Section 112A of the Income Tax Act, 1961 was introduced by the Finance Act, 2018, and it applies to capital gains arising from the sale of equity shares or units of equity-oriented funds on or after April 1, 2018. In this blog, we will discuss this section in detail with proper headings.
Introduction:
Section 112A is a provision of the Income Tax Act, 1961 that deals with the taxation of long-term capital gains on the sale of equity shares and units of equity-oriented funds.
Applicability:
This provision is applicable to long-term capital gains arising from the sale of equity shares or units of equity-oriented funds on or after April 1, 2018.
Definition of long-term capital gains:
Long-term capital gains are those gains that arise from the sale of equity shares or units of equity-oriented funds that are held for more than 12 months.
Tax rate:
The tax rate for long-term capital gains under section 112A is 10%. However, if the long-term capital gains exceed Rs. 1 lakh, then the excess amount will be taxed at 20%.
Exemptions:
The following exemptions are available under section 112A:
a) Long-term capital gains up to Rs. 1 lakh in a financial year are exempt from tax.
b) Long-term capital gains arising from the sale of equity shares or units of equity-oriented funds that are acquired before January 31, 2018, are grandfathered and are not subject to tax under section 112A.
c) Long-term capital gains arising from the sale of equity shares or units of equity-oriented funds that are listed on a recognized stock exchange located in International Financial Services Centre (IFSC) and are charged Securities Transaction Tax (STT) are also exempt from tax under section 112A.
Calculation of capital gains:
To calculate long-term capital gains, the cost of acquisition and the cost of improvement of the asset are adjusted for inflation using the Cost Inflation Index (CII).
Impact on investors:
Section 112A has a significant impact on investors who sell their equity shares or units of equity-oriented funds. The tax rate of 10% on long-term capital gains is lower than the tax rate on short-term capital gains, which is 15%. This makes it more beneficial for investors to hold their investments for a longer period.
Impact on the stock market:
Section 112A has had a significant impact on the stock market since it was introduced. Initially, there was a lot of confusion and uncertainty among investors, which resulted in a sharp decline in the stock market. However, over time, investors have become more familiar with the provision, and the market has stabilized.
Calculation of the cost of acquisition:
The cost of acquisition of equity shares or units of equity-oriented funds can include the purchase price, brokerage fees, and other expenses related to the acquisition of the asset. The cost of improvement can include expenses incurred for making any additions or alterations to the asset.
Transfer of shares or units in case of inheritance:
If an investor acquires equity shares or units of equity-oriented funds by way of inheritance, the cost of acquisition will be the cost to the previous owner. However, if the previous owner had acquired the asset before January 31, 2018, then the grandfathering provisions will apply.
Impact on mutual funds:
Section 112A has also had an impact on the mutual fund industry. Mutual fund managers are now required to consider the tax implications of their investment decisions, and many have started to offer tax-saving mutual funds.
Importance of tax planning:
Given the impact of Section 112A on investments, tax planning has become an essential aspect of investment planning. Investors need to be aware of the tax implications of their investment decisions and take steps to minimize their tax liability.
Impact on foreign investors:
Foreign investors who invest in Indian equity shares or units of equity-oriented funds may also be subject to tax under Section 112A. However, the tax rate may vary based on the Double Taxation Avoidance Agreement (DTAA) between India and the foreign investor’s country of residence.
Impact on systematic investment plans (SIPs):
Systematic Investment Plans (SIPs) are a popular investment option for many investors. Under Section 112A, each installment of an SIP is considered as a separate investment, and the holding period of each installment is calculated separately. Therefore, each installment of an SIP may be subject to tax based on the holding period of that particular installment.
Impact on the sale of shares in case of mergers and acquisitions:
In the case of mergers and acquisitions, the holding period of the shares or units may be deemed to be the holding period of the original shares or units. This means that if the original shares or units were acquired before January 31, 2018, then the grandfathering provisions will apply to the shares or units received in the merger or acquisition.
Impact on the sale of bonus shares:
Bonus shares are additional shares that are issued to existing shareholders of a company. Under Section 112A, the holding period of bonus shares is deemed to be the same as the holding period of the original shares. Therefore, if the original shares were acquired before January 31, 2018, then the bonus shares will also be eligible for grandfathering.
Conclusion:
In conclusion, section 112A of the Income Tax Act, 1961 is an important provision that governs the taxation of long-term capital gains arising from the sale of equity shares or units of equity-oriented funds. The provision provides exemptions for certain types of capital gains and offers a lower tax rate for long-term capital gains. As an investor, it is important to understand this provision to make informed investment decisions.
Read more useful content:
- section 145 of income tax act
- section 10e of income tax act
- section 9 of the income tax act
- section 94b of income tax act
- section 206aa of income tax act
Frequently Asked Questions (FAQs)
- What is Section 112A of the Income Tax Act, 1961?
Section 112A is a provision in the Income Tax Act that governs the taxation of long-term capital gains arising from the sale of equity shares or units of equity-oriented funds.
2. What is the holding period for long-term capital gains under Section 112A?
The holding period for long-term capital gains under Section 112A is 12 months or more.
3. What is the tax rate on long-term capital gains under Section 112A?
The tax rate on long-term capital gains under Section 112A is 10%, if the gains exceed Rs. 1 lakh.
4. Is there any exemption for long-term capital gains under Section 112A?
No, there is no exemption for long-term capital gains under Section 112A. However, the gains are eligible for grandfathering if the shares or units were acquired before January 31, 2018.
5. What is the cost of acquisition for calculating long-term capital gains under Section 112A?
The cost of acquisition for calculating long-term capital gains under Section 112A includes the purchase price, brokerage fees, and other expenses related to the acquisition of the asset.
6. Are mutual fund investments covered under Section 112A?
Yes, mutual fund investments, including equity-oriented funds, are covered under Section 112A.
7. What is the tax rate for short-term capital gains under Section 112A?
Short-term capital gains are taxed at the regular income tax rates, which can vary depending on the investor’s income level.
8. Are foreign investors subject to tax under Section 112A?
Yes, foreign investors who invest in Indian equity shares or units of equity-oriented funds may also be subject to tax under Section 112A. However, the tax rate may vary based on the DTAA between India and the foreign investor’s country of residence.
9. What is the impact of Section 112A on systematic investment plans (SIPs)?
Each installment of an SIP is considered as a separate investment, and the holding period of each installment is calculated separately. Therefore, each installment of an SIP may be subject to tax based on the holding period of that particular installment.
10. What is the impact of Section 112A on bonus shares?
The holding period of bonus shares is deemed to be the same as the holding period of the original shares. Therefore, if the original shares were acquired before January 31, 2018, then the bonus shares will also be eligible for grandfathering.
