Long-term capital gains (LTCG) under the Income Tax Act 1961 are those made upon the disposal or transfer of a capital asset owned for a particular time, usually 12 months in case of listed securities and 24 to 36 months in case of other assets. Such gains arise if the sale price is higher than the indexed cost of purchase and improvements thereon. LTCG has certain concessional rates of taxation that depend on the nature of the asset, and it is eligible for exemptions under sections 54, 54EC, and 112A.
What is Section 112A?
LTCG on account of the transfer of listed equity shares, business trust units or equity-oriented mutual fund units are subject to Section 112A of the Act. Added by the Finance Act 2018, it covers winnings realised after April 1, 2018, once the Section 10(38) exclusion was removed. At a preferential 10% rate without indexing, under this section, LTCG of more than ₹1,00,000 in a year is taxed. This provision is applicable only if STT has been levied on sale and, in some instances, on purchase. It also has a grandfathering provision where gains which have accrued till January 31, 2018, are exempt.
Applicability of Section 112A
The transfer of equity shares, units of equity-oriented mutual fund schemes, and units of business trusts attracts LTCG provisions. This section was needed in place of the long-standing exemption allowed under Section 10(38), which earlier used to grant exemption on full such capital gains.
Conditions for Applicability
Section 112A is to be applied in the following circumstances:
1. Type of Asset:
The asset being transferred has to be of the following types:
- Equity shares of a listed company
- Units of an equity-oriented mutual fund
- Units of a business trust (such as REITs or InvITs).
2. Holding Period: In order to be considered a long-term capital asset, the asset should be held for at least 12 months before being transferred.
3. Nature of Transaction: The transfer should be taxable, i.e., it should not be exempt under articles like 47.
4. Mode of Acquisition: The asset should have been liable to Securities Transaction Tax (STT) at the time of both acquisition (in some cases, as determined by the government) and sale.
5. Taxable threshold: Long-term capital gains over ₹1,00,000 in a financial year are taxable. Income up to ₹1 lakh is exempt.
Tax Rate under Section 112A
10% on long-term capital gains over ₹1,00,000. Surcharge and cess depending on the income level of the taxpayer.
Under this section, the indexation benefit—inflation of the cost—is not qualified. Chapter VIA deductions (e.g., 80C, 80D, etc.) are not eligible against this LTCG.
Application for Various Taxpayers
- Individuals, Hindu Undivided Families (HUFs), partnerships, and businesses all fall under Section 112A.
- Double Taxation Avoidance Agreement relief for non-residents is available to both residents and non-residents.
Co-operation with Other Provisions
LTCG will be taxed under Section 112 at a rate of 20% indexed unless Section 112A’s conditions are met. Some exemption clauses—Sections 54F, 54EC, or 54EE, for instance—can apply if the profit is reinvested according as directed.
Exceptions According To Section 112A
Section 112A offers particular help for long-term capital gains (LTCG) generated from the disposal of listed equity shares, equity-oriented mutual funds, and business trust units.
- Tax-free LTCG of up to ₹1,00,000 annually.
- Only gains from after 2018 are taxed under grand-fathering provision, which makes exempt earnings made up until January 31, 2018.
- Section 112A taxes gains at a lesser rate, therefore exempting tax on gains indexed for inflation.
- Eligible investments must pay the STT on purchase and sale.
Calculation Of LTCG Under Section 112A
Section 112A estimates LTCG by computing the sale value, removing transfer expenses, including the grandfathered cost theory (for properties acquired before February 1, 2018), and taxing a 10% on just the surplus over ₹1,00,000 without indexing.
This method follows just and reasonable taxation by protecting small investors and promoting market participation.
1. Calculate the Sale Price’s Full Value of Consideration
This is the actual selling price earned or about to be paid for the item.
The transaction value, or market price, is used if the sale takes place via a known stock exchange.
2. Subtract Expenditure Incurred on Transfer
Costs directly attributable to the transfer, including:
- Brokerage or commission
- Transaction fees
- Securities transaction charges (if not already added)
- Stamp duty on transfer
These are deducted from the sale consideration.
3. Value the Cost of Acquisition (under the Grandfathering Rule)
There is a special grandfathering rule that applies to assets acquired before February 1, 2018, ensuring that any profit earned up to this date continues to be exempted from taxation.
The cost of acquisition (COA) is calculated as follows:
COA = Greater of (a) and (b)
where,
(a) = Actual cost of acquisition, and
(b) = Lower of:
(i) Fair Market Value (FMV) as of January 31, 2018, and
(ii) Total consideration amount (selling price)
For the shares listed on an official stock exchange, the fair market value (FMV) is given as the highest recorded price as of January 31, 2018. If the share was not traded on that day, the closing price of the preceding date closest to it will be used.
For assets acquired on or after February 1, 2018, the COA captures the actual acquisition cost.
4. Calculate LTCG
LTCG = Full Value of Consideration – (Cost of Acquisition + Cost of Improvement + Transfer Expenses)
As Section 112A applies only to securities, the cost of improvement is usually not applicable (except in exceptional cases).
5. Apply the Exemption Threshold
Section 112A(2) grants an exemption for LTCG up to ₹1,00,000 in a financial year.
Tax is applicable only on amounts over ₹1 lakh.
6. Apply the Applicable Tax Rate
10% tax is levied on the excess LTCG over ₹1,00,000, without considering:
- Indexation, or
- Deductions under Chapter VIA (e.g., 80C, 80D, etc.)
Tax Payable = 10% × (LTCG – ₹1,00,000)
Add any relevant surcharge and a 4% health and education cess.
Illustration
Cost of share acquisition (June 2016): ₹1,00,000
Fair Market Value (FMV) on January 31, 2018: ₹2,50,000
Selling price (April 2024): ₹4,00,000
Transfer cost is ₹5,000
Step-by-Step Calculation:
Total consideration amount is ₹4,00,000.
Subtract transfer cost of ₹5,000 to arrive at net consideration of ₹3,95,000.
Cost of Acquisition: The higher of:
- Actual cost: ₹1,00,000
- The smaller of (FMV ₹2,50,000, Sale ₹4,00,000) is ₹2,50,000, meaning, the Cost of Acquisition (COA) is ₹2,50,000
Long-Term Capital Gain (LTCG): ₹3,95,000 – ₹2,50,000 = ₹1,45,000.
Exemption limit is ₹1,00,000. Taxable LTCG is ₹45,000 – ₹1,00,000.
Tax at 10%: ₹45,000 × 10% = ₹4,500.
Add 4% cess (₹180) for total tax payable of ₹4,680.
Important Points to Keep in Mind:
- LTCG ≤ ₹1,00,000 are fully exempt.
- No indexation benefit, as compared to Section 112.
- Under Section 112A, long term capital losses (LTCL) will only be allowed to be offset against LTCG, not short term capital gains (STCG).
- Unutilised LTCL can be brought forward for 8 years.
- The method of calculation is the same for residents as for non-residents, though non-residents can receive relief under Double Taxation Avoidance Agreements (DTAA).
What is the Grandfathering Clause in Section 112A?
Investors are shielded from being taxed on gains accumulated before under Section 112A of the Income Tax Act, 1961, a grandfathering provision. It guarantees taxation of only actual profits made after 31st January, 2018.
Acquired assets before February 1, 2018, will have an acquisition cost under this regulation equal to the higher of the actual price paid and the lesser of the FMV as on January 31, 2018, or the sale consideration. This approach guarantees investors get to retain tax-free revenues made before the start of the new tax system, hence avoiding retroactive taxation. Investor trust in the capital markets and equity.
Consequences of Non-Compliance with Section 112A
Non-compliance with Section 112A of the Income Tax Act, 1961, could result in the loss of long-term capital gains tax benefit. Should the requirements of payment of Securities Transaction Tax (STT), accurate transaction reporting, or proper calculation of gains not be met, the profits could, with indexation under Section 112A rather than 10%, be charged at a 20% rate. Furthermore, attracting interest, penalties, and investigation under Sections 234A, 234B, 234C, and failure to declare or underreporting of capital gains on an income tax return could draw attention under Section 270A, and the taxpayer might suffer legal and financial consequences.
Conclusion
Section 112A of the Act is crucial in ensuring equitable tax on long-term capital gains from equity investments, thus maintaining investor sentiment. The provision serves to balance revenue generation and investment promotion through levying a 10% rate on gains over ₹1 lakh and, at the same time, protecting earnings garnered before 2018 through a grandfathering effect. The STT requirement brings greater transparency to equity transactions and imposes a streamlined, equitable system for taxation of long-term securities. Overall, Section 112A supports the development of India’s capital market framework by fostering responsible investment and harmonising tax regulations with modern financial practices.
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