Section 112A of Income Tax Act - Long Term Capital Gains on Shares

Long-term capital gains (LTCG) are the gains that arise when long-term capital asset is transferred. The taxation of LTCG under Income-tax Act,1961 is categorised  into two provisions i.e. Section 112 and Section 112A. Section 112A specifically addresses the taxation of LTCG on listed shares, equity-oriented funds, and units of a business trust. In this article, we will discuss about Section 112A - its applicability, exemption and examples. 

Budget 2024 Updates

• With effect from FY 2024-25, there will be only two holding periods, 12 months and 24 months. For all listed securities, the holding period is 12 months, and for all other assets, it is 24 months. Thus, listed shares held for a period of more than 12 months will be considered long-term
• From FY 2024-25, the limit on the exemption of Long Term Capital Gains on the transfer of equity shares or equity-oriented units or units of Business Trust is proposed to be increased from Rs.1 Lakh to Rs.1.25 lakh per year. The rate at which it is taxed is also increased from 10% to 12.5%.

What are Long-Term Capital Gains on Shares?

A long-term capital gain is the profit earned from the sale of shares or other assets when they are held for more than 12 months at the time of sale. It is calculated as the difference between the sale price and purchase prices of assets held for more than a year. In other words, it represents the net profit that the investor earns from the sale of the asset.

Listed equity shares can be considered as long-term capital assets if they are held for at least 12 months, whereas gains from unlisted equity shares will be considered long-term only if they are held for at least 24 months.

Scope of Section 112A

The following conditions apply for availing the benefit of the concessional rate under section 112A of Income-tax Act,1961:

1. The securities transaction tax (STT) has been paid on the acquisition and transfer of an equity share of a corporation.
2. The STT was paid when the asset was sold in the case of units of an equity-oriented fund or units of a business trust.
3. The securities should be long-term investments.
4. No deduction under Chapter VI A is available for such long-term capital gain.
5. A rebate under section 87A cannot be claimed in respect of long-term capital gain tax due under section 112A.

Applicability of Section 112A  

Capital gain tax under section 112A will be levied only if the below-mentioned conditions are fulfilled:

1. Sale must be of equity shares or units of an equity-oriented mutual fund or units of a business trust.
2. The securities should be long-term capital assets i.e. having more than 1 year of holding.
3. Capital gain is more than Rs.1 lakh. This limit has been increased to Rs.1.25 lakh with effect from FY 2024-25.
4. The transactions of purchase and sale of equity shares are subject to STT (Securities Transaction Tax). In the case of equity-oriented mutual fund units or business trusts, the transaction of the sale is liable to STT.

What is the Grandfathering Clause in Section 112A?

Section 112A was introduced on 1st February 2018 to tax the profits made on shares. Earlier, tax was exempt on such profits. To protect the interests of investors, CBDT introduced grandfathering clauses to ensure that the tax is only prospective in nature, and the tax is levied only on the gains from 1st February 2018. For this, the cost of acquisition of the equity or equity-related securities is to be calculated on the basis of a formula covered in section 112A. To summarize, the grandfathering clause in Section 112A provides relief from LTCG tax on sale of equity shares and units of equity-oriented that were acquired before January 31, 2018, by modifying the purchase cost as if the shares were purchased on 1st February 2018.

Use the below formula for calculating COA:

• Value I - Fair Market Value as of 31st Jan 2018 or the Actual Selling Price, whichever is lower
• Value II - Value I or Actual Purchase Price, whichever is higher

Value II shall be the Cost of Acquisition (as per grandfathering rule)

Long Term Capital Gain(LTCG) = Sales Value – Cost of Acquisition (as per grandfathering rule) – Transfer Expenses

Tax Liability = 10% (LTCG – Rs 1 lakh)

Illustration for LTCG on Shares as per Grandfathering Rule

Let us understand with an example

Mr Udit made a lump-sum investment of Rs. 20 lakh in shares of a listed company in June 2005. 
FMV on January 31, 2018, is Rs. 40 lakh. Udit redeems his entire investment in May 2019 for Rs.43 lakh netting a gain of Rs. 23 lakh. However, due to the grandfathering clause, Udit’s taxable gain would be only Rs. 3 lakh.

Udit had made another one-shot investment of Rs. 15 lakh in shares of another listed company in February 2016. The FMV of the investment on January 31, 2018, was Rs. 4 lakh, and he further sold all these shares in June 2019 for a sum of Rs. 10 lakhs. In this transaction, Rahul incurred a loss of Rs. 5 lakh calculated for tax purposes as per the above-mentioned formula.

Exemption on LTCG on Listed Shares

LTCG under section 112A at 10% is to be calculated only on the gains in excess of Rs. 1 Lakh.

CBDT has clarified in the FAQ section that the amount of Rs.1 Lakh is not to be reduced from the total amount, but while calculating taxes. You can use the ClearTax tax calculator, which automatically takes care of such complex calculations. 

Note - For the benefit of the lower and middle-income classes, the limit on the exemption of Long-Term Capital Gains on the transfer of equity shares or equity-oriented units or units of Business Trust has increased from Rs.1 Lakh to Rs.1.25 lakh per year. However, the rate at which it is taxed has increased from 10% to 12.5%. The exemption limit to Rs.1.25 lakhs has been increased for the whole of the year, whereas the tax rate changed on 23rd July 2024.

Example: Mr. A has an LTCG on listed shares of Rs. 3,00,000. Calculate the tax liability on the same.

1. Sold on 1st March 2024 - Tax liability on listed shares = (3,00,000 - 1,00,000) * 10% = Rs. 20,000.
2. Sold on 1st July 2024 - Tax liability on listed shares = (3,00,000 - 1,25,000) * 10% = Rs. 17,500.
3. Sold on 1st August 2024 - Tax liability on listed shares = (3,00,000 - 1,25,000) * 12.5% = Rs. 21,875

LTCG on Transfer of Bonus and Rights Shares acquired on or before 31 January 2018

The LTCG for these shares shall be calculated by considering the FMV on 31st January 2018 as the COA of such shares, thereby exempting gains until 31st January 2018 from tax.

Eg: You have Reliance shares purchased on 1st April 2016 and issued bonus shares as on 1st April 2017. Now if such bonus shares are sold after 31st Jan 2018, then FMV as of 31st Jan 2018 will be considered as the Cost of acquisition of such shares.

Set-off of Long-term Capital Loss with Long-term Capital Gain

The loss on the sale of long-term listed equity shares or equity-related instruments is a long-term capital loss. 

Please note that long term loss on capital gains can be set off only against long-term capital gain. In a situation of an investor has incurred losses from some securities and profits from other securities, then the same can be set off against each other.

Carry Forward of Long-Term Capital Losses (LTCL) on Sale of such Shares

If the net result for any assessment year is a loss, other than a capital gain, the assessee is entitled to have the amount written off against his income from any other source under the same head.

 A short-term capital loss might be set off against any capital gain in the case of capital losses. As a result, a short-term capital loss can be set off against both a short-term capital loss and a long-term capital loss.  Long-term capital loss, on the other hand, may only be offset against long-term capital gain.

Long-term capital gains resulting from the transfer of equity shares listed on a recognised stock exchange are currently taxed at 10%. If any long-term capital losses result from the selling of such equity shares, such losses may now be set off against the other long-term capital gain.

Fair Market Value

a. The Fair Market Value (FMV) of a listed security is the highest price quoted on a recognised stock market.

b. If the security was not traded on 31 January 2018, the FMV is the highest price quoted on a date immediately before 31 January 2018 when the security was traded on a recognised stock exchange.

c. In the case of unlisted units on January 31, 2018, the net asset value of the units on that date.

d. The FMV of an equity share listed after January 31 2018, or acquired through a merger or other transfer under Section 47 will be: Purchase price *Cost inflation index for fiscal year 2017-18 / Cost inflation index for the year of purchase or fiscal year 2001-02.

Reconciliation of Capital Gain Statement vs AIS

As part of its digital initiative, the Income tax department have started receiving the details on the sale of your shares  directly from Depositories like CDSL and NSDL. Such data is reflected in your AIS - Annual Information Statement.

Thus it is very important that you reconcile the capital gain statement that you have with the data available in AIS before you file your ITR. Any Mismatch in ITR and AIS will result in a notice from the Income tax department

Rebate under 87A

Rebate under Section 87A of the Income Tax Act is allowed on income tax computed on all income, excluding the income tax payable on such LTCG.

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