Section 112A of Income Tax Act

Under Section 112A, long-term capital gains (LTCG) tax applies to listed equity shares, equity-oriented mutual funds, and business trusts. The tax rate for these listed securities is 10% on gains exceeding Rs 1 lakh threshold.
Section 112A of Income Tax Act
3 min
25-June-2024

Section 112A of the Income Tax Act of 1961 was introduced in the Finance Act, 2018. This section addresses the taxation of long-term capital gains resulting from the sale of equity-oriented mutual funds, equity shares, and units of business trusts. It states that LTCG exceeding Rs. 1 lakh is subject to a tax of 10%.

For the uninitiated, long-term capital gains arise from the sale of assets held for more than one year. Let us understand Sec 112A of the Income Tax Act in detail along with its scope, applicability, and important provisions.

What is section 112A?

Section 112A of the Income Tax Act deals with the taxation of long-term capital gains on the sale of:

It is important to highlight that LTCG of up to Rs. 1 lakh in a fiscal year are tax-exempt. Any gains surpassing this threshold are subject to a 10% tax rate without the advantage of indexation.

Before the amendment of section 112A

Prior to the Assessment Year 2018-19, Section 10(38) of the Income Tax Act, 1961, exempted LTCG from tax if they resulted from the transfer of equity shares, equity-oriented mutual fund units, or units of business trusts.

For the exemption to apply, the transfer of these assets needed to be subject to Securities Transaction Tax (STT). This meant that if both the purchase and sale of these assets were executed on recognised stock exchanges and were subjected to STT, the resulting long-term capital gains were completely exempt from tax.

Also read about: Income Tax Slabs for FY 24-25

After the amendment of section 112A

Following April 1, 2018, the tax relief formerly provided under Section 10(38) of the Income Tax Act has been discontinued. Instead, it is now governed by Section 112A of the Income Tax Act.

As per Section 112A, gains from long-term capital exceeding Rs. 1,00,000 incur a 10% tax devoid of indexation benefits. This provision aims to:

  • Streamline taxation on capital gains
    and
  • Encourage investment growth

Exceptions to section 112A of the Income Tax Act

It is pertinent to note that Sec 112A of the Income Tax Act allows for several exceptions. This means that specific categories of taxpayers and transactions are either:

  • Taxed under different provisions
    or
  • Exempted from the tax implications of Section 112A

Let us look at some popular exceptions in this section:

  • Section 112A applies to equity-oriented mutual funds. Gains made from investing in mutual funds of other nature are not taxed under this section.
  • If the provisions of Section 112 are applicable, then Section 112A does not apply.
  • The provisions of Section 112A do not apply to the NRIs.
  • Sec 112A applies only to securities subject to STT (securities transaction tax). Thus, it does not cover the transfer of securities listed on a recognised stock exchange within an International Financial Service Center (IFSC). That’s because such securities are not subject to Securities Transaction Tax (STT) when transferred.
  • Section 112A does not apply if an assessee can prove that:
    • The securities they possess are capital assets (investments held for long-term capital appreciation)
      and not
    • Stock-in-trade (held for trading purposes)
  • The securities held by Foreign Institutional Investors (FIIs) are capital assets and hence are not covered under Sec 112A.
  • An assessee cannot claim the deductions available under Chapter VI-A of the Income Tax Act against the LTCG taxable under Sec 112A.

Understanding section 112A of the Income Tax Act with examples

To better understand Section 112A, its provisions and applicability, let us look at three distinct situations:

Situation 1: Non-applicability of Sec 112A of the Income Tax Act

Say Mr. X purchased 1,000 shares of ABC Ltd. on March 1, 2024, at Rs. 100 per share. He sold all these shares on April 1, 2026, at Rs. 180 per share. In this case, LTCG will arise as the holding period exceeds 12 months. See the calculation below:

  1. Total sales consideration: Rs. 1,80,000 (1,000 shares × Rs. 180 per share)
  2. Cost of acquisition: Rs. 1,00,000 (1,000 shares × Rs. 100 per share)
  • LTCG (A) - (B): Rs. 80,000 (Rs. 1,80,000 - Rs. 1,00,000)

Now, this LTCG of Rs. 80,000 is exempt under Sec 112A.

Situation 2

Mr. A purchased 1,500 units of a popular equity-oriented mutual fund at Rs. 150 per unit. After holding them for more than 12 months, he sold all these units at Rs. 220 per unit. In this case, we can calculate the LTCG as;

  1. Total sales consideration: Rs. 3,30,000 (1,500 units × Rs. 220 per share)
  2. Cost of acquisition: Rs. 2,25,000 (1,500 units × Rs. 150 per share)
  • LTCG (A) - (B): Rs. 1,05,000 (Rs. 3,30,000 - Rs. 2,25,000)

Now, this LTCG of Rs. 1,05,000 is taxable under Sec 112A of the Income Tax Act. Mr. A will be required to pay Rs. 10,500 (Rs. 1,05,000 x 10%) as tax. Also, it is important to mention that indexation benefits are not available in this section.

Situation 3

Mr. Z is an individual investor. He has been actively trading in the stock market for the past few years. He maintains a Demat account where he holds various securities and considers some of them as:

  • Investments for long-term capital appreciation (capital assets)
    and
  • Others he trades frequently as part of his business (stock-in-trade)

In the financial year 2023-2024, Mr. Z sells two types of securities:

Long-term investment

Trading stock

  • He sells shares of XYZ Ltd., a listed company
  • He had purchased these shares three years ago at Rs. 50,000.
  • The current market value of these shares at the time of sale is Rs. 1,50,000
  • This resulted in a long-term capital gain of Rs. 1,00,000.
  • He also sells shares of ABC Ltd., another listed company, which he had purchased just a month ago at Rs. 1,20,000
  • Due to a sudden increase in the market price, he sells these shares at Rs. 1,80,000
  • This results in a short-term capital gain of Rs. 60,000.



Now, Mr. Z is filing his income tax return and wants to ensure that the provisions of Section 112A of the Income Tax Act do not apply to the long-term capital gain arising from the sale of shares of XYZ Ltd.

To support this claim, he provides several pieces of evidence and establishes that the securities of XYZ Ltd. were indeed capital assets and not stock-in-trade.

As a result, the long-term capital gain of Rs. 1,00,000 arising from the sale of shares of XYZ Ltd. was not subjected to tax under Section 112A of the Income Tax Act. However, the short-term capital gain of Rs. 60,000 from the sale of shares of ABC Ltd. would be taxed according to the applicable provisions for short-term capital gains.

Example

Suppose an individual investor purchases 100 units of a business trust, XYZ Trust, for Rs. 10,000 each in 2022. They held these units for more than 12 months and sold them in 2024 for Rs. 15,000 each. The total LTCG gain is Rs. 5,00,000 (Rs. 15,00,000 - Rs. 10,00,000).

As per Sec 112A, the investor must pay Rs. 50,000 [(Rs. 5,00,000 (Taxable Gain) × 10% (Tax Rate)] as tax.

Scope of section 112A of the Income Tax Act

Under Section 112A of the Income Tax Act, 1961, a 10% tax is levied on long-term gains resulting from the transfer of specified assets, including equity shares, equity mutual funds’ units, and units in business trusts.

These gains are not considered taxable income and do not affect overall income. Also, it is worth mentioning that to attract the provisions of Sec 112A, the specified assets must be subject to STT (securities transaction tax); otherwise, they will not be taxed under this section.

Applicability of section 112A

Sec 112A of the Income Tax Act has been operational since April 1, 2018. It provides guidance to investors regarding capital gains resulting from transactions involving:

  • Equity shares
  • Equity-oriented mutual funds units, and
  • Units of business trusts

The applicability of this section is contingent upon the payment of Securities Transaction Tax (STT) during the acquisition and transfer of equity shares or units of equity-oriented funds.

Long-term capital gains under section 112A

Section 112A of the Income Tax Act defines the tax implications for capital gains arising from the sale of long-term assets, including units in business trusts, units of mutual funds which primarily invest in equity shares, or equity shares of a company.

To benefit from the reduced tax rate provided by this section, the investor must hold these assets for more than one year. If the total profit from the sale exceeds Rs. 1 lakh, a tax of 10% is applicable on the excess amount, with additional surcharges and education cess on the taxable gains.

However, residents who are Hindu Undivided Families (HUFs) or individuals are subject to different tax rules. For them, if the net income falls below the exemption limit, the Long-Term Capital Gain (LTCG) is reduced by that amount. This provision ensures that individuals and HUFs receive the appropriate tax benefits based on their income levels.

Grandfathering provisions under section 112A

To protect investor interests, the CBDT also introduced grandfathering provisions, which protect the gains accrued until January 31, 2018. This means any appreciation in value up to January 31, 2018, is not taxable.

For assets acquired before February 1, 2018, the cost of acquisition for computing capital gains will be higher of:

  • The actual cost of acquisition
    and
  • The lower of the fair market value as of January 31, 2018, and the actual sale consideration.

Based on the determined value, assesses can calculate their LTCGs. If it exceeds Rs. 1 lakh, you will have to pay tax at a rate of 10%.

Let us understand this better through a hypothetical example:

  • Mr X bought 500 shares of ABC Ltd. on June 1, 2016, at Rs. 100 per share
  • The fair market value of these shares on January 31, 2018, was Rs. 150 per share
  • She sold all these shares on March 1, 2023, at Rs. 200 per share.
  • Now, applying the grandfathering rule:
    • The cost of acquisition will be higher of:
    1. The actual purchase price (Rs. 100)
      or
    2. The lower of the FMV as of January 31, 2018 (Rs. 150) and the actual sale consideration (Rs. 200)
  • So, the cost of acquisition is Rs. 150 per share

Now, we can calculate the LTCG as follows:

  • The total sale value is 500 shares × Rs. 200 = Rs. 1,00,000
  • The cost of acquisition (grandfathered) = 500 shares × Rs. 150 = Rs. 75,000
  • The LTCG = Sale value - Cost of acquisition = Rs. 100,000 - Rs. 75,000 = Rs. 25,000

Since the LTCG is Rs. 25,000 and is below the threshold of Rs. 1 lakh, no tax is payable under Section 112A.

Reporting ITR under section 112A

Schedule 112A of the Income Tax Act was introduced in the Income Tax Returns (ITR) for the Assessment Year 2020-21 to streamline the reporting of LTCG where grandfathering provisions apply.

This schedule requires detailed reporting on a scrip-by-scrip basis. While filing ITR, assessees need to provide the following necessary details:

  • ISIN code
  • The name of the scrip
  • The number of shares or units sold
  • The sale price
  • The purchase cost, and
  • The fair market value (FMV) as of January 31, 2018

By providing this information, taxpayers can correctly compute long-term capital gains. Also, they can enjoy the benefits of grandfathering provisions that protect gains accrued up to January 31, 2018.

Set off long-term capital loss against long-term capital gain

One should be aware that long-term capital losses can only be offset against long-term capital gains. If an assessee incurs a long-term capital loss from the sale of equity shares, units of mutual funds that invest in equity shares or units of business trust, this loss can be used to offset any long-term capital gains.

For example:

  • Assume that a taxpayer has a long-term capital loss of Rs. 50,000 from the sale of equity shares and a long-term capital gain of Rs. 1,50,000 from the sale of mutual fund units within the same financial year.
  • The net long-term capital gain subject to tax under Section 112A would be Rs. 1,00,000 (Rs. 1,50,000 gain - Rs. 50,000 loss).

Summary

Section 112A of the Income Tax Act was introduced in 2018. It deals with the taxation of LTCG from equity shares, equity-oriented mutual funds, and units of business trusts.

It imposes a 10% tax on gains exceeding Rs. 1 lakh in a financial year without the benefit of indexation. Notable exceptions include gains from non-equity mutual funds, transactions by non-resident Indians (NRIs), and securities traded on recognised stock exchanges within International Financial Service Centers (IFSCs).

Also, grandfathering provisions protect gains accrued until January 31, 2018, and assessees can set off long-term capital losses with long-term capital gains within the same financial year.

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Frequently asked questions

What is Section 112A of the Income Tax Act?
Section 112A of the Income Tax Act imposes a tax rate of 10% on long-term capital gains exceeding Rs. 1 lakh from the transfer of specified assets.
What is the difference between Section 111A and 112A?
Section 111A applies a 15% tax on short-term capital gains from equity shares and equity-oriented funds, while Section 112A levies a 10% tax on long-term gains exceeding Rs. 1 lakh from specified assets.
What types of securities are covered under Section 112A?
Equity shares, units in equity-oriented mutual funds, and units in business trusts are covered under Section 112A of the Income Tax Act.
What is the tax rate applicable under Section 112A?
The tax rate applicable under Section 112A is 10%.
Is there any exemption limit for long-term capital gains under Section 112A?
Yes. Under Section 112A, long-term capital gains up to Rs. 1 lakh are exempt from tax. Gains exceeding this threshold are taxed at 10%.
How are long-term capital gains calculated under Section 112A?
Under Section 112A, long-term capital gains are calculated by subtracting the cost of acquisition from the full value of consideration received on the transfer of specified assets.
Are there any specific conditions to avail of the benefit of Section 112A?

To benefit from Section 112A, the assets must include equity shares, equity-oriented mutual fund units, or units in business trusts, subject to STT.

Additionally, the gains must surpass the Rs. 1 lakh exemption limit and qualify as long-term (held for over 12 months).

What is the role of the grandfathering clause in Section 112A?
The grandfathering clause in Section 112A ensures that gains accrued till January 31, 2018, are exempt from taxation.
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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.