The Indian Income Tax Act, 1961 is a comprehensive piece of legislation that governs the taxation of income in India. One of the key provisions of the Act that has significant implications for taxpayers is Section 112A, which deals with the taxation of capital gains arising from the transfer of equity shares or units of equity-oriented mutual funds. In this blog, we will delve deeper into Section 112A of the Income Tax Act, its implications for taxpayers, and the changes that have been made to it in recent years.
What is Section 112A of Income Tax Act?
Section 112A was introduced in the Income Tax Act in Budget 2018 and is applicable to capital gains arising from the sale of equity shares or units of equity-oriented mutual funds on or after April 1, 2018. Under this section, long-term capital gains (LTCG) on equity shares and equity-oriented mutual funds are taxed at a concessional rate of 10% if the gains exceed Rs. 1 lakh in a financial year. The LTCG tax rate before the introduction of this section was zero.
Who is affected by Section 112A?
Section 112A of the Income Tax Act applies to all taxpayers who have made long-term capital gains from the sale of equity shares or equity-oriented mutual funds. This section is applicable to both individuals and corporates. However, the tax implications may vary depending on the taxpayer’s status and the type of investment made.
How is Section 112A different from Section 10(38)?
Before the introduction of Section 112A, taxpayers could avail of an exemption from long-term capital gains tax on the sale of equity shares or equity-oriented mutual funds under Section 10(38) of the Income Tax Act. However, with the introduction of Section 112A, the exemption under Section 10(38) has been withdrawn. This means that long-term capital gains on the sale of equity shares or equity-oriented mutual funds are now taxable, subject to the conditions specified under Section 112A.
What are the conditions for availing of the concessional tax rate under Section 112A?
To avail of the concessional tax rate of 10% under Section 112A, the following conditions must be met:
- The gains must be long-term capital gains, i.e., the shares or units must have been held for more than 12 months.
- The sale must be made on a recognized stock exchange.
- Securities transaction tax (STT) must have been paid at the time of sale.
If any of the above conditions are not met, the long-term capital gains will be taxed at the regular rate of 20% after allowing for indexation benefits.
What are the recent changes to Section 112A?
In Budget 2020, the government made changes to Section 112A by including a new provision that requires taxpayers to calculate the cost of acquisition of shares or units acquired before February 1, 2018, using the fair market value as on that date. This means that the gains made on such shares or units will be taxed based on the fair market value as on February 1, 2018, and not the actual cost of acquisition.
Conclusion:
Section 112A of the Income Tax Act has significant implications for taxpayers who invest in equity shares or equity-oriented mutual funds. The introduction of this section has resulted in the withdrawal of the exemption available under Section 10(38) and has made long-term capital gains taxable subject to certain conditions. Taxpayers must understand the provisions of this section and ensure that they comply with the conditions to avail of the concessional tax rate.
Read more useful content:
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- section 226(3) of income tax act
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Frequently Asked Questions (FAQs)
Q. What is Section 112A of the Income Tax Act?
Section 112A is a provision introduced in the Income Tax Act in Budget 2018, which deals with the taxation of capital gains arising from the transfer of equity shares or units of equity-oriented mutual funds.
Q. What is the tax rate applicable under Section 112A?
Long-term capital gains (LTCG) on equity shares and equity-oriented mutual funds are taxed at a concessional rate of 10% if the gains exceed Rs. 1 lakh in a financial year.
Q. When does Section 112A apply?
Section 112A applies to long-term capital gains arising from the sale of equity shares or equity-oriented mutual funds on or after April 1, 2018.
Q. What is the definition of long-term capital gains under Section 112A?
Under Section 112A, long-term capital gains refer to gains made on the sale of equity shares or equity-oriented mutual funds held for more than 12 months.
Q. What are the conditions for availing of the concessional tax rate under Section 112A?
To avail of the concessional tax rate of 10% under Section 112A, the following conditions must be met:
- The gains must be long-term capital gains.
- The sale must be made on a recognized stock exchange.
- Securities transaction tax (STT) must have been paid at the time of sale.
Q. What happens if any of the conditions specified under Section 112A are not met?
If any of the conditions are not met, the long-term capital gains will be taxed at the regular rate of 20% after allowing for indexation benefits.
Q. Does Section 112A apply to all taxpayers?
Section 112A applies to all taxpayers who have made long-term capital gains from the sale of equity shares or equity-oriented mutual funds, including individuals and corporates.
Q. What are the recent changes made to Section 112A?
In Budget 2020, the government made changes to Section 112A by including a provision that requires taxpayers to calculate the cost of acquisition of shares or units acquired before February 1, 2018, using the fair market value as on that date. This means that the gains made on such shares or units will be taxed based on the fair market value as on February 1, 2018, and not the actual cost of acquisition.
Q. Is there any exemption available for long-term capital gains under Section 112A?
No, there is no exemption available for long-term capital gains under Section 112A. The exemption available under Section 10(38) has been withdrawn with the introduction of Section 112A.
Q. Are short-term capital gains taxable under Section 112A?
No, Section 112A applies only to long-term capital gains on the sale of equity shares or equity-oriented mutual funds held for more than 12 months. Short-term capital gains are taxed at the regular rate of 15%.
