Key Analysis on Transfer of Long Term Capital Assets -Section 112

Section 112

Applicability

Section 112 applies to all types of taxpayers, such as individuals, HUF, company, firm, resident, non-resident (not a company), a foreign company, etc.

Long-term assets are covered under Section 112

Section 112 specifies income tax rates on all kinds of long-term capital assets, such as-

1. Listed securities
2. LTCG on zero-coupon bonds
3. Unlisted securities
4. Immovable property
5. Other long-term capital assets

Section 112 not Covered  Followings

This section does not apply to the capital assets covered under Section 112A below-

1. Listed equity shares where STT paid on acquisition or transfer
2. Units of equity-oriented mutual funds where STT paid on transfer
3. Units of business trust where STT paid on transfer

Tax Rates u/s 112

• If there is LTCG on listed securities (other than units) and zero-coupon bonds
  >>> Tax rate is lower of-10% (without indexation)
  >>> 20% (with indexation)
• For any other long-term capital asset such as units of debt fund, immovable property sold by a resident – Tax rate is 20%

Examples for Tax Rates

Steps for Calculation of tax if Total Income includes Long term Capital Gain

If the total income of the taxpayer includes income from the transfer of long-term capital assets, then the income tax liability will be calculated as below-

1. Reduce the total taxable income by the amount of long-term capital gains (LTCG) and calculate tax on the income so reduced as per the normal applicable tax rates applicable to individuals or a HUF.
2. Separately calculate tax on the long-term capital gains at rates specified above.
3. Add both the amounts (1+2) to know the total tax liability.

Key Notes

1. In the case of individuals and HUFs, if the normal income, i.e. income excluding the long-term capital gain, is less than the basic exemption limit, then set off the unadjusted amount with the long-term capital gains and calculate tax on LTCG at specified rates.
2. Chapter VI-A deduction will not apply to long-term capital gains
3. The benefit of the basic exemption limit mentioned above does not apply to Non-residents.

Example-1

Suppose Santosh (below 60 years of age) has a total income of Rs 8 lakh in which long-term capital gain on sale of immovable property of Rs 1 lakh is included. So the tax payable by the individual can be calculated as below-
Income excluding Long Term Capital Gain-= Rs 7 lakh (Rs 8 lakh – Rs 1 lakh)
Tax payable on Rs 7 lakh as per old tax slab rates-=Rs 52,500
Tax on Long Term Capital Gain @20%= Rs 20,000 (20% on Rs 1 lakh)
Total tax payable by Santosh=52,500+ 20,000= 72,500

Example-2

Suppose an Santosh (below 60 years of age) has a total income of Rs 3.5 lakh in which long-term capital gain (mutual funds units) of Rs 3 lakh is included. Here, the normal income (Rs 3.5 lakh – Rs 3 lakh= Rs 50,000) is less than the basic exemption limit (Rs 2.5 lakh). So the tax payable by the individual can be calculated as below-

A. Income excluding Long Term Capital Gain = Rs 50,000 (Rs 3,50,000 – Rs 3,00,000)
B. Long Term Capital Gain =Rs 3,00,000
C. Tax payable on Rs 50,000 = Nil
D. Basic exemption limit = Rs 2,50,000
E. Unadjusted amount (D-A) – Rs 2,00,000 (Rs 2,50,000 lakh – Rs 50,000)
F. LTCG after adjusting
G. basic exemption limit(b-e)= Rs 1,00,000 (Rs 3,00,000 – Rs 2,00,000)
H. 20% tax on adjusted LTCG (20% x f)- Rs 20,000 (20% on Rs 1,00,000)
I. Total tax payable (c + g)-=Rs 20,000