can be carried forward for up to 8 years to be set off against future LTCG exclusively.
In cases where a taxpayer has income from the sale of some listed equity shares and securities, and a loss from others, only net gains exceeding INR 1 lakh are taxable at a rate of 10%. Additionally, the net LTCL under Section 112A of the Income Tax Act can be set off against LTCG from the sale of shares, securities, property, jewellery, car, or any other capital asset. Any remaining loss beyond this can be carried forward for up to 8 years.
Exemption from LTCG on Shares
Taxpayers who earn income from the sale of a long-term capital asset can avail themselves of a capital gain exemption under Sections 54 to 54GB of the Income Tax Act, provided they meet certain conditions.
This exemption allows taxpayers to reinvest the proceeds from the sale into a specified capital asset. By doing so, they can reduce their capital gains and consequently save on taxes. However, it’s essential for taxpayers to hold onto the new asset for the specified period outlined in the relevant section. If they sell the asset before this specified period, they must report it as income in the relevant financial year and pay tax at the applicable rate.
To facilitate this process, taxpayers have the option to open an account under the Capital Gains Account Scheme. This allows them to park the sale proceeds in the account until they are ready to invest in the specified asset and claim the capital gains exemption.
Read More: Income Tax on Mutual Funds
Web Stories: Income Tax on Mutual Funds
Official Income Tax Return filing website: https://incometaxindia.gov.in/
