Long Term Capital Gain Tax on Shares & Mutual Funds : Section 112A

Up to FY 2018-19, LTCG i.e. Long Term Capital Gain on shares and securities on which Securities Transaction Tax (STT) is paid was exempt under Sec 10(38) of the Income Tax Act. However, under Budget 2018, the exemption under Sec 10(38) was removed. Further, a new Section 112A of Income Tax Act was introduced to levy a 10% income tax on Long Term Capital Gains on the sale of equity shares, equity mutual funds, and units of business trust in excess of Rs. 1 lac for a financial year. Section 112A was applicable from FY 2018-19 (AY 2019-20) onwards.

What is Long Term Capital Gain?

The profit or loss on the sale of a capital asset held for more than the specified holding period is a Long Term Capital Gain (LTCG) or Long Term Capital Loss (LTCL).

Based on the period of holding, here is a summary of Capital Gain on the sale of Capital Assets. Eg: If the listed equity share of a domestic company is sold after 12 months of purchase, the profit or loss is Long Term Capital Gain or Long Term Capital Loss on shares.

Capital Asset Period of Holding
Equity Shares of Domestic Company listed on a recognized stock exchange 12 months
Equity Shares of Domestic Company not listed on a recognized stock exchange 24 months
Equity Shares of Foreign Company whether listed or not 24 months
Equity-Oriented Mutual Funds or ETFs (Exchange Traded Funds) 12 months
Debt-Oriented Mutual Funds or ETFs (Exchange Traded Funds) 36 months
Debentures or Bonds listed on a recognized stock exchange 12 months
Debentures or Bonds not listed on a recognized stock exchange 36 months
Immovable Property such as land, building, or house property 24 months
Movable Property such as jewelry, car, painting, work of art 36 months

Section 112A Grandfathering Rule to calculate Long Term Capital Gain on Shares

Traders who would have invested in equity markets with a view to earning tax-free income in the form of Long Term Capital Gains would now have to pay tax as per the new rule. The announcement of 10% LTCG was made on 1st February 2018. Thus, an investor who was holding an investment in equity shares and equity mutual funds as of 31/01/2018, should not be required to pay tax on entire capital gains. Hence, to ensure that LTCG on shares earned up to 31st January 2018 should not be taxed, the Capital Gains earned up to 31/01/2018 would be grandfathered using a formula.

For equity shares and equity mutual funds bought on or before 31/01/2018, the cost of acquisition should be calculated as follows:

  1. Lower of Fair Market Value as of 31st January 2018 or the Actual Selling Price
  2. Step 1 or Actual Cost Price whichever is higher

Section 112A of Income Tax Act – Calculation of Long Term Capital Gain Tax on Shares

The budget was announced on 01/02/2018 and so the provisions for tax on LTCG on shares are different based on the date of purchase.

Particulars

Up to 31/01/18 01/02/18 Onwards
Date of Purchase Shares bought on or before 31/01/2018 Shares bought on or after 01/02/2018
STCG (sold within 365 days) STCG @ 15% STCG @ 15%
LTCG (sold after 365 days) SP = price at which shares are sold SP = price at which shares are sold
CP = Follow these steps:

Higher of the following:

(i) Price as on 31.01.18 or Actual Selling Price whichever is less

(ii) Actual Cost
CP = price at which shares are bought
LTCG = SP – CP LTCG = SP – CP
Tax = 10% (LTCG – Rs.1,00,000) Tax = 10% (LTCG – Rs.1,00,000)

Examples for Grandfathering Rule

  Case I Case II
Purchase Date  1st Jan 2018 10th Feb 2018
Purchase Value 2,00,000 2,00,000
Sell Date  10th Jan 2020 10th Jan 2020
Sale Value 3,50,000 3,50,000
Grandfathering rule applicable Yes No
Actual Cost * 2,40,000 ** 2,00,000
LTCG
= Sale Value – Actual Cost
1,10,000 1,50,000
Exempt Exempt up to INR 1 Lakh Exempt up to INR 1 Lakh
Tax Liability 1,10,000 – 1,00,000= 10,000 * 10%
= 1,000
1,50,000 – 1,00,000= 50,000 * 10%
= 5,000

*Note: Actual Cost is the Cost of Acquisition to calculate capital gains 

**Calculation of Actual Cost using FMV (Case I)

  Condition Amount (INR) Qualifying Amount
Step 1 Lower of:

Actual Selling Price
or
FMV on 31st Jan 2018
Lower of:

3,50,000 or 2,40,000  

2,40,000
Step 2 Higher of:

Value in Step 1
or
Purchase Value
Higher of:

2,40,000 or 2,00,000

2,40,000
  Actual Cost   2,40,000

Income Tax on Long Term Capital Gain

The tax rate of a capital asset is determined on the basis of the nature of capital gain i.e. LTCG or STCG.

Capital Asset STT LTCG STCG
Listed equity share of a domestic company Yes 10% in excess of INR 1 lac u/s 112A 15% u/s 111A
Listed equity share of a domestic company No 10% without indexation slab rate
Unlisted equity share of a domestic company No 20% with indexation slab rate
Listed equity share of a foreign company Yes / No 10% without indexation slab rate
Unlisted equity share of a foreign company Yes / No 20% with indexation slab rate
Equity Mutual Fund or ETF (Exchange Traded Fund) Yes 10% in excess of INR 1 lac u/s 112A 15% u/s 111A
Debt Mutual Fund or ETF No 20% with indexation slab rate
Listed Debentures or Bonds No 10% without indexation slab rate
Unlisted Debentures or Bonds No 20% without indexation slab rate
Land, Building, House Property, Car, Jewellery, Paintings, Art of Work NA 20% with indexation slab rate

Long Term Capital Gain Tax on Shares – Equity Shares and Equity Mutual Funds

Date of Purchase Date of Sale Tax Treatment
On or before 31/01/2018 On or before 31/01/2018 Exempt u/s 10(38)
On or before 31/01/2018 Between 31/01/2018 and 01/04/2018 Exempt u/s 10(38)
On or before 31/01/2018 01/04/2018 onwards Calculate LTCG as per the above table
* LTCG up to 31/01/2018 exempt
* LTCG after 31/01/2018 – Tax at 10% in excess of Rs. 1 lac
On or after 31/01/2018 01/04/2018 onwards Calculate LTCG as per the above table
Tax at 10% in excess of Rs. 1 lac
Under Budget 2022, the surcharge on long term capital gains (LTCG) on listed equity shares, units, etc has been capped at 15%
Tip
Under Budget 2022, the surcharge on long term capital gains (LTCG) on listed equity shares, units, etc has been capped at 15%

LTCG on Shares – Reporting under Schedule 112A of ITR

The ITR Form under which the taxpayer needs to report income from capital gains includes ITR-2 and ITR-3. AY 2020-21 onwards, the ITR Forms comprised of reporting LTCG on shares and mutual funds under Schedule 112A. Under Schedule 112A of ITR, the taxpayer needs to provide scripwise reporting of long term capital gains on equity shares and equity mutual funds purchased on or before 1st February 2018. To calculate the LTCG as per Section 112A after considering the provisions of the grandfathering rule, reporting Schedule 112A is mandatory. The taxpayer needs to report the following details in ITR:

  • ISIN i.e. International Securities Identification Number
  • Name of the share or unit
  • Number of shares
  • Sales price per share or unit
  • Cost of Acquisition
  • FMV i.e. Fair Market Value as on 31/01/2018
  • Expenditure related to transfer

Set Off & Carry Forward LTCL under Section 112A of Income Tax Act

The loss on sale of listed equity shares and mutual funds held for more than 12 months is a Long Term Capital loss. A taxpayer can set off LTCL from one capital asset against LTCG from another capital asset. As per the income tax rules for set off and carry forward of losses, LTCL i.e. Long Term Capital Loss can be set off against Long Term Capital Gains only in the current year. The taxpayer can carry forward the remaining loss for 8 years and set off against future LTCG only.

If the taxpayer has income from sale of some listed equity shares and securities, and profit from other listed equity shares and securities, only net gains in excess of INR 1 lac are taxable at 10%. Further, the net LTCL under Section 112A of income tax act can be set off against LTCG on sale of shares, securities, property, jewellery, car or any other capital asset. The remaining loss can be carried forward for 8 years.

Exemption from LTCG on Shares

The taxpayer having income from the sale of a long term capital asset can claim capital gain exemption under Section 54 to 54GB of the Income Tax Act if he/she fulfills the conditions.

A taxpayer can claim the exemption by reinvesting the proceeds from the sale into a specified capital asset. Such exemption would lower the capital gains and save taxes on the same. However, the taxpayer must hold the new asset for the specified period as per the relevant section. However, if he/she sells the asset before the specified time period, he/she must report it as an income in the relevant financial year and pay tax at the applicable rate.

The taxpayer has an option to open an account under the Capital Gains Account Scheme and park the sale proceeds in it till the time they invest in the specified asset to claim the Capital Gains exemption.

FAQs

Are LTCG on sale of listed shares and securities taxable now?

Yes. Under Budget 2018, the exemption under Sec 10(38) was removed. Further, a new Section 112A of Income Tax Act was introduced to levy a 10% income tax on Long Term Capital Gains on the sale of equity shares, equity mutual funds, and units of business trust in excess of Rs. 1 lac for a financial year. Sec 112A was applicable to FY 2018-19 (AY 2019-20) onwards.

What is the new grandfathering rule introduced in Budget 2018?

Grandfathering rule is used to determine the cost of acquisition to calculate the long term capital gain tax on shares and securities that are listed and on which STT is paid.
To calculate the LTCG on the sale of equity shares and equity mutual funds bought on or before 31/01/2018, the cost of acquisition is lower of FMV as of 31/01/2018 or the actual selling price and higher of the earlier result and actual cost price.

How to determine FMV i.e. Fair Market Value of equity shares and mutual funds to calculate LTCG on shares under Section 112A?

FMV i.e. Fair Market Value is the highest price of an equity share or equity mutual fund quoted on a recognised stock exchange as on 31st January 2018. If the said share or mutual fund was not traded on 31st Jan 2018, FMV would be the highest price on the immediately preceding trading day. FMV of Equity Shares is available on the NSE website. Further, the FMV of Equity Mutual Funds is available on the AMFI website.

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