Section 112A provides for long-term capital gains tax on the sale of listed equity shares, equity-oriented mutual funds and business trust. The rate of long-term capital gains tax on these listed securities is 10% for gains exceeding the threshold of Rs 1 lakh. The ITR forms contain schedule 112A to fill scrip wise details of these listed securities sold during a financial year. A taxpayer having long-term capital gains under the grandfathering provisions of section 112A should mandatorily fill the details in schedule 112A.
1. Introduction to Section 112A
Section 112A was inserted by the Finance Act 2018 to tax long-term capital gains from the sale of listed equity shares, units of equity-oriented mutual funds and units of business trust. The schedule 112A brought to tax gains which were earlier exempt until FY 2017-18 (AY 2018-19). Earlier, section 10(38) allowed a capital gains exemption from the sale of listed equity shares, units of mutual fund and business trust.
2. Scope of Section 112A
The conditions to tax capital gains under section 112A are:
- The sale should be of listed equity shares, units of a mutual fund and units of a business trust.
- The securities should be long-term capital assets.
- The transactions of purchase and sale of equity share are subject to STT (Securities Transaction Tax). In the case of equity-oriented mutual fund units or business trust, the transaction of the sale is liable to STT.
3. Long-term capital gains under Section 112A
The tax under section 112A is only on long-term capital gains. The period of holding should be more than one year to qualify for taxation under section 112A. The tax rate is 10% above a threshold exemption of Rs 1 lakh. This means the long-term capital gains covered under section 112A are not taxable up to Rs 1 lakh per financial year. The gains exceeding Rs 1 lakh are liable to tax at 10% plus education cess and applicable surcharge.
For example, if a taxpayer has annual (net) long-term capital gain under section 112A of Rs 1,50,000, then the tax of 10% under section 112A is on Rs 50,000 (Rs 1,50,000 – Rs 1,00,00).
A resident individual or HUF whose total income after reducing the long-term capital gains is below the basic exemption limit, and then the long-term capital gains stand reduced by such shortfall. For example, we consider a taxpayer’s total income is Rs 4,00,000 and (net) long-term capital gains under section 112A is Rs 2,00,000. Here, the balance income after reducing capital gains is Rs 2 lakh which is below the basic exemption limit. The amount by which the reduced total income falls short of basic exemption limit is Rs 50,000 (Rs 2,50,000 – Rs 2,00,000). The taxable long-term capital gains will be Rs 1,50,000 (Rs 2,00,000 – Rs 50,000).
4. Set-off long-term capital loss from long-term capital gain
The loss if any upon the sale of long-term listed equity shares or units mentioned above, is a long-term capital loss. You can set off the loss against long-term capital gain only. In case of losses from a few securities and gains from other securities, you can set-off the losses from the gains. The net gains only get taxed and only if the net gains exceed Rs 1,00,000. See illustration under point no. 5 below.
You can carry forward the long-term capital loss which you cannot set-off for a period of eight years succeeding the assessment year in which you incur the loss.
5. Grandfathering provisions under section 112A
The Finance Act, 2018 introduced the grandfathering provisions to exempt long-term capital gains earned until 31 January 2018.
In the case of specified securities bought before 1 February 2018, for calculating the cost of acquisition, we first take the lower of fair market value as on 31 January 2018 and the sale consideration. Then, we compare the result with the purchase price and take the higher of the two.
An example of capital gains calculation under section 112A:
|Sale price||Cost||FMV||Lower of A and C||Cost of acquisition – Higher of B and D||Capital gain|
In the given illustration, a taxpayer can set-off losses from the gains and arrive at the long-term capital gain taxable using the grandfathering mechanism is Rs 3,60,000. The taxpayer needs to pay tax only on the gains exceeding Rs 1,00,000, which is Rs 2,60,000.
Fair Market Value:
a. The FMV of listed securities is the highest price of the security quoted on the recognised stock exchange.
b. In case there was no trading in the security on 31 January 2018, the FMV is the highest price of the security quoted on a date immediately preceding 31 January 2018 when the security had traded on the recognised stock exchange.
c. In the case of unlisted units as on 31 January 2018, the net asset value of the units as on 31 January 2018.
d. In the case of equity share which was listed after 31 January 2018 or acquired under a merger or other transfer under section 47, the FMV will be: Purchase cost *Cost inflation index for FY 2017-18 / Cost inflation index of the year of the purchase or FY 2001-02.
6. Reporting under Schedule 112A of the ITR
The income tax returns for AY 2020-21 contain Schedule 112A to enable scrip-wise reporting of long-term capital gains. Schedule 112A requires data such as ISIN code, name of the scrip, number of units or shares sold, sale price, purchase cost and FMV as on 31 January 2018.
The details are necessary to arrive at the correct amount of long-term capital gains where the grandfathering provisions are applicable. ClearTax’s e-filing platform enables you to directly upload your stock statements from broking agencies such as Zerodha, Karvy, CAMS and others. You can quickly fill the data in Schedule 112A while filing your ITR.