Before the financial year 2018-19, individuals earning long-term capital gains on equity shares and mutual funds were exempt from tax. However, in the 2018 Budget, the Finance Minister introduced a new section that had a considerable impact on the Indian equity market. The earlier exemption under section 10(38) of the Income Tax Act was abolished. Presently, long-term capital gains from the sale of equity shares, equity mutual funds, and units of business trusts are taxable under section 112A if they exceed the specified limit.
What is Section 112A?
Section 112A of the Income Tax Act pertains to the taxation of long-term capital gains arising from the transfer of specified assets like equity shares, equity mutual funds, and units of business trusts. The investor is subject to a 10% tax rate, and this tax is applicable only when the capital gain amount exceeds INR 1 lakh in a financial year.
Budget announcement
In this year’s union budget 2024, the tax rate for long-term capital gain under section 112A is increased to 12.5%. The revised rate of taxation will be applicable for securities sold on or after 23rd July 2024. The exemption of INR 1 lakh is also increased to INR 1,25,000. This limit of 1.25 lakhs is applicable on total long-term capital gain earned during the FY 2024-25 and onwards.
Section 112A: Grandfathering Rule to Calculate LTCG on Shares
Traders who previously enjoyed tax-free Long Term Capital Gains in equity markets now face a LTCG tax introduced on February 1, 2018. To overcome the same, A grandfathering formula is applied to exempt capital gains earned until January 31, 2018, for investors holding equity shares and mutual funds at that date.
For equity shares and equity mutual funds bought on or before 31/01/2018, the cost of acquisition should be calculated as follows:
- Lower of Fair Market Value as of 31st January 2018 or the Actual Selling Price
- Step 1 or Actual Cost Price whichever is higher
Example
| Particulars | Case I | Case II |
| Purchase Date | 1st Jan 2018 | 10th Feb 2018 |
| Purchase Value (INR) | 2,00,000 | 2,00,000 |
| FMV as of 31st Jan 2018 (INR) | 2,40,000 | 2,40,000 |
| Sell Date | 10th Jan 2020 | 10th Jan 2020 |
| Sale Value (INR) | 3,50,000 | 3,50,000 |
| Grandfathering rule applicable | Yes | No |
| Actual Cost * | 2,40,000 ** | 2,00,000 |
| LTCG = Sale Value – Actual Cost (INR) | 1,10,000 | 1,50,000 |
| Exempt | Exempt up to INR 1 Lakh | Exempt up to INR 1 Lakh |
| Tax Liability (INR) | 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 (INR) | |
| 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 revised tax rate as per budget 2024 for the investor is based on the nature of capital assets which are:
| Capital Asset | Period of Holding | LTCG |
| Equity Shares, Equity MF, ETFs, and Bonds of a Domestic Company listed on a recognized stock exchange in India | 12 Months | 12.5% over INR 1.25 lakh u/s 112A |
| Equity Shares of Domestic & Foreign Companies not listed on a recognized stock exchange | 24 Months | 12.5% |
| Immovable property such as land, building or house property (If purchased before 23rd July 2024) | 24 Months | 12.5% without indexation or 20% with indexation whichever is more beneficial |
| Immovable property such as land, building or house property (If purchased after 23rd July 2024) | 24 Months | 12.5% |
| Car, Jewellery, Paintings, Art of Work | 24 Months | 12.5% |
LTCG on Shares – Reporting under Schedule 112A of ITR
Taxpayers are required to report income from capital gains using ITR-2 and ITR-3 forms. The reporting of long-term capital gains on shares and mutual funds is done under Schedule 112A of the ITR Forms. This schedule mandates tradewise reporting of LTCG on equity shares and equity MF acquired on or before 1 February 2018. To calculate the LTCG as per the provisions of the grandfathering rule, reporting Schedule 112A is mandatory. The taxpayer can report the same in the Income-tax utility under Schedule 112A as described below:
Set Off & Carry Forward LTCL u/s 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, Long Term Capital Loss can be set off against Long Term Capital Gain only in the current year. The taxpayer can carry forward the remaining loss for 8 years and set off against future LTCG only.
The exemption of INR 1.25 lakh is available on net gains remaining after loss set off (if any). Further, LTCL under Section 112A can be set off against LTCG on 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 a capital gain exemption under Section 54 to 54GB of the Income Tax Act if they fulfill the conditions.
A taxpayer can claim the exemption by reinvesting the proceeds from the sale into a specified capital asset. Such an 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 they sell the asset before the specified period, they must report it as an income in the relevant financial year and pay tax at the applicable rate.
The taxpayer has the 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
No, the benefit of indexation will not be available on equity shares or equity-oriented MF to calculate LTCG.
In the case of non-residents, TDS is deducted at the rate of 12.5%. TDS provisions do not apply to resident taxpayers.
Deductions, such as those from Section 80C to 80U, cannot be available against long-term capital gains arising from equity shares and equity-oriented mutual funds.
No, the rebate under section 87A is not available in respect of LTCG u/s 112A.
Yes, Section 112A applies to NRI as well. They are also liable to pay tax at the rate of 12.5% if the gain exceeds INR 1,25,000 over the year.
No, only resident individuals have the option to pay a 20% tax with indexation on the sale of immovable property purchased before July 23, 2024.
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