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

Capital gains are taxed according to the tenure of holding investments. Investment gains are broadly classified into long-term capital gains and short-term capital gains. The taxation of long-term capital gains is divided under two provisions, Section 112 and Section 112A of the Income Tax Act.

Update:

The amendment to Finance Bill 2023 scrapped the indexation benefit for gains from debt mutual funds, and they will be taxed at the investor’s slab rates. Thus, from 1 April 2023, gains from debt mutual funds with up to 35% of the equity exposure will be taxed at the investor’s slab rates and considered short-term capital gains.

In this article, we will learn the tax rates applicable to transferring all long-term capital assets (except capital assets covered under Section 112A).

Section 112 applies to whom?

Section 112 applies to all types of taxpayers, such as individuals, HUFs, companies, firms, residents, non-residents (not companies), and foreign companies.

What types of long-term assets are covered under Section 112?

Section 112 specifies income tax rates on all kinds of long-term capital assets, such as-

• Listed securities 
• Zero-coupon bonds 
• Unlisted securities 
• Immovable property 
• Other long-term capital assets

This section does not apply to the capital assets covered under Section 112A below-

• Listed equity shares where STT paid on acquisition and transfer 
• Units of equity-oriented mutual funds where STT paid on transfer 
• Units of business trust where STT paid on transfer

How to classify various capital assets into long-term and short-term?

See the table below to understand how capital assets are classified:

What is the tax rate on long-term capital gain covered under Section 112?

1. If there is LTCG on listed securities (other than units) where STT is not paid at the time of acquisition and transfer 
   1. Tax rate is lower of-10% (without indexation)
   2. 20% (with indexation)
2. If there is LTCG on zero-coupon bonds 
   1. Tax rate is lower of-10% without indexation
   2. 20% with indexation
3. In the case of a non-resident (other than a company) or a foreign company, if there is LTCG from unlisted securities or shares
   1. Tax rate is 10% on LTCG without computation of capital gain in foreign currency and indexation. i.e. Tax = 10% x (Sale price – Cost of Acquisition)
4. For any other long-term capital asset such as immovable property sold by a resident – Tax rate is 20%

There taxation rates for various types of long-term capital gains are as follows:

Taxation Rates:

How to calculate the tax liability if total income includes long-term capital gain?

If the total income of the taxpayer includes income from the transfer of long-term capital assets, then the income tax liability will be calculated as below-

1. Reduce the total taxable income by the amount of long-term capital gains (LTCG) and calculate tax on the income so reduced as per the normal applicable tax rates applicable to you.
2. Separately calculate tax on the long-term capital gains at rates specified above.
3. Add both the amounts to know the total tax liability.

Points to remember

1. In the case of individuals and HUFs, if the normal income, i.e. income excluding the long-term capital gain, is less than the basic exemption limit, then set off the unadjusted amount with the long-term capital gains and calculate tax on LTCG at specified rates (see example 2 below).
2. The benefit of the basic exemption limit mentioned above does not apply to non-residents. 
3. Chapter VI-A deduction will not apply to long-term capital gains (see example 3 below).

Illustrations

1.Suppose an individual (below 60 years of age) has a total income of Rs 8 lakh in which long-term capital gain on sale of immovable property of Rs 1 lakh is included. So the tax payable by the individual can be calculated as below-

• Income excluding LTCG- Rs 7 lakh (Rs 8 lakh – Rs 1 lakh)
• Tax payable on Rs 7 lakh as per old tax slab rates- Rs 52,500
• 20% tax on LTCG- Rs 20,000 (20% on Rs 1 lakh)
• Total tax payable- Rs 72,500 (excluding cess)

2. Suppose an individual (below 60 years of age) has a total income of Rs 3.5 lakh in which long-term capital gain (mutual funds units) of Rs 3 lakh is included. Here, the normal income (Rs 3.5 lakh – Rs 3 lakh= Rs 50,000) is less than the basic exemption limit (Rs 2.5 lakh). So the tax payable by the individual can be calculated as below-

• Income excluding LTCG – Rs 50,000 (Rs 3.5 lakh – Rs 3 lakh)
• LTCG – Rs 3 lakh
• Tax payable on Rs 50,000 – Nil
• Basic exemption limit – Rs 2.5 lakh
• Unadjusted amount (d-a) – Rs 2 lakh (Rs 2.5 lakh – Rs 50,000)
• LTCG after adjusting 
  basic exemption limit(b-e)- Rs 1 lakh (Rs 3 lakh – Rs 2 lakh)
• 20% tax on adjusted LTCG (20% x f)- Rs 20,000 (20% on Rs 1 lakh)
• Total tax payable (c + g)- Rs 20,000 (excluding cess)

3. Suppose an individual (below 60 years of age) has a gross total income of Rs 4 lakh in which long term capital gain (mutual funds units) of Rs 3 lakh is included. Chapter VI-A deduction is Rs 1.5 lakh.

Here, the gross total income excluding LTCG is Rs 1 lakh (Rs. 4 lakh – Rs 3 lakh). You can adjust the Chapter VI-A deduction from normal income only, not LTCG. Hence. Your normal income will be Nil after claiming Chapter VI-A deductions. Hence, the total income tax liability will be calculated as under.

• Income after deductions- Nil
• LTCG – Rs 3 lakh
• Tax payable normal income – Nil
• Basic exemption limit – Rs 2.5 lakh
• Unadjusted amount (d-a) – Rs 2.5 lakh (Rs 2.5 lakh – 0)
• LTCG after adjusting 
  basic exemption limit (b-e)- Rs 50,000(Rs 3 lakh – Rs 2.5 lakh)
• 20% tax on adjusted LTCG (20% x f) Rs 10,000 (20% on Rs 50,000)
• Total tax payable (c + g) Rs 10,000 (excluding cess)

Reporting of LTCG in ITR form

Taxpayers must report income from capital gains in ITR-2 and ITR-3 forms. They must report the below details for reporting LTCG under Schedule CG of the ITR:

• The full consideration value, i.e. sale value
• Deductions under Section 48
• Indexed cost of acquisition, i.e. purchase value
• Indexed cost of improvement, if applicable
• Expenditure exclusively and wholly in connection with transfer, i.e. transfer expenses

The LTCG will be automatically computed.

Set off and carry forward of Long Term Capital Loss (LTCG) under Section 112

The loss on sale of a  long-term capital asset is a Long Term Capital Loss (LTCL) as per Section 112. A taxpayer can set off the LTCL from one capital asset against the LTCG from another capital asset. As per the income tax rules for set off and carry forward of losses, a taxpayer can set off the LTCL against the LTCG only in the current year. However, a taxpayer can carry forward the remaining loss for 8 years and set off only against future LTCG.

Section 112 v/s 112A v/s 111A

Section 112 of the Income Tax Act applies to all long-term capital assets. Different tax rates are defined for long-term capital gains on these assets except those covered under Section 112A.

Section 112A of the Income Tax Act is the overriding section of Section 112. Thus, it applies to long-term capital gains on the sale of specified long-term capital assets, i.e., equity shares, equity mutual funds, and units of business trust on which STT is paid and is listed on a recognised stock exchange in India.

Section 111A of the Income Tax Act applies to short-term capital gains on the sale of equity shares, equity mutual funds, and units of business trust on which STT is paid and is listed on a recognised stock exchange in India.

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