Understanding Section 112A of the Income Tax Act, 1961

The sale of listed equity shares, equity-oriented mutual funds, and business trusts are subject to Long-term Capital Gains (LTCG) tax under Section 112A. For gains over ₹1.25 Lakhs, these listed assets are subject to a 12.5% LTCG tax. This increased exemption limit will apply for FY 2024-25 and subsequent years, as per the Union Budget 2024-25 announced in July, 2024.

 

Schedule 112A, which must be filled out for each scrip sold within a fiscal year, is part of the ITR forms. It must be fully completed by any taxpayer who has long-term capital gains under the grandfathering rules of Section 112A of the Income Tax Act, 1961.

Before Assessment Year 2018–2019, Section 10(38) provided an exemption from LTCG tax on the transfer of equity shares, units of equity-oriented funds, and units of business trust.

From 1st April 2018, income from the transfer of assets, as specified above, will not qualify for provisions u/s 10 (38). For taxable income from the transfer of these assets, the provisions of Section 112A will be applicable as of April 1, 2018.

Section 112A of the Income Tax Act is applicable to the taxation of long-term capital gains arising from the transfer of specified securities. Here's a breakdown of its applicability:

1. Nature of Assets

Section 112A primarily applies to the transfer of equity shares in a company, units of an equity-oriented fund (like mutual funds), and units of a business trust.

2. Long-Term Capital Gains

It specifically deals with the taxation of long-term capital gains, which occur when these specified securities are held for more than 12 months.

3. Cost Calculation

For the purpose of calculating capital gains, the cost of acquisition is taken as the higher of actual cost or the fair market value as of January 31, 2018. This prevents manipulating gains by those holding stocks acquired before this date.

4. Exemptions and Threshold

Up to ₹1.25 Lakhs of long-term capital gains in a financial year is exempt from tax under Section 112A. Only gains exceeding this threshold are subject to taxation. This increased exemption limit will apply for FY 2024-25 and subsequent years.

According to Section 112A of the Income Tax Act, 1961, long-term capital gains that result from the transfer of a long-term capital asset, such as equity shares in a company, units in a mutual fund that invests in equity, or units in a business trust, are subject to tax at a rate of 12.5% of the gains.

 

These long-term capital gains, however, will not contribute towards the assessee's overall income and will not be subject to taxation.

 

Additionally, in accordance with Section 112A's rules, long-term capital gains from the transfer of a long-term capital asset, such as equity shares in a company, units of an equity-oriented mutual fund, or units of a business trust, listed on a recognised stock exchange in India and subject to securities transaction tax, are subject to tax at a rate of 12.5% of the capital gains.

 

Such long-term capital gains are free from taxation and are not counted towards the assessee's overall income.

This section is applied to the capital gains that arise from long-term capital assets transfer. The following are those assets:

• Company equity share 

• Equity oriented fund units

• Business trust units

 

So as to enjoy concessional rate benefits under this section, the holding period of the assets has to be greater than 12 months. The tax that is payable on the total income is 12.5% if it exceeds ₹1.25 Lakhs. This increased exemption limit will apply for FY 2024-25 and subsequent years. Surcharge and education cess will be applicable on the gains taxable.

 

 In the case of a HUF or an individual, the taxation of a resident is very different. In case the net income is reduced the Long-Term Capital Gain (LTCG) below the exemption cap, then the LTCG will reduce by such amount.

Wherever Section 112A's provisions apply, a long-term capital gain tax of 12.5% must be paid. This tax is applicable if the capital gains amount exceeds ₹1.25 Lakhs.

The loss on long-term equity share sales or equity-related tools is a Long-term Capital Loss (LTCL). These long term losses on gains can be balanced by LTCG. 

 

In an instance where the investor has sustained losses from certain securities and profits from others, then the same can be balanced off against one another. Only the net gain is taxable if they exceed ₹1.25 Lakhs.

Grandfathering provisions refer to a mechanism that preserves certain benefits or exemptions for existing situations even when new rules or amendments are introduced. These provisions are designed to shield individuals or entities from the immediate impact of changes in tax laws.

 

In order to protect the investor’s interest, grandfathering clauses were introduced by the Central Board of Direct Taxes. This was to make sure that the taxes are prospective in nature and levied only on the gains from the levy date.

 

For this, acquisition cost of the equity-related or equity securities has to be calculated on the basis of a formula covered under this section.

• Value I- Market Valuation Fair or the real selling rate, whichever is lesser

• Value II – Real acquisition cost or Value I, depending on which is higher 

 

LTCG = Value of sales – Acquisition cost – Transfer Expenses

 

Liability of tax = 12.5% (LTCG  – ₹1.25 Lakh)

This is the actual market price of a capital asset, like stocks or equity-oriented mutual funds, as determined by the stock exchange or mutual fund valuation. When calculating capital gains tax u/s 112A, the FMV as of 31st January 2018, is used as the acquisition cost if the actual cost is lower. 

 

This helps prevent manipulation of gains by those holding stocks acquired before this date. If the selling price is less than the FMV on 31st January, the actual selling price becomes the FMV for tax calculation. The FMV ensures a fair and consistent approach to determine capital gains tax on equity investments.

The I-T returns for annual year 2020-21 contain Schedule 112A to enable reporting it scrip-wise of LTCG. Schedule 112A needs data like scrip name, ISIN code, units number or shares that are sold, purchase cost, sale price, and FMV as of 31st January 2018.