The Income Tax Act of India lays down provisions for taxation of capital gains earned by individuals and companies on the sale of capital assets. Capital gains can be classified as long-term or short-term depending on the duration of holding the asset. Long-term capital gains refer to profits earned on the sale of a capital asset that has been held for more than 12 months, while short-term capital gains refer to profits earned on the sale of a capital asset that has been held for less than 12 months.

In this article, we will focus on Section 112A of the Income Tax Act which deals with the provisions for long-term capital gains tax on shares.

Understanding Section 112A of Income Tax Act

Section 112A of the Income Tax Act was introduced in the Union Budget of 2018 and it came into effect from April 1, 2018. The section lays down the provisions for long-term capital gains tax on equity shares and equity-oriented mutual funds. The tax rate under this section is 10% on the long-term capital gains exceeding Rs. 1 lakh.

Before the introduction of Section 112A, long-term capital gains on equity shares and equity-oriented mutual funds were exempt from tax. However, with the introduction of this section, a long-term capital gains tax was introduced on equity shares and equity-oriented mutual funds as well.

Provisions of Section 112A

The following are the provisions of Section 112A of the Income Tax Act:

1. Applicable only on equity shares and equity-oriented mutual funds:

Section 112A is applicable only on equity shares and equity-oriented mutual funds. It is not applicable on other types of investments such as debt funds, real estate, gold, etc.

2. Applicable on long-term capital gains:

The section is applicable only on long-term capital gains earned on equity shares and equity-oriented mutual funds. Long-term capital gains are those gains that are earned on the sale of a capital asset that has been held for more than 12 months.

3. Tax rate:

The tax rate under Section 112A is 10% on long-term capital gains exceeding Rs. 1 lakh. If the long-term capital gains are less than Rs. 1 lakh, then there is no tax applicable.

4. Calculation of long-term capital gains:

Long-term capital gains are calculated as the difference between the sale price of the equity shares or equity-oriented mutual funds and the cost of acquisition.

5. Cost of acquisition:

The cost of acquisition is the price paid for acquiring the equity shares or equity-oriented mutual funds. This includes brokerage charges, transaction charges, and any other charges incurred in the acquisition of the shares or mutual funds.

6. Indexation benefit not available:

Indexation benefit is the adjustment of the cost of acquisition for inflation. However, indexation benefit is not available under Section 112A.

7. Grandfathering clause:

The government has introduced a grandfathering clause to provide relief to taxpayers who had acquired equity shares or equity-oriented mutual funds before February 1, 2018. The gains made on the sale of such shares or mutual funds will be calculated based on their fair market value as on January 31, 2018.

What is Section 112A of Income Tax Act?

Section 112A of the Income Tax Act was introduced in the 2018 budget and came into effect from 1st April 2018. This section deals with the taxation of long-term capital gains arising from the transfer of listed equity shares or units of equity-oriented funds.

Under this section, long-term capital gains exceeding Rs. 1 lakh are taxed at the rate of 10%. Earlier, long-term capital gains from equity shares were exempted from tax. However, after the introduction of Section 112A, investors have to pay a tax on the long-term capital gains from equity shares exceeding Rs. 1 lakh.

What is Long-Term Capital Gain?

Long-term capital gains are the profits earned on the sale of a capital asset, which is held for more than 12 months. In the case of shares and mutual funds, if the holding period is more than 12 months, it is considered as long-term capital gain.

The long-term capital gains tax on shares applies only to listed equity shares and equity-oriented mutual funds. The capital gains on other assets like debt funds, real estate, gold, etc. are taxed differently.

Calculation of Long-Term Capital Gains Tax under Section 112A

As per Section 112A, long-term capital gains tax on shares is calculated as follows:

Long-Term Capital Gains = Full Value of Consideration – Indexed Cost of Acquisition – Indexed Cost of Improvement – Expenses Incurred in Transfer

The Indexed Cost of Acquisition and Indexed Cost of Improvement are adjusted for inflation using the Cost Inflation Index. The expenses incurred in transfer like brokerage, commission, etc. can be claimed as a deduction while calculating the long-term capital gains tax.

Once the Long-Term Capital Gains are calculated, the tax on it is levied at the rate of 10% if it exceeds Rs. 1 lakh.

Illustration

Let’s understand the calculation of long-term capital gains tax under Section 112A with the help of an example.

Suppose Mr. A purchased 100 shares of XYZ Ltd on 1st January 2018 for Rs. 50,000. On 1st April 2020, he sold these shares for Rs. 1,50,000.

The indexed cost of acquisition will be calculated as follows:

• Cost Inflation Index for Financial Year 2017-18: 272
• Cost Inflation Index for Financial Year 2020-21: 301

Indexed Cost of Acquisition = Cost of Acquisition * (Cost Inflation Index for Year of Sale/Cost Inflation Index for Year of Purchase)

= Rs. 50,000 * (301/272)

= Rs. 55,147

The long-term capital gains will be calculated as follows:

Long-Term Capital Gains = Full Value of Consideration – Indexed Cost of Acquisition – Indexed Cost of Improvement – Expenses Incurred in Transfer

= Rs. 1,50,000 – Rs. 55,147 – 0 – Rs. 1,500

= Rs. 93,353

As the long-term capital gains exceed Rs. 1 lakh, Mr. A will have to pay a tax of 10% on the amount exceeding Rs. 1 lakh, i.e., Rs. 8,335.

Frequently Asked Questions (FAQs)

Q. Is Section 112A applicable only to shares?

A. No, Section 112A is applicable to listed equity shares or units of equity

What are the tax rates for long-term capital gains under Section 112A?

As per Section 112A of the Income Tax Act, long-term capital gains arising from the transfer of equity shares or units of an equity-oriented mutual fund are taxed at 10% if the gains exceed Rs. 1 lakh in a financial year. This tax rate is applicable from FY 2018-19 onwards.

It is important to note that the tax is levied only on the amount of gain exceeding Rs. 1 lakh. For instance, if you sell shares worth Rs. 2 lakhs and the long-term capital gains are Rs. 1.5 lakhs, then you will be taxed on the amount exceeding Rs. 1 lakh, which is Rs. 50,000. The tax liability in this case will be 10% of Rs. 50,000, which is Rs. 5,000.

However, in case the total long-term capital gains during a financial year do not exceed Rs. 1 lakh, then no tax will be levied.

What are the exemptions available under Section 112A?

Section 112A provides certain exemptions to taxpayers who have incurred long-term capital gains from the transfer of equity shares or units of equity-oriented mutual funds. These exemptions are as follows:

1. If the shares or units were acquired before January 31, 2018, then the cost of acquisition will be the actual cost of acquisition.
2. If the shares or units were acquired on or after February 1, 2018, then the cost of acquisition will be the higher of the actual cost of acquisition or the fair market value of the shares or units as on January 31, 2018.
3. If the shares or units were acquired as part of a scheme of acquisition of shares or units by the taxpayer, which is not chargeable to tax under Section 47, then the cost of acquisition will be the cost of acquisition of the original shares or units.
4. In case of merger or amalgamation of a company or a mutual fund, the cost of acquisition of shares or units of the merged or amalgamated entity will be the cost of acquisition of the original shares or units.

What are the consequences of not paying long-term capital gains tax under Section 112A?

If you fail to pay the long-term capital gains tax on the transfer of equity shares or units of equity-oriented mutual funds as per the provisions of Section 112A, then you will be liable to pay interest at the rate of 1% per month or part of the month for the period of delay.

Moreover, if the tax amount exceeds Rs. 10,000, then you will also be liable to pay a penalty of an amount equal to 10% of the tax due. Therefore, it is important to comply with the provisions of Section 112A to avoid any interest or penalty.

FAQs

1. What is the difference between long-term capital gains and short-term capital gains?

Long-term capital gains refer to gains made from the sale of a capital asset held for more than 12 months. Short-term capital of a capital asset held for 12 months or less. The tax rate for long-term capital gains is generally lower than that of short-term capital gains.

2. Are all capital assets subject to LTCG tax under Section 112A?

No, only equity shares and equity-oriented mutual funds are subject to LTCG tax under Section 112A. Other capital assets such as debt-oriented mutual funds, bonds, real estate, and gold are not subject to this tax.

3. Can I claim any deductions while calculating the LTCG tax under Section 112A?

No, there are no deductions available while calculating the LTCG tax under Section 112A. The tax is calculated on the total LTCG amount without any deductions.

4. How can I reduce
   

   my tax liability on LTCG?

One way to reduce your tax liability on LTCG is by utilizing the benefit of indexation. Indexation is a method of adjusting the cost of acquisition of an asset for inflation, thereby reducing the taxable gain. However, indexation is not applicable for equity shares and equity-oriented mutual funds.

5. What is the impact of LTCG tax on the stock market?

The LTCG tax has a direct impact on the stock market as it affects investor sentiment and investment decisions. The introduction of LTCG tax in 2018 had a short-term negative impact on the stock market, as investors sold their holdings to avoid the tax. However, over time, the market has stabilized, and investors have adjusted their investment strategies accordingly.

Conclusion

Section 112A of the Income Tax Act, 1961, has introduced provisions for the taxation of long-term capital gains on equity shares and equity-oriented mutual funds. The LTCG tax is calculated at a flat rate of 10% and applies to gains exceeding Rs. 1 lakh in a financial year. While the tax has a direct impact on investors, it is important to understand the provisions of the law and make informed investment decisions. Utilizing the benefit of indexation can help in reducing the tax liability on LTCG. As with any tax law, it is advisable to seek the guidance of a tax professional before making investment decisions.