Any income or loss arising on the sale of a capital asset is a capital gain. Based on the nature of the capital asset and the nature of the capital gain, the income tax department has defined the provisions for capital gains tax. Capital Gain arising on the sale of a long term capital asset is a Long Term Capital Gain. As per the Income Tax Act, provisions for tax on Long Term Capital Gains are covered under Section 112 and Section 112A. Section 112 of Income Tax Act is the provision for taxation of capital gains on long term capital assets other than those covered under Section 112A of Income Tax Act.
- What is Section 112 of Income Tax Act?
- Income Tax on LTCG under Section 112 of Income Tax Act
- Adjustment of LTCG u/s 112 against Basic Exemption Limit
- LTCG u/s 112 – Reporting in Schedule CG of ITR
- Set Off & Carry Forward LTCL under Section 112 of Income Tax Act
- Exemption from LTCG Tax under Section 112
- Section 112 v/s 112A v/s 111A
What is Section 112 of Income Tax Act?
Section 112 is the income tax provision for tax on long term capital assets. It applies to all taxpayers such as individual, HUF, partnership firm, company, resident, non-resident, foreign company, etc. This section covers capital gains arising from the sale of all long-term capital assets. Long Term Capital Asset covers the following assets:
- Securities (other than unit) listed on a recognised stock exchange in India
- Unit of the unit trust of India
- zero-coupon bond
- Securities not listed on a recognised stock exchange in India
- Immovable property being land or building or both
- Any other capital asset
Section 112 does not apply to the capital gains on the sale of the following long-term capital assets to which Section 112A applies:
- Listed equity shares where STT is paid on acquisition or transfer
- Units of equity-oriented mutual funds where STT is paid on transfer
- Units of business trust where STT is paid on transfer
Income Tax on LTCG under Section 112 of Income Tax Act
The income tax rate applicable to different capital assets is based on the nature of the asset and the period of holding. Below are the applicable tax rates for LTCG under Section 112.
|Asset Type||Period of Holding||Tax Rate on LTCG|
|Listed Securities (other than unit)||12 months||Lower of 10% without indexation or 20% with indexation|
|Zero-Coupon Bonds||12 months||Lower of 10% without indexation or 20% with indexation|
|Unit of Unit Trust of India||12 months||20% with indexation|
|Unlisted Securities||24 months||20%|
|Immovable Property||24 months||20% with indexation|
|Any other asset||36 months||20%|
Adjustment of LTCG u/s 112 against Basic Exemption Limit
Taxpayers holding the status of Resident as per the rules to determine the residential status can take benefit of adjusting the special rate income against the basic exemption limit to reduce taxes. Thus, if your total taxable income is less than the basic exemption limit, you can adjust your special rate income such as LTCG u/s 112, STCG u/s 111A, LTCG u/s 112A, etc. against the shortfall in the basic exemption limit and pay tax on the remaining income only.
LTCG u/s 112 – Reporting in Schedule CG of ITR
The ITR Form under which the taxpayer needs to report income from capital gains includes ITR-2 and ITR-3. The taxpayer must report the following details for LTCG under Schedule CG of the ITR:
- Full value of consideration i.e. sales value
- Deductions under Section 48
- Indexed Cost of acquisition i.e. purchase value
- Indexed Cost of improvement
- Expenditure wholly and exclusively in connection with transfer i.e. transfer expenses
- LTCG is automatically computed
Set Off & Carry Forward LTCL under Section 112 of Income Tax Act
The loss on sale of a capital asset as per Section 112 held for more than the period of holding 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, the taxpayer can set off LTCL i.e. Long Term Capital Loss 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.
Exemption from LTCG Tax under Section 112
The taxpayer having long term capital gain income from the sale of a specified asset under Section 112 such as listed securities on which STT is not paid, zero-coupon bonds, immovable property, unlisted securities, etc can claim the following capital gain exemptions:
- Section 54EE – Exemption on sale of any long-term capital asset on investment in units of a specified fund.
- Section 54F – Exemption on sale of any long-term capital asset (except house) on investment in residential house property.
- The taxpayer can claim Capital Gain Exemption on the sale of immovable property under Section 54, Section 54EC, Section 54EE, Section 54GB depending upon the nature of the capital asset
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.
Section 112 v/s 112A v/s 111A
- Section 112 of Income Tax Act applies to all long term capital assets defined under Section 2(29AA) of the Income Tax Act. Different tax rates are defined for long term capital gains on these assets except the ones covered under Section 112A.
- Section 112A of Income Tax Act is the overriding section of Section 112. Thus, it applies to long term capital gains on sale of specified long term capital assets i.e. equity shares, equity mutual funds, and units of business trust on which STT is paid and are listed on a recognised stock exchange in India.
- Section 111A of Income Tax Act applies to short term capital gains on sale of equity shares, equity mutual funds, and units of business trust on which STT is paid and are listed on a recognised stock exchange in India.
Section 112A is the provision for tax on LTCG on equity shares, equity mutual funds, and units of business trust on which STT is paid and listed on a recognised stock exchange in India. Section 112 is the provision for tax on LTCG for all assets except those covered under Section 112A.
The tax rate under Section 112A is 10% in excess of INR 1 lac. The tax rate under Section 112 is based on the nature of the capital asset.
The Income Tax Act does not allow claiming deduction from Section 80C to 80U against LTCG under Section 112. However, the taxpayer can claim Chapter VI-A deductions on capital gains taxable at slab rates.
Capital gain tax on the sale of a long term capital asset under Section 112 can be saved either by claiming exemption from Section 54 to Section 54GB based on the nature of the capital asset. Further, you can save tax by setting off STCL or LTCL on the sale of any other capital asset against such income.