Section 112A: Tax on long-term capital gains on certain assets

Aarti Maurya | Last updated: 08 April 2024

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Quick Summary

Section 112A of the Income Tax Act outlines a concessional tax rate of 10% on long-term capital gains exceeding Rs 100,000 from the sale of specific assets like equity shares, equity-oriented funds, and business trusts. To qualify, Securities Transaction Tax (STT) must have been paid on both acquisition and transfer. The 'grandfathering clause' introduced in February 2018 ensures that only gains accrued from February 1, 2018, onwards are taxed, with specific rules for calculating the cost of acquisition based on fair market value as of that date.

Conditions for availing the benefit of this concessional rate
No deduction under Chapter VI A against LTCG taxable under section 112A
Grandfathering clause in section 112A
Method of calculation of long term capital gains

Sec 112A provides that a concessional rate of tax at 10% will be leviable on long term capital gains exceeding Rs 100000 on transfer of -

An equity share in a company
A unit of an equity-oriented fund
A unit of a business trust

Conditions for availing the benefit of this concessional rate

In the case of equity share in a company, STT has been paid on acquisition and transfer of such capital assets.
In the case of a unit of an equity-oriented fund or unit of business trust, STT has been paid on such capital assets.

Section 112A: Tax on Long-Term Capital Gains

No deduction under Chapter VI A against LTCG taxable under section 112A

Deductions under Chapter VI-A cannot be availed in respect of such long-term capital gains on equity shares of a company or units of an equity-oriented mutual fund or unit of a business trust included in the total income of the assessee.

No benefit of rebate under section 87A against LTCG taxable under section 112A.

Grandfathering clause in section 112A

Grandfathering clause in Section 112A of IT Act was introduced in February 2018 to tax the profits made on shares while exempting previous gains. It ensures that the tax is only applicable to gains from February 1, 2018, onwards.

To calculate the Cost of Acquisition (COA) under this clause:

First Determine Value I: Find the Fair Market Value as of January 31, 2018, or the Actual Selling Price, whichever is lower.

Second Determine Value II: Compare Value I with the Actual Purchase Price, and select the higher value.

Value II becomes the Cost of Acquisition (COA) under the grandfathering rule.

For calculating Long Term Capital Gain (LTCG), the formula is :

LTCG = Sales Value - Cost of Acquisition (as per grandfathering rule) - Transfer Expenses

Finally, the tax liability on LTCG is calculated at a rate of 10%, applicable to the amount of LTCG exceeding Rs 1 lakh. i.e., Tax Liability = 10% (LTCG – Rs 1 lakh)

Method of calculation of long term capital gains

The long-term capital gain will be computed by deducting the cost of acquisition from the full value of consideration on the transfer of the long-term capital assets.

Cost of acquisition of long-term capital acquired before or on 31^st of January, 2018 will be the actual cost.

However, if the actual cost is less than the fair market value of such assets as on 31^st of January, 2018, the fair market value will be deemed to be the cost of acquisition.

Further, if the full value of consideration on transfer is less than fair market value, then such full value of consideration or the actual cost, whichever is higher, will be deemed to be the cost of acquisition.

An illustration

An equity share is acquired on 1^st January 2017 at RS 100 , its fair market value is Rs 200 on 31^st January 2018 and it is sold on 1^st of April, 2019 at Rs 250.

Solution : As the actual cost of acquisition in less than the fair market value as on 31^st of January, 2018, the fair market value of RS 200 will be taken as the cost of acquisition and long-term capital gain will be RS 50 (RS 250- RS 200).