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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 capital gain 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

1. Section 112A shall be applicable from 1st April 2018 (A.Y. 2019-2020)
2. 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
3. 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

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.