Section 112a - Income Tax on Long Term Capital Gain

Through the Finance Bill 2018, the Government has introduced Section 112A under the Income Tax Act, 1961. The new section 112A has been inserted in order to levy long-term 1 tax on the transfer of equity share, units of equity-oriented funds and units of a business trust. The reason for the introduction of new Section 112a, as provided by the Government, is that the exemption from long-term capital gain tax on transfer of equity share, units of equity-oriented funds and units of business trust has led to significant erosion in the tax base resulting in loss of revenue and due to abusive use of tax benefits, arbitrage opportunities have been created because of the exemption for long-term capital gains.

Before Amendment of Section 112a

Before Assessment Year 2018-2019, long-term capital gain tax on the transfer of equity share, units of equity-oriented funds and units of business trust was exempted as per provisions of section 10 (38).

After Amendment of Section 112a

With effect from 1st April 2018, provisions of section 10 (38) will not be applicable to any income arising from the transfer of equity share, units of equity-oriented funds and units of business trust. From 1st April 2018, provisions of Section 112a shall be applicable to taxable income arising from the transfer of equity shares, units of equity-oriented funds and units of business trust.

Applicability of Section 112a

Section 112a shall be applicable from 1st April 2018 (A.Y. 2019-2020)
Transaction affecting levy of a capital gain on transfer of equity share, units of equity-oriented funds and units of business trust shall be governed by the provisions of Section 112a from the effective date
Section 112a shall be applicable only in a case where Securities Transaction Tax (popularly known as STT) has been paid at the time of transfer, and also on an acquisition in case of equity share/units of equity-oriented funds

Income Tax Rate under Section 112a

When provisions of Section 112a are applicable, long-term capital gain tax @10% shall be levied. Further, in order to levy long term capital gain tax @10%, the capital gain should be exceeding INR 1 Lakh.

Calculating Long-Term Capital Gain

First and second proviso to section 48 i.e. benefit of indexation of cost of acquisition and cost of improvement shall not be allowed while calculating long term capital gain tax under Section 112a.
Further, in the case of NRI, the benefit of indexation and the benefit of calculation of capital gain in a foreign currency will not be allowed in cases where Section 112a is applicable.
Cost of acquisition for the assets acquired before 1st February 2018, shall be higher of the following :
- The actual cost of acquisition, and
- The lower of the fair market value of such assets and the full value of the consideration received or accruing as a result of the transfer of the capital asset.
Fair market value should be calculated in the following manner –
- Fair market value for capital assets listed on a recognized stock exchange as on 31st January 2018 shall be –
  - Fair market value shall be the highest price of the capital asset quoted on 31st January 2018.
  - Fair market value in case if there is no trading of the capital asset on 31st January 2018 will be the highest price of the capital asset quoted on a date immediately preceding 31st January 2018 when the asset was last traded.
- If the capital assets for which the fair market value is attempted to be calculated is a unit and but the unit is not listed on a recognized stock exchange as on 31st January 2018, in such cases, the fair market value of such capital assets shall be the net asset value of the capital asset as on 31st January 2018.
- Fair market value in other cases shall be, in case of an equity share which is not listed in the stock exchange as on 31st January 2018 but which is listed on a stock exchange on the date of transfer an amount which bears to the cost of acquisition the same proportion as cost inflation index for the F.Y. 2017-18 bears to the cost inflation index for the first year in which the asset was held or for the year beginning on 1st April 2001, whichever is later.
Deductions under section 80C to 80U and/or rebate under section 87A shall not be allowed to the effect of capital gain levied effecting provisions of Section 112a.

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Frequently Asked Questions

Common questions about Section 112A Tax on Long Term Capital Gains India.

Section 112A is a new provision introduced by the Finance Bill 2018, effective from April 1, 2018, to levy long-term capital gains tax on the transfer of equity shares, units of equity-oriented funds, and units of business trusts. It aims to address revenue losses and curb abusive use of tax benefits arising from the earlier exemption on such long-term capital gains.

Section 112A applies to taxable income arising from the transfer of equity shares, units of equity-oriented funds, and units of business trusts, where Securities Transaction Tax (STT) has been paid at the time of transfer and acquisition (in case of equity shares/units of equity-oriented funds), effective from April 1, 2018 (Assessment Year 2019-2020).

Under Section 112A, long-term capital gains exceeding INR 1 lakh are taxed at a flat rate of 10%.

The benefit of indexation of cost of acquisition and cost of improvement is not allowed while calculating long-term capital gains under Section 112A. Additionally, for assets acquired before February 1, 2018, the cost of acquisition is the higher of the actual cost or the fair market value as on January 31, 2018.

The fair market value for listed capital assets is the highest price quoted on January 31, 2018, or the immediately preceding trading day. For unlisted equity shares, it is calculated based on the cost inflation index, and for unlisted units of equity-oriented funds, it is the net asset value as on January 31, 2018.

No, deductions under Sections 80C to 80U and rebate under Section 87A are not allowed on capital gains taxed under Section 112A.

Yes, Section 112A applies to NRIs as well. However, the benefits of indexation and calculation of capital gains in foreign currency are not allowed for NRIs in cases where Section 112A is applicable.

The government introduced Section 112A to address the significant erosion in the tax base and revenue losses resulting from the earlier exemption on long-term capital gains from the transfer of equity shares, units of equity-oriented funds, and units of business trusts, which had created arbitrage opportunities and abusive use of tax benefits.

No, Section 112A applies only to long-term capital gains. Short-term capital gains on the transfer of equity shares, units of equity-oriented funds, and units of business trusts are taxed as per the regular income tax slab rates.

Yes, the long-term capital gains taxed under Section 112A can be offset against other long-term capital losses or carried forward to subsequent years, as per the provisions of the Income Tax Act.