What is Section 112A of the IT Act About Long-Term Capital Gains?

What is Section 112A of the Income Tax Act?

As mentioned above, Section 112A of the income tax act is about tax on long-term capital gains from the sale of listed equity shares, units of equity-oriented mutual funds and units of business trust. The rate of long-term capital gains tax on these listed securities is at 10% for the gains above the threshold of ₹1 lakh. Section 112A of the Income Tax Act of India was introduced by the Finance Act 2018.

 

 

The Income Tax Returns filing form contains Schedule 112A to fill out scrip-wise details about these listed securities that are sold during a financial year. A taxpayer who is having long-term capital gains under the provisions of Section 112A must fill the details in Schedule 112A.

Conditions to Tax Capital Gains Under Section 112A

The scope of Section 112A can be explained in the following conditions:

• The sale must be of listed equity shares, units of a mutual fund and units of a business trust

• Long-term capital assets should be securities

• Transaction of purchase and sale of equity shares is subject to the STT (Securities Transaction Tax). The transaction of the sale is liable to STT in the case of equity-oriented mutual fund units or business trust

What is Long-Term Capital Gains Under Section 112A?

The tax that comes under Section 112A of Income Tax Act 1961 is only on the long-term capital gains. To qualify as taxation under Section 112A, i.e., to become a long term capital gain, the period of holding should be more than a year. The tax rate is 10% above the set income tax exemption threshold of ₹1 lakh.

This means that the long-term capital gains under Section 112A of the income tax act are taxable only above ₹1 lakh. The gains that are above ₹1 lakh are liable to tax at the rate of 10% plus education cess and surcharge as applicable. Let us understand what is long-term capital gain and the tax applicable to it with the help of an example.

If a taxpayer has an annual long-term capital gain under Section 112A of the Income Tax Act of India of ₹1,75,000, then the applicable tax of 10% will be on ₹75,000 (₹1,75,000 - ₹1,00,000).

If a resident individual or HUF’s total income is below the basic exemption limit after reducing the long-term capital gains, the long-term capital gains stand reduced by such shortfall. For example, a taxpayer’s total income is ₹4,00,000 and net long-term capital gains under Section 112A is ₹2,00,000. The balance income in this case after reducing the capital gains is ₹2 lakh, which is below the basic exemption threshold.

Thus, the amount by which the reduced total income falls short of the basic exemption limit is ₹2,50,000 – ₹2,00,000 = ₹50,000. Therefore, the taxable long-term capital gains become ₹2,00,000 - ₹50,000 = ₹1,50,000.

How to Set Off a Long-Term Capital Loss Under Section 112A?

The loss incurred, if any, on the sale of long-term listed equity shares or units is a long-term capital loss. You can only set off the loss against long-term capital gains under Section 112A of the Income Tax Act of India. If you lose on some securities and win on others, you can set off the losses from the gains. Only the net gains get taxed if the net earnings exceed ₹1,00,000. You can also carry forward the long-term capital loss that you cannot set off for a period of eight years succeeding the assessment year where you have incurred the loss.

Grandfathering Provisions Under Section 112A

The grandfathering provisions to exempt long-term capital gains earned until January 31, 2018, were introduced through The Finance Act, 2018. For calculating the cost of acquisition of specified securities bought before February 1, 2018, we first take the lower fair market value as of January 31, 2018, and the sale price into consideration. After that the result is compared with the purchase price and the higher among these two is taken. Let’s understand this with an example of capital gains calculation under Section 112A of the Income Tax Act of India.

 

Fair Market Value

• The highest price of the security quoted on the recognised stock exchange is the fair market value of the listed securities

• If there was no trading in the security on January 31, 2018, then the highest price of the security quoted on a date immediately before January 31, 2018, when the security had traded on the recognised stock exchange is the FMV

• In the case of unlisted units as of January 31, 2018, the FMV will be the net asset value of the units as of January 31, 2018

• In case of equity share listed after January 31, 2018, or acquired under a merger or other transfer under Section 47, the FMV will be:

Purchase cost *Cost inflation index for FY 2017-18 / Cost inflation index of the year of the purchase or FY 2001-02.

How to Report ITR Under Section 112A?

The Income Tax Returns filing for AY 2020-21 consists of Schedule 112A. This enables a scrip wise reporting of long-term capital gains where the grandfathering provisions are applicable. Various details are required for Schedule 112A, like ISIN code, name of the scrip, number of units or shares sold, sale price, purchase cost and FMV as of January 31, 2018. Such details are important to arrive at the correct amount of long-term capital gains with applicable grandfathering provisions.