Section 112A of income tax act: Tax Treatment of Long-Term Capital Gains (LTCG) on Shares
Capital gains are the proceeds from the sale or transfer of any kind of asset, moveable or immovable. These resources are referred to as capital. Capital assets may fall into two categories based on how long a seller has held the assets prior to a transaction. There are long-term and short-term capital assets among them. Section 112 and Section 112A of the Income-tax Act of 1961 are the two sections that deal with LTCG taxation. The taxation of LTCG on listed shares, equity-oriented funds, and business trust units is particularly covered by Section 112A. We will talk about Section 112A in this post, including its instances, exemptions, and applicability.
Table of Content
What is Section 112A of the Income Tax Act, 1961?
The Income Tax Act's Section 112A deals with the taxation of long-term capital gains that result from the transfer of certain assets, including business trust units, equity shares, and equity mutual funds. The investor is liable to a 10% tax, which only kicks in when the amount of capital gains in a given financial year surpasses INR 1 lakh. If the following criteria are met, section 112A capital gain tax will only be applied:
The sale must involve equity shares, business trust units, or units of an equity-oriented mutual fund.
The securities ought to be long-term capital assets, meaning that they should be held for more than a year.
The capital gains exceed one lakh rupees.
Securities Transaction Tax (STT) applies to the buying and selling of equity shares. The selling transaction is subject to STT in the case of business trusts or equity-oriented mutual fund units.
Section 112A of Income Tax Act Applicability
To take advantage of the concessional rate under section 112A of the Income-tax Act of 1961, the following requirements must be met:
Upon purchasing and transferring an equity share of a corporation, the securities transaction tax (STT) has been paid.
If units of a business trust or units of an equity-oriented fund, the STT was paid upon the asset's sale.
Long-term investments should be made in the securities.
For such a long-term capital gain, there is no deduction allowed under Chapter VI A.
Long-term capital gain tax payable under section 112A is not eligible for a refund under section 87A.
Latest Updates on LTCG on Shares
A few modifications to India's long-term capital gain tax on shares were made in 2018. The way short-term capital gains are taxed, however, has not changed. If there was a Securities Transaction Tax (STT) applied to the asset at the time of purchase and sale, the tax on short-term capital gains is 15%. Section 10(38) of the Income Tax Act of 1961 was repealed in the 2018 budget. The exemption from long-term capital gains tax on equity shares that resulted from the sale of equity shares and mutual funds with an equities focus was eliminated. The Kelkar Committee proposed the clause in the Finance Act of 2004. The purpose of this action was to attract investments from foreign institutional investors (FII). However, Section 112A took the place of Section 10 (38) following the 2018 budget. The following assets are assumed to result in capital gains subject to taxation in this section:
Equity shares
Units of equity-oriented funds or funds with an equity orientation
Units or businesses within business trusts
Income Tax on LTCG on shares
In India, if long-term capital gains (LTCG) on shares and equity-oriented mutual funds exceed Rs. 1 lakh in a financial year, they are subject to 10% taxation (plus surcharge and cess). The term "LTCG" refers to gains made from selling mutual funds or shares that have been held for longer than a year. In addition to the securities listed in Section 112A, other securities are taxable. The structure of a long-term capital gain tax on Indian shares and other securities is shown in the following table.
Grandfathering Clause in Section 112A
On February 1st, 2018, Section 112A was enacted to tax earnings on shares. The tax was previously not due on these profits. To safeguard investors' interests, the CBDT implemented grandfathering measures, which guarantee that the tax is solely prospective and that it is only imposed on gains as of February 1, 2018. To do this, the section 112A calculation must be used to determine the cost of acquiring the equity or equity-related securities. In summary, by altering the purchase cost to reflect the shares' acquisition date of February 1, 2018, the grandfathering clause in Section 112A exempts sales of equity shares and units of equity-oriented companies from the LTCG tax. Here are the tax implications of this clause:
To calculate the cost of acquisition (COA). use the following formula:
Value I is the Actual Selling Price less the Fair Market Value as of January 31, 2018, whichever is lower.
Value II: The greater of Value I or the actual buying price
Value II, in accordance with the grandfathering rule, will be the acquisition cost.
Sales Value - Acquisition Cost (as determined by the grandfathering rule) - Transfer Expenses equals Long Term Capital Gain (LTCG)
10% of Tax Liability (LTCG - Rs 1 lakh)
Illustration of Section 112A Tax Calculation
Assume A buys shares on 1.5.17 for Rs. 15,000 and sells them on 1st February 2018 for Rs. 20,000. On 31st January, 2018, the highest price that was quoted for that security was Rs. 18000. It is best to calculate his LTCG on shares after determining the acquisition cost. The greater of –
The acquisition actually costing Rs. 15000
The lower of the FMV, which is Rs. 18,000 and the selling price of Rs. 20,000
Given that this is the higher of the real purchase cost and the lower of the FMV and sale price, the cost of acquisition should be equal to the fair market value, or Rs. 18000.
Thus, LTCG is equal to Sale Price - Acquisition Cost= Rs. (20000 – 18000)
LTCG = Rs. 2000
Tax Exemption on LTCG on Shares
Under Section 54F, individuals are eligible to get a long-term capital gain tax exemption on shares. They must fulfil the requirements listed below in order to get Section 54F benefits:
The net consideration amount earned from the sale of shares must be reinvested by the individual in no more than two real estate properties. Prior to Budget 2019, each person could only own one residential property.
Reinvestment needs to happen either two years after the sale or a year before.
A person may also choose to put their consideration money towards a building project. However, after the date of the sale or transfer of shares, such a building must be finished within three years. A person must reinvest the whole net consideration value if they wish to receive an exemption on the complete amount of capital gains. If it isn't feasible, the amount invested as a percentage of consideration will determine the capital gain exemption.
Carry Forward & Set-Off of Long-Term Capital Losses
The assessee is entitled to have the amount written off against any other income he receives under the same head if the net outcome for any assessment year is a loss other than a capital gain. In the event of capital losses, any capital gain may be offset by a short-term capital loss. Consequently, one can offset a short-term capital loss against both a long-term and short-term capital loss. However, long-term capital gain is the only thing that can counter long-term capital loss. Currently, a 10% tax is applied to long-term capital gains arising from the transfer of equity shares listed on a recognised stock exchange. The selling of such equity shares may now result in any long-term capital losses, which may be offset against the other long-term capital gain.
A long-term capital loss is the amount lost on the sale of equity-related securities or long-term listed equity shares. Please be aware that only long-term capital gains may be deducted from long-term losses on capital gains. If an investor experiences losses on certain securities and gains on other assets, they might be offset against one another. Thus, net gains are only subject to taxation if they surpass Rs 1 lakh.
Disclosure of LTCG in ITR Filing
The Central Board of Direct Tax has revised and modified the ITR-2 and ITR-3 forms in accordance with those modifications. The provisions are as follows:
Long-term capital gains (LTCG) from the sale or transfer of shares must be disclosed by individuals and Hindu Undivided Families (HUFs) in Section B7 of the ITR-2 form, if the gains are not included under the heading "Income from Business or Profession."
Non-residents are required to report any LTCGs from the sale or transfer of shares in Sections B7 and B8 of ITR-2 and ITR-3, respectively.
Profits from the sale or transfer of equity shares must be reported under the heading "Income from business and profession" if an individual views his equity shares and equity-oriented shares as stock-in-trade. In that scenario, even if the gain exceeds Rs. 1 lakh, it will not be subject to the 10% long-term capital gain tax on shares.
Conclusion
The Income Tax Act's Section 112A has made major modifications to the way long-term capital gains from the transfer of equity shares and units of equity-oriented mutual funds are taxed. It is now easier for taxpayers to calculate their tax burden due to the implementation of a single tax rate for such gains and the elimination of the indexation benefit. Taxpayers should seek expert assistance to guarantee compliance with the Income Tax Act, as the tax treatment of capital gains might vary based on various circumstances, including the type of the asset.
FAQ
Q1. How do you calculate Long Term Capital Gain Tax on shares?
The sale price, acquisition cost, and any related fees must be determined before you can compute the long-term capital gains tax on shares. Take the acquisition and sale costs and deduct these from the sale price to find your capital gains. If a fiscal year's capital gains surpass one lakh rupees, the excess profits are subject to a 10% tax rate, which includes a surcharge and cess. For gains under Rs. 1 lakh, there is no tax obligation.
Q2. How can you save Long Term Capital Gain Tax on shares?
To lower the long-term capital gains tax on shares, take into account investing in tax-saving options, holding onto shares for a longer amount of time, balancing capital gains with capital losses, purchasing tax-free bonds, and utilising the indexation benefit. See a tax expert or financial advisor to determine the best course of action for your unique tax situation.
Q3. Is indexation benefit available for gains taxed under Section 112A?
No, gains subject to Section 112A tax are not eligible for the inflation-adjusted cost of acquisition benefit provided by indexation.
Q4. Do taxpayers need to file a separate return for gains taxed under Section 112A?
No, in order to claim gains subject to Section 112A tax, taxpayers do not need to submit a separate tax return. The appropriate income tax return schedules need to have the gains disclosed.
Q5. What is the difference between Section 112 and Section 112A of the Income Tax Act?
The provision for taxing long-term capital gains (LTCG) on equity shares, equity mutual funds, and business trust units on which STT is paid and listed on an acknowledged Indian stock exchange is found in Section 112A. The provision for LTCG tax on all assets, save those covered by Section 112A, is found in Section 112.
Q6. What is the difference between Section 111A and Section 112A of the Income Tax Act?
Short-Term Capital Gains (STCG) are covered under Section 111A. For long-term capital gains, see Section 112A (LTCG). The maximum amount of gain that is free from LTCG under section 112A of the Income Tax Act is Rs 1 lakh. If the gain exceeds this amount, only a 10% tax rate will be imposed.
Q7. How is the FMV of the shares determined?
On January 31, 2018, the FMV will be the highest price of that share or unit quoted on a recognised stock market. The fair market value, however, will be the highest price quoted on a day that is immediately before January 31, 2018, on which it has been traded, if there is no trading on that day. If a unit is not listed, its fair market value will be its net asset value as of January 31, 2018, rather than its listed value.
Q8. Is TDS deductible when a non-resident taxpayer makes capital gains?
If an LTCG payment is sent to a non-resident, 10% of the payment must be withheld for taxes. The computation of capital gains must follow section 115AD, which specifies that tax would only be applied at the rate of 10% to gains exceeding Rs. 1 lakh.
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