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

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.

Section 112A -Applicability 

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 gains is more than Rs.1 lakh.
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.

Adjustment for Rs.100,000 exemption

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

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

Set-off long-term capital loss from 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. So only net gains become taxable if they exceed Rs 1 Lakh.