Long Term Capital gain Tax on Listed Equity Shares
- Section 112A provides for long term capital gains on the sale of listed equity shares, equity-oriented mutual funds, and the units of a business trust.
- The said section was introduced in Budget 2018 after the removal of exemption under section 10(38). It is applicable from the financial year 2018-19.
- It provides for taxation of long-term capital gains on listed securities at 10% for gains exceeding the threshold limit of Rs. 1 lakh.
- The income tax form contains the schedule for Section 112A of income tax act which requires the taxpayer to fill the scrip wise details of securities sold during the year.
Scope of Section 112A
The following conditions apply for availing the benefit of the concessional rate under section 112A of Income Tax Act.
- In the case of an equity share of a company, the securities transaction tax(STT) has been paid on the acquisition and transfer of such assets.
- In the case of the units of an equity oriented fund or the units of a business trust, the STT has been paid at the time of sale of the asset.
- The securities should be long-term capital assets.
- Deduction under chapter VI A cannot be availed in respect of such long-term capital gain.
- Rebate under section 87A cannot be claimed in respect of tax payable on long-term capital gain under section 112A
- Recommended Read: Section 43B
Long Term Capital Gain Under Section 112A of Income Tax Act
Section 112A of Income Tax Act is applicable to the capital gains arising from the transfer of long-term capital assets. The following are such assets:
- An equity share in a company
- Units of equity oriented fund
- Units of a business trust
- In order to avail of the concessional rate under section 112A, the period of holding of the assets should be greater than one year.
- The tax payable on the total income is 10% exceeding Rs. 1,00,000. Education cess and surcharge would be applicable on the taxable gains.
EXAMPLE
Let us understand the above with the help of an example. Mr. Amit has a net long-term capital gain under section 112A of Rs 2,00,000. The tax of 10% under section 112A will be on Rs 1,00,000 (Rs 2,00,000 – Rs 1,00,000).
In this case, the total income except the long-term capital gain is Rs. 1,50,000. Also, the basic exemption limit is Rs. 2,50,000. Therefore, in this case, the long-term capital gain at 10% will be calculated on the balance of long-term capital gain. Hence, the calculation will be Rs. 1,00,000 (250000-150000)- for shortfall, which amounts to Rs 1,00,000. The unexhausted limit to be reduced from LTCG – 2,00,000-1,00,000 = 1,00,000, hence no tax.
Grandfathering Provisions Under Section 112A of Income Tax Act
Till the financial year 2017-18, long-term capital gains arising on the sale of equity shares and equity-linked units of mutual funds stood exempted under section 10(38) of the income tax act. This had changed with the introduction of grandfathering clauses in budget 2018 which allowed the gains to be exempted till 31st January 2018. The cost of acquisition of such securities had to be calculated as per the specified formula.
Important note
In the case of securities bought before 1st February 2018, the cost of acquisition in such a case was calculated as below:
Step 1: Consider the lower of the fair market value and the sale consideration.
Step 2: Consider the higher value calculated as per step 1 and the purchase price
