Section 112A of Income Tax Act: All You Need to Know

Section 112A of Income Tax Act, 1961 is a crucial provision that deals with the taxation of long-term capital gains (LTCG) arising from the transfer of certain specified assets. These assets include equity shares or units of equity-oriented funds or units of a business trust. This section was introduced to provide relief and clarity regarding the taxability and computation of LTCG. This article provides a detailed overview of what Section 112A states and how the income as well as consequent tax is calculated.

Applicability of Section 112A

Section 112A of Income Tax Act, 1961 applies to all assessees that are liable to pay tax on LTCG arising from the transfer of specified assets. The following conditions should be met for calculating tax as per Section 112A:

- The sale includes units of a business trust, equity shares, or units of equity-oriented mutual funds.

- The securities are held for a period of more than one year and thus termed as long-term capital assets.

- 112A capital gains exceed Rs. 1 lakh.

- The buying and selling of equity shares, equity-oriented funds, or units of business trust are subject to Securities Transaction Tax.

Before and After the Amendment of Section 112A

LTCG taxation has undergone significant changes over the years. The major changes introduced in the amendment of Section 112A of Income Tax Act are as follows:

- Prior to 1 April, 2018, full exemption was provided for LTCG on listed equity shares and equity-oriented mutual funds under section 10(38) of the Income Tax Act, 1961. 

- From 1 April, 2018 onward, the government bought LTCG u/s 112A within the ambit of tax, with a 10% tax rate on LTCG over Rs. 1 lakh. 

- After 23 July, 2024, the tax rate on long-term capital gain has been increased to 12.5% for LTCG exceeding Rs. 1.25 lakhs.

Exceptions to Section 112A

Section 112A of Income Tax Act applies specifically to long-term capital gains (LTCG) arising from the sale of listed equity shares, equity-oriented mutual funds, and units of business trusts. However, there are certain exceptions where this section does not apply:

- Unlisted Shares: Gains from the sale of unlisted shares are not covered under Section 112A.

- Debt-Oriented Mutual Funds: These are taxed differently and are excluded from Section 112A.

- Non-Resident Transfers Not Taxable in India: If the capital gains are not taxable under Indian law due to applicable DTAA (Double Taxation Avoidance Agreement), Section 112A is not applicable.

- Transfer of Shares Not Subject to STT: If Securities Transaction Tax (STT) is not paid on the acquisition or sale of shares (as applicable), then Section 112A does not apply.

These exceptions are important for determining the correct tax treatment of capital gains.

Computation of Long-Term Capital Gains u/s 112A

Section 112A also specifies the manner of calculating the income for computing tax. Here is the step-by-step process to calculate the long-term capital gains tax on mutual fund units, equity shares and units of business trust for the purpose of Section 112A:

Step-1: Determine the full value of consideration: It is the actual amount received or accrued from the transfer of the specified asset.

Step-2: Deduct the following amounts from the full value of consideration:

- Expenditure for Transfer: Expenditure incurred wholly and exclusively in connection with the transfer.

- Indexed Cost of Acquisition: The cost adjusted for inflation using the Cost Inflation Index (CII).

- Indexed Cost of Improvement: The cost of improvements adjusted for inflation using the CII.

The indexed cost of acquisition and indexed cost of improvement are calculated using the following formula: Indexed Cost = (Cost of Acquisition or Improvement) × (CII of the year of transfer / CII of the year of acquisition or improvement).

Long-Term Capital Gain Tax Rate and Exemptions

The LTCG computed as per the above steps is taxable at a special long-term capital gain tax rate of 10% if it exceeds Rs. 1 lakh in a financial year. To compute the total tax of the person having LTCG, the following steps should be followed: Tax @10% should be calculated on LTCG exceeding Rs. 1 lakh; Tax on all the other income should be calculated (excluding the LTCG already covered above) at the applicable tax rates.

Further, in the case of resident individuals and Hindu Undivided Families (HUFs), if the total income (excluding LTCG) is less than the basic exemption limit (Rs. 2.50 lakhs), then the LTCG can be adjusted against such basic exemption limit. Also, the long-term capital gains can be adjusted against the rebate provided under Section 87A.

However, certain exemptions from LTCG can reduce or eliminate the tax liability under Section 112A:

1. Grandfathering provision: For calculating the LTCG, the cost of acquisition and improvement can be taken as the higher of the actual cost or the fair market value as on 31 January 2018. This provision offers relief to individuals who held assets acquired before this date.

2. Loss adjustment: If an individual incurs a long-term capital loss on the transfer of specified assets, the loss can be set off against any other LTCG. If any loss remains unadjusted, it can be carried forward for up to 8 years and set off against future LTCG. Therefore, it is only the net gains (after adjusting the long-term capital loss) that shall be taxable if it exceeds Rs. 1 lakh during the financial year.

3. Indexation benefit: The indexed cost of acquisition and improvement, as mentioned earlier, allows individuals to adjust their costs for inflation, thereby reducing the taxable LTCG amount. Indexation allows the taxpayers to adjust their purchase cost at par with the inflation.

Examples for Better Understanding of Section 112A

To better understand the application of Section 112A, let us consider a couple of practical examples:

Example 1

Mr. Kumar purchased 500 shares of XYZ Ltd. on 01 March 2019 at Rs. 100 per share. He sold all the shares on 15 April 2023 at Rs. 250 per share. Let us calculate his LTCG using the provisions of Section 112A.

Step 1: Full value of consideration = 500 shares × Rs. 250 = Rs. 1,25,000

Step 2: Indexed cost of acquisition = 500 shares x Rs. 100 × (348/280) = Rs. 62,143 (using the CII for the financial years 2018-19 and 2023-24)

Step 3: LTCG = Full value of consideration – Indexed cost of acquisition = Rs. 1,25,000 – Rs. 62,143 = Rs. 62,857.

Since the LTCG is less than Rs. 1 lakh, no tax will be applicable in this case.

Example 2

Mrs. Roy bought 10,000 units of an equity-oriented mutual fund on 01 November 2019 at Rs. 50 per unit. She sold all the units on 01 June 2023 at Rs. 75 per unit. Let us calculate her long-term capital gain on equity mutual fund using the provisions of Section 112A.

Step 1: Full value of consideration = 10,000 units × Rs. 75 = Rs. 7,50,000

Step 2: Indexed cost of acquisition = 10,000 units x Rs. 50 × (348/289) = Rs. 6,02,076 (using the CII for the financial years 2019-20 and 2023-24)

Step 3: LTCG = Full value of consideration - Indexed cost of acquisition = Rs. 7,50,000 - Rs. 6,02,076 = Rs. 1,47,924.

Since the long-term capital gain on equity mutual fund exceeds Rs. 1 lakh, a tax of 10% will be applicable on the amount exceeding Rs. 1 lakh. In this case, the taxable LTCG will be Rs. 47,924 (Rs. 1,47,924 – Rs. 1,00,000).

Wrapping up

Section 112A of Income Tax Act, 1961 provides clear guidelines for the taxation of LTCG arising from the transfer of specified assets such as equity shares, units of equity-oriented funds and units of business trust. However, this section deals with only listed securities as the levy of STT is an essential component to attract taxation under this section. By understanding the computation methodology and the associated exemptions from LTCG, taxpayers can effectively plan their investments and tax liabilities. It is always advisable to consult a qualified tax professional for personalised guidance based on individual circumstances. For more such useful information, visit TATA Capital now!

FAQs

How do I claim 112A exemption?

To claim exemption under 112A, you must ensure that the transfer of assets is subject to Securities Transaction Tax (STT). In Budget 2024, a new exemption limit for long-term capital gains was increased to 1.25 lakhs. 

What types of securities are covered under Section 112A?

Securities covered under Section 112A include equity shares, units in business trusts, and units in equity-oriented mutual funds. 

What is the tax rate applicable under Section 112A?

The long-term capital gains tax rate applicable under Section 112A is 12.5%. This new tax rate was introduced in the Budget of 2024.

Is there any exemption limit for long-term capital gains under Section 112A?

Under Section 112A, there is an exemption limit for long-term capital gains up to Rs. 1.25 lakhs. LTGC’s exceeding this amount will be taxed at a rate of 12.5%.

What do I fill out in Schedule 112A?

If you earn long-term capital gains from selling listed equity shares or equity-oriented mutual funds, you must report them in Schedule 112A of your Income Tax Return. This section requires detailed scrip-wise information on all long-term sales of stocks and mutual funds.

Is rebate available on LTCG under Section 112A?

Tax rebate is available only on total tax liability, which does not include long-term capital gain. There is no rebate available for LTCG 112A.

What is the tax rate for 112A?

The tax rate for 112A is 12.5% with exemptions for LTCG under Section 112A up to Rs. 1.25 lakhs. This rate is an increase on the previous tax rate of 10% on LTCG exceeding Rs. 1 lakh.