What is Section 112A?

Section 112A of the Income Tax Act was announced in Budget 2018 to replace the exemption previously provided under section 10(38). This section applies to the sale of listed equity shares, equity-oriented mutual funds, and units of a business trust, and imposes a tax on long-term capital gains crossing Rs. 1 lakh at a rate of 10%. This provision became effective from the financial year 2018-19. Should an investor have sold some securities in the year, they will need to mandatorily fill in the details of the sale in the schedule for Section 112A of the IT form.

Before the Amendment of Section 112A

Before the Assessment Year 2018-19, Section 10(38) of the Income Tax Act, 1961 granted an exemption from the tax applicable on long-term capital gains resulting from the transfer of either of the following:

  • equity shares
  • units of equity-oriented funds
  • units of business trusts.

After the Amendment of Section 112A

Post April 1, 2018, the provisions of Section 10(38) of the Income Tax Act do not apply to income generated from the sale of equity-oriented fund units, equity shares, and units of business trusts. Instead, income that is a result of the transfer of these assets are subject to the provisions of Section 112A of the Income Tax Act, and tax is calculated accordingly.

Exceptions to Section 112A of Income Tax Act

Below are the exceptions to Section 112A:

Scope of Section 112A of Income Tax Act

According to Section 112A of Income Tax Act, 1961, when a long-term capital asset is transferred (sold/redeemed) and it yields long-term capital gains, it will attract a tax equivalent to 10% of the gains. These long-term capital assets include units in a business trust, units in a mutual fund that invests in equity, or equity shares in a company.

None of these long-term capital gains will not be regarded as taxable income and will not contribute towards the overall income. Also, if the long-term capital asset is among the aforementioned assets, and they are subject to securities transaction tax, the long-term capital gains resulting from their transfer or sale will attract a tax rate of 10% of the capital gains.

Applicability of Section 112A

Starting from April 1, 2018, Section 112A of the Income Tax Act, 1961 has been in effect. This provision applies to transactions involving the following transfers if they lead to capital gains:

  • Equity share transfers
  • Transfer of units of equity-oriented funds
  • Transfer of units of business trusts

However, the application of section 112A is subject to the payment of Securities Transaction Tax (STT) at the time of acquisition and transfer of equity shares or units of equity-oriented funds. 

Long-Term Capital Gains under Section 112A

Section 112A defines the tax applicable on capital gains that are a result of the transfer of long-term capital assets. This includes units in a business trust, units in a mutual fund that invests in equity, or equity shares in a company. The investor must hold the assets longer than a year to avail of the concessional rate benefits under this section.

The tax payable on the total profit is 10% if it supercedes Rs.1 lakh, and a surcharge and education cess will be levied on the taxable gains. However, the taxation of a resident HUF or individual is subject to different rules. If the net income is reduced to a level below the exemption cap, then the Long-Term Capital Gain (LTCG) will be decreased by that amount.

Grandfathering Provisions Under Section 112A

To safeguard the interests of investors, the Central Board of Direct Taxes (CBDT) introduced grandfathering clauses. These clauses ensure that taxes are charged only on the gains made from the date of implementation and are prospective.

To implement this, the acquisition cost of equity-related or equity securities is calculated based on the formula below:

  • LTCG = Value of sales – Acquisition cost – Transfer Expenses
  • Liability of tax = 10% (Long-term capital gain – Rs.1 lakh)

The formula consists of two values – Value I and Value II. Here, value I is the lesser among the market valuation fair as of 31st January 2018, and the real selling rate and Value II is the higher among the real acquisition cost and Value I.

The Long-Term Capital Gain (LTCG) can be calculated as the difference between the value of sales and the acquisition cost, minus transfer expenses. The liability of tax is calculated at 10% of the long-term capital gain over Rs.1 lakh. This mechanism ensures that only the gains made after the implementation date are taxed and the acquisition cost is calculated fairly.

Reporting ITR Under Section 112A

Schedule 112A is included in the Income Tax Returns for the Assessment Year 2020-21 to facilitate the reporting of long-term capital gains, where grandfathering provisions are applicable, on a scrip-wise basis. This schedule necessitates the provision of information such as the ISIN code, scrip name, number of shares or units sold, sale price, purchase cost, and the fair market value as of January 31, 2018. These details are essential to ensure that the correct amount of long-term capital gains is computed in cases where grandfathering provisions are applicable.

Set off Long-Term Capital Loss Against Long-Term Capital Gain

If there is a net loss for any assessment year under any income type other than capital gain, the assessee is eligible to get that amount set off against their income from any other source under the same head/income type.

A short-term capital loss can be set off against both short-term or long-term capital gains whereas a long-term capital loss can be set off only against long-term capital gains.

Long-term capital gains yielded by the transfer of equity shares listed on a recognized stock exchange are taxed at 10%. Any long-term capital losses from the sale of such equity shares are allowed to be set off from other long-term capital gains of the assessee.