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

Long-term capital gains (LTCG) are the gains that arise when there is a transfer of long-term capital assets. The taxation of LTCG under the Income-tax Act,1961 is as per the provisions of 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. Section 112 addresses the taxation of LTCG on any other category of asset like property, jewelry etc. 

In this article, we will discuss Section 112A - its applicability, exemption and examples. 

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 (for listed securities) or 24 months (for other assets) 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 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 the Income-tax Act,1961:

• The securities transaction tax (STT) has been paid on the acquisition and transfer of an equity share of a corporation.
• 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.
• The securities should be long-term investments.
• No deduction under Chapter VI A is available for such long-term capital gain.
• 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:

• Sale must be of equity shares or units of an equity-oriented mutual fund or units of a business trust.
• The securities should be long-term capital assets i.e. should have been held for more than 12 months.
• Only the capital gains exceeding Rs. 1,25,000 will be taxed.
• 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 based on 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.

The Cost Of Acquisition as per grandfathering clause will be calculated as follows:

• 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 on equity shares sold on or after 23rd July 2024 will be taxed at 12.5%. However, LTCG equity shares sold before 23rd July 2023 will be taxed at 10%. In both the case there will be an exemption of Rs. 1,25,000 available i.e., only LTCG exceeding Rs. 1,25,000 will be taxed at applicable rates. 

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

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 cost of acquisition 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 on Sale of 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 gains. As a result, a short-term capital loss can be set off against both a short-term capital gain and a long-term capital gain.  Long-term capital loss, on the other hand, may only be offset against long-term capital gain.

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 only.

Fair Market Value

• The Fair Market Value (FMV) of a listed security is the highest price quoted on a recognised stock market.
• 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.
• In the case of unlisted units on January 31, 2018, the net asset value of the units on that date.
• 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 x 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 has started receiving the details of 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 important that you reconcile the capital gains 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

The rebate under Section 87A of the Income Tax Act is not applicable to Long-Term Capital Gains (LTCG) taxed under Section 112A.

Related Articles:

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Section 112 of Income Tax Act: How to calculate income tax on long-term capital gains

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Section 54EC- Deduction on LTCG Through Capital Gain Bonds

Capital Gains Exemption