Section 112A of the Income Tax Act - Long Term Capital Gains on Shares

What is Section 112A of the Income Tax Act?

Section 112A of the Income Tax Act deals with the taxation of long-term capital gains arising from the transfer of certain assets such as equity shares, mutual funds, and business trust units. The investor is subject to 12.5% tax only if the total capital gains exceed Rs. 1.25 lakhs. This section is only applicable to long-term capital gains, i.e., gains from the sale of capital assets that are held for more than 12 months.

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The provisions of section 112A are applicable in the following conditions -

• The STT has been paid on the acquisition and transfer of an equity share of a corporation.
• The STT was paid when the asset was sold, in the case of the units of an equity-oriented fund or units of a business trust.
• The securities invested in should be long-term investments.
• Chapter VI-A deductions cannot be claimed for such investments.
• Rebate u/s 87A is disallowed for LTCG under section 112A.

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Applicability of Section 112A of the Income Tax Act

Section 112A provisions are applicable only if the following conditions are met -

• The sale must be of equity shares or units of equity-oriented mutual funds, or units of a business trust.
• The securities involved must be long-term capital assets and should have been held for 12 months or more before being sold.
• Only the Capital gains exceeding Rs. 1.25 lakhs will be taxed.
• The transactions related to the sale or purchase of equity shares are subject to STT (Securities Transaction Tax). In the case of equity-oriented mutual fund units or business trust units, the transaction of sale is liable to STT.

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What is the Grandfathering Clause in Section 112A?

The Indian government introduced the grandfathering provision to protect investors from incurring sudden tax liability due to the gains accrued before the introduction of this provision. As per this clause, gains upto January 31, 2018, are not liable for tax. The cost of acquisition of the assets purchased before January 31, 2018, can be adjusted based on the higher of the following -

• The actual purchase price of the asset, or
• The fair market value (FMV) of the asset as of January 31, 2018.

This makes sure that only the capital gains earned after January 31, 2018, are subject to tax under section 112A.

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Exceptions to Section 112A of the Income Tax Act

The following are the exceptions under section 112A of the Income Tax Act -

• Non-Equity Mutual Funds: Profits from hybrid funds and debt mutual funds are taxed under different provisions.
• NRIs: Non-Resident Indians (NRIs) are taxed under section 115AD instead of section 112A.
• IFSC Transactions: Securities listed in IFSCs (International Financial Services Centres) are not subject to STT and are exempt from it.
• Foreign Institutional Investors: Gains from securities held by FIIs as capital assets are not covered under section 112A.
• Business Stock: If an investor proves that the securities were held as stock-in-trade instead of capital assets, then section 112A will not apply.

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Understanding Section 112A of the Income Tax Act with Examples

Income Tax on LTCG on Listed Shares

LTCG under section 112A on equity shares sold after 23rd July 2024 will be subject to tax at 12.5%. However, the LTCG on equity shares sold before this date will be taxed at 10%. In both cases, an exemption of Rs. 1,25,000 will be available. This means that only LTCG exceeding Rs. 1,25,000 will be taxed at the applicable tax rates.

Example: Mr. Aman has an LTCG on listed shares of Rs. 4,00,000. Calculate the tax liability on the same.

• Sold on 1st March 2024 - Tax liability on listed shares = (4,00,000 - 1,00,000) * 10% = Rs. 30,000.
• Sold on 1st July 2024 - Tax liability on listed shares = (4,00,000 - 1,25,000) * 10% = Rs. 27,500.
• Sold on 1st August 2024 - Tax liability on listed shares = (4,00,000 - 1,25,000) * 12.5% = Rs. 34,375.

LTCG on Transfer of Bonus and Right Shares Acquired on or Before 31 January 2018

The long-term capital gains shall be calculated on the basis of the Fair Market Value on 31st January 2018. This value should be taken as the cost of acquisition of such shares, making gains until 31st January 2018, exempt from tax.

For example, you have Vodafone shares purchased on 1st April 2016 and issued bonus shares as of 1st April 2017. If these bonus shares are sold after 31st Jan 2018, then the Fair Market Value as of 31st Jan 2018 will be considered as the Cost of acquisition of such shares.

Set-off of Long-term Capital Loss with Long-term Capital Gain

The losses incurred on the sale of long-term equity shares or equity-related instruments are considered long-term capital losses. This long-term capital loss can only be set off against long-term capital gains. If an investor has incurred a loss in one security and gained profits from other securities, they can be set off against each other.

Carry Forward of Long-term Capital Losses of Shares

If the investor has incurred a loss in net during an assessment year, the assessee can write off this amount against his income from any other source under the same head.

A short-term capital loss can be set off against any capital gains. However, long-term capital loss can only be set off against long-term capital gain. If any long-term capital losses result from the sale of such equity shares, these losses can be set off against the other long-term capital gains only.

Fair Market Value

• If the security was not traded on 31 January 2018, the FMV is considered the highest price quoted on a date immediately before 31 January 2018 when the security was traded on a recognised stock exchange.
• In the case of unlisted units on January 31, 2018, the NAV of the units on that date will be considered the FMV.
• The FMV of an equity share listed after January 31 2018, or acquired through a merger or other transfer under Section 47, will be calculated as follows:
  Purchase price x Cost inflation index for fiscal year 2017-18 / Cost inflation index for the year of purchase or fiscal year 2001-02.

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Disclosure of LTCG in ITR Filing

The long-term capital gains arising from the sale or transfer of shares must be reported by both individuals and HUFs in section B7 of the ITR-2 form, if they are not included under the heading “Income from Business or Profession”.

Non-residents must report the LTCGs from the sale or transfer of shares in sections B7 & B8 of ITR-2 and ITR-3, respectively.

Profits from the sale or transfer of equity shares should be displayed under the heading "Income from business and profession" if the equity shares and equity-oriented shares are held as stock-in-trade. In this case, even if the gain exceeds Rs. 1.25 lakh, it will not be subject to 12.5% tax.

Note: Starting FY 2024-25, taxpayers can now report LTCG upto Rs. 1,25,000 in both ITR-1 and ITR-4 forms. The new forms have also introduced separate reporting requirements for capital gains accrued before 23rd July 2024 and after 23rd July 2024.

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