Section 112(1) of the Income Tax Act: An Overview
Section 112(1) of the Income Tax Act is an important provision that deals with the taxation of capital gains. It provides for the calculation of long-term capital gains tax (LTCG) and the applicable tax rate. In this blog, we will take a closer look at Section 112(1) and its various provisions.
What is Section 112(1) of the Income Tax Act?
Section 112(1) of the Income Tax Act deals with the taxation of long-term capital gains. It provides that if a taxpayer has earned long-term capital gains on the sale of a capital asset, the tax liability will be calculated based on the provisions of this section.
What is Long-Term Capital Gain?
Long-term capital gain is the profit earned on the sale of a capital asset that has been held for more than 36 months. This period is reduced to 24 months in the case of immovable property such as land, building, and house property. The capital asset can be anything from real estate to stocks, mutual funds, or any other asset that is not used for business or professional purposes.
Calculation of Tax on Long-Term Capital Gains
Section 112(1) provides for a lower tax rate on long-term capital gains compared to short-term capital gains. The tax rate applicable on long-term capital gains is 20% (excluding surcharge and cess) of the amount of capital gains. However, this rate is not fixed and can vary depending on the type of asset and the amount of gain.
Exemption from Long-Term Capital Gains Tax
Section 112(1)(c) of the Income Tax Act provides an exemption from long-term capital gains tax if the capital gains are invested in certain specified assets. This is known as the exemption under Section 54F. To claim this exemption, the taxpayer must invest the entire net sale proceeds of the capital asset in the purchase or construction of a residential house property.
Other Provisions under Section 112(1) of the Income Tax Act
Besides the calculation of long-term capital gains tax and the exemption under Section 54F, Section 112(1) of the Income Tax Act has other provisions as well, which are as follows:
- Indexation of Cost of Acquisition
Section 112(1)(a) provides for the indexation of the cost of acquisition of the capital asset. The cost of acquisition is adjusted for inflation, which reduces the amount of capital gains subject to tax. The Central Government notifies the Cost Inflation Index (CII) every year, which is used for the calculation of the indexed cost of acquisition.
- Capital Losses
Section 112(1)(b) provides for the set-off of capital losses against capital gains. Capital losses can be carried forward for up to eight assessment years and set off against capital gains in subsequent years.
- Applicable Tax Rate
The tax rate of 20% on long-term capital gains under Section 112(1) is exclusive of surcharge and cess. The applicable surcharge and cess depend on the taxpayer’s income level and other factors.
- Non-Applicability to Listed Securities
The tax rate under Section 112(1) is not applicable to long-term capital gains from the sale of listed securities such as shares and mutual fund units. For listed securities, the applicable tax rate is 10% (excluding surcharge and cess).
Impact of Changes in Section 112(1) of the Income Tax Act
Section 112(1) of the Income Tax Act has undergone several changes in recent years, which have impacted the taxation of long-term capital gains. Here are some of the significant changes made to Section 112(1):
- Introduction of LTCG Tax on Listed Securities
In the Union Budget 2018, the Finance Minister announced the reintroduction of the long-term capital gains (LTCG) tax on listed securities. Previously, this tax was abolished in 2004. As per the new provisions, long-term capital gains exceeding Rs. 1 lakh from the sale of listed securities would be taxed at a rate of 10%, without the benefit of indexation.
- Removal of Exemption under Section 54EC
The exemption under Section 54EC, which allowed taxpayers to invest in specified bonds to claim a deduction from long-term capital gains tax, was removed in the Union Budget 2021. Previously, taxpayers could invest up to Rs. 50 lakhs in bonds issued by NHAI or REC to claim the deduction. However, the exemption is no longer available from April 1, 2021.
- Revision of CII Base Year
The base year for calculating the Cost Inflation Index (CII) was changed from 1981 to 2001 in 2017. This change was made to align the CII with the current economic scenario and inflation rates.
- Increase in Surcharge Rates
The surcharge rates on long-term capital gains were increased in the Union Budget 2019. As per the new provisions, taxpayers earning between Rs. 2 crores and Rs. 5 crores would be subject to a surcharge of 15%, and those earning over Rs. 5 crores would be subject to a surcharge of 25%.
Conclusion
In conclusion, Section 112(1) of the Income Tax Act provides for the calculation of long-term capital gains tax and the applicable tax rate. It also provides an exemption from long-term capital gains tax if the capital gains are invested in a residential house property. Taxpayers must be aware of the provisions of this section to ensure that they calculate their tax liability correctly and take advantage of any applicable exemptions.
Read more useful content:
- section 145 of income tax act
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Frequently Asked Questions (FAQs)
- What is Section 112(1) of the Income Tax Act?
Section 112(1) of the Income Tax Act provides for the taxation of long-term capital gains on the sale of capital assets. It specifies the tax rate, indexation of the cost of acquisition, and the set-off of capital losses against capital gains.
2. What is the tax rate under Section 112(1)?
The tax rate under Section 112(1) is 20% on long-term capital gains. This tax rate is exclusive of surcharge and cess, which may be applicable depending on the taxpayer’s income level.
3. What is the indexation benefit under Section 112(1)?
The indexation benefit under Section 112(1) allows taxpayers to adjust the cost of acquisition of the capital asset for inflation, which reduces the amount of capital gains subject to tax.
4. What is the set-off benefit under Section 112(1)?
The set-off benefit under Section 112(1) allows taxpayers to set off capital losses against capital gains. Capital losses can be carried forward for up to eight assessment years and set off against capital gains in subsequent years.
5. What is the time period for a capital asset to be considered long-term?
For most capital assets, a holding period of more than 36 months is considered long-term. However, for certain assets such as shares, mutual fund units, and listed securities, a holding period of more than 12 months is considered long-term.
6. Is the tax rate under Section 112(1) applicable to all types of capital assets?
No, the tax rate under Section 112(1) is not applicable to all types of capital assets. It is only applicable to long-term capital gains on the sale of assets other than listed securities such as shares and mutual fund units.
7. What is the tax rate for long-term capital gains on listed securities?
The tax rate for long-term capital gains on listed securities is 10%, excluding surcharge and cess. This rate was introduced in the Union Budget 2018.
8. Can taxpayers claim exemptions or deductions on long-term capital gains?
Yes, taxpayers can claim exemptions or deductions on long-term capital gains. For example, under Section 54F, taxpayers can claim an exemption if they invest the capital gains in a residential property within a specified time period.
9. What happens if a taxpayer does not pay the long-term capital gains tax?
If a taxpayer does not pay the long-term capital gains tax, they may be subject to penalties and interest charges. The Income Tax Department may also initiate legal action against the taxpayer.
10. Can taxpayers consult with tax experts for advice on Section 112(1)?
Yes, taxpayers can consult with tax experts such as chartered accountants or tax lawyers for advice on Section 112(1) and other tax-related matters. They can also use online tax calculators or seek assistance from the Income Tax Department’s helpline.
