The Income Tax Act, 1961, governs the taxation of various sources of income in India. One of the sources of income is capital gains, which arise when a capital asset is sold at a price higher than its cost of acquisition. The tax on capital gains is governed by different provisions of the Income Tax Act, depending on the nature of the asset, the holding period, and other factors.
In this blog, we will discuss Section 112A of the Income Tax Act, which deals with the tax on long-term capital gains arising from the transfer of equity shares or units of equity-oriented mutual funds. This provision was introduced in Budget 2018 and has been applicable from the Assessment Year (AY) 2019-20 onwards.
Applicability of Section 112A
Section 112A applies to long-term capital gains arising from the transfer of the following assets:
- Equity shares in a company listed on a recognized stock exchange in India
- Units of equity-oriented mutual funds
- Units of a business trust listed on a recognized stock exchange in India.
The following conditions must be satisfied for the gains to be considered as long-term capital gains:
- The asset must have been held for more than 12 months from the date of acquisition.
- The transfer must have taken place on or after 1st April 2018.
Tax Rate under Section 112A
The tax rate on long-term capital gains arising from the transfer of equity shares or units of equity-oriented mutual funds is 10% (plus applicable surcharge and cess). This tax rate is applicable if the total long-term capital gains during the financial year are up to Rs. 1 lakh.
If the total long-term capital gains during the financial year exceed Rs. 1 lakh, the excess gains will be taxed at the rate of 20% (plus applicable surcharge and cess). However, the benefit of indexation, which allows for inflation adjustment in the cost of acquisition, is not available for gains taxed under Section 112A.
Illustration
Let us understand the tax implications of Section 112A with the help of an example. Suppose Mr. A purchased equity shares of XYZ Ltd. on 1st July 2019 for Rs. 1,00,000 and sold them on 15th July 2021 for Rs. 1,50,000. In this case, the capital gain of Rs. 50,000 will be considered as a long-term capital gain, as the shares were held for more than 12 months. If Mr. A has no other long-term capital gains during the financial year, the tax payable on this gain will be 10% of Rs. 50,000, i.e., Rs. 5,000. However, if Mr. A has other long-term capital gains during the financial year, and the total amount exceeds Rs. 1 lakh, the tax rate on the excess amount will be 20%.
Conclusion
Section 112A of the Income Tax Act has brought about significant changes in the taxation of long-term capital gains arising from the transfer of equity shares and units of equity-oriented mutual funds. The introduction of a separate tax rate for such gains and the removal of the benefit of indexation has made it simpler for taxpayers to compute their tax liability. It is important to note that the tax treatment of capital gains can vary depending on the nature of the asset and other factors, and taxpayers should seek professional advice to ensure compliance with the Income Tax Act.
Read more useful content:
- section 234e of income tax act
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- section 90a of income tax act
- section 40a(7) of income tax act
- section 226(3) of income tax act
- section 24 of income tax act
Frequently Asked Questions (FAQs)
Q1. What is Section 112A of the Income Tax Act?
A1. Section 112A of the Income Tax Act is a provision that governs the tax on long-term capital gains arising from the transfer of equity shares or units of equity-oriented mutual funds. It was introduced in Budget 2018 and has been applicable from the Assessment Year (AY) 2019-20 onwards.
Q2. What are the conditions for long-term capital gains to be taxed under Section 112A?
A2. The following conditions must be satisfied for the gains to be considered as long-term capital gains under Section 112A:
The asset must have been held for more than 12 months from the date of acquisition.
The transfer must have taken place on or after 1st April 2018.
Q3. What is the tax rate on long-term capital gains under Section 112A?
A3. The tax rate on long-term capital gains arising from the transfer of equity shares or units of equity-oriented mutual funds is 10% (plus applicable surcharge and cess). However, if the total long-term capital gains during the financial year exceed Rs. 1 lakh, the excess gains will be taxed at the rate of 20% (plus applicable surcharge and cess).
Q4. Is the benefit of indexation available for gains taxed under Section 112A?
A4. No, the benefit of indexation, which allows for inflation adjustment in the cost of acquisition, is not available for gains taxed under Section 112A.
Q5. What are the assets covered under Section 112A?
A5. Section 112A applies to long-term capital gains arising from the transfer of the following assets:
Equity shares in a company listed on a recognized stock exchange in India
Units of equity-oriented mutual funds
Units of a business trust listed on a recognized stock exchange in India.
Q6. What is the period of holding for an asset to be considered as a long-term capital asset under Section 112A?
A6. The asset must have been held for more than 12 months from the date of acquisition to be considered as a long-term capital asset under Section 112A.
Q7. When did Section 112A become applicable?
A7. Section 112A became applicable from the Assessment Year (AY) 2019-20 onwards.
Q8. Do taxpayers need to file a separate tax return for gains taxed under Section 112A?
A8. No, taxpayers do not need to file a separate tax return for gains taxed under Section 112A. The gains should be reported in the relevant schedules of the income tax return.
