If you are someone who is about to receive the Long Term Capital Gains on any of your assets then you must know Section 112A of the Income Tax Act as it acts as a blessing for the people who have accrued long-term capital gains because it provides them the right of exemption from the applicable taxes. So, let’s look at Section 112A in more detail.
Introduction to Section 112A of the Income Tax Act
Section 112A was inserted by the Finance Act in the year 2018 to tax the long-term capital gains accrued from the sale of the units of the business trust, the sale of the listed equity shares and units of the equity-oriented mutual funds. This Section has been brought into force to tax the capital gains which were prior to the introduction of this Section exempted from taxes.
The rate of long-term capital gains tax on the above list of shares is 10% for the gains which exceed the threshold of Rs. 1 Lakh. The ITR Forms contain a schedule 112A to fill in the details of the listed securities that are sold during the financial year. A taxpayer who has long-term capital gains specified under the grandfathering provisions of Section 112A is required to manually fill the details specified under Schedule 112A.
Earlier before the introduction of this Section, Section 10(38) allows the capital gains exemption from the sale of the listed equity shares, business trusts and the units of the mutual funds.
What is the Scope of Section 112A?
- Sale of the Specified Units: To cover under this Section it is essential that the sale should be of the equity shares, units of the equity-oriented mutual funds and the units of the business trust.
- Duration of the Securities: The securities are required to be the long-term capital assets that have been held for a period greater than 1 year
- Subject to the Securities Transaction Tax: These transactions of the sale and the purchase of the equity shares are subject to the Securities Transaction Tax.
- No Deductions: The deductions specified under Chapter VI- A cannot be availed in respect of the gains.
- No Rebate: These transactions cannot claim Rebate under Section 87A.
What is the Applicability of Section 112A?
- Sale of the Specified Units: This Section is only applicable to the sale of the specified listed securities which are equity shares, units of a business trust or units of equity-oriented mutual funds.
- Duration of the Securities: As we have discussed above the securities are required to be held for a duration which is more than 12 months.
- Cap on the Capital Gains: The Capital Gains that exceed Rs.1,25,000 are liable to be taxed only.
- Subject to the Securities Transaction Tax: These transactions of the sale and the purchase of the equity shares are subject to the Securities Transaction Tax.
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Long Term Capital Gains Treatment under Section 112A
Section 112A is applicable on the long-term capital gains and the period of the holding is required to be more than one year to qualify for the taxation under Section 112A. The tax rate is 10% which is above the threshold of Rs. 1 Lakh which means that these long-term capital gains are not taxable upto the limit of Rs. 1 Lakh every financial year. But with the amendments in the Section the limit on the exemption on these Long Term Capital Gains on the transfer of units of the Business Trust, Transfer of the Equity Shares or the Equity Oriented Funds have increased from Rs. 1 Lakh to 1.25 Lakhs per financial year. Apart from this, the rate of the tax rates have been increased from 10% to 12.5%.
The concept of the HUFs has also been covered under this Section as a resident individual or HUF whose total income after deducting the long-term capital gains is below the limit of the basic exemption then the long-term capital gains will be reduced by such shortage. A surcharge on the long-term capital gains has also been set at 15%.
Setting up of the Long Term Capital Loss from the Long Term Capital Gain under Section 112A
If any loss has been incurred upon the sale of the long-term listed equity units or the shares, it is termed as the long-term capital loss. This long-term capital loss can only be set off against the long-term capital gains. In the case of the losses from securities and the gains from other securities, then the losses can be set off against the gains and these net gains are only liable for taxation if the value of the net gains exceeds Rs. 1,00,000. An individual or a HUF can carry forward the long-term capital losses for a period of 8 years if you are unable to set off in the succeeding assessment years.
What are the Provisions related to the Grandfathering Rule under Section 112A?
With the Finance Act, 2018 the grandfathering clause has been introduced for exempting the long-term capital gains which have been earned until 31st January 2018 and in the case of the specified securities this rule has been changed to refer to 1st February 2018 in order to calculate the cost of the acquisition. In order to calculate this the lower fair market value which stands as of 31 January 2018 and the consideration of the sale and then a comparison with the purchase price is drawn with the results obtained and then taking the higher of these two.
The formula for calculating the Cost of the Acquisition in accordance with the Grandfathering Clause will be calculated as follows:
- Value I = The Fair Market Value as on the date of 31st January 2018 or the Actual Selling Price, whichever is lower.
- Value II = Value I or Actual Purchase Price, whichever is higher.
Value II must be the Cost of the Acquisition (in accordance with the Grandfathering Rule)
Long-Term Capital Gain = Sales Value – Cost of the Acquisition – Transfer Expenses
Tax Liability = 10% (Long Term Capital Gain – Rs. 1 Lakh)
Example of the Calculation of the Capital Gains under Section 112A:
Mr. A made a lump sum investment of Rs. 20 Lakhs in the shares of a listed company in the year 2005. The Fair Market Value of such shares as on the date 31 January 2018, stands for Rs. 40 Lakhs and A redeems their entire investment in May 2019 for Rs. 43 Lakhs where the Long-term capital gains is Rs. 23 Lakhs but with the taxable amount of Mr. A is only Rs. 3 Lakhs with the help of the grandfathering provisions
| A | B | C | D | E | F |
| Sale Price | Cost | FMV | Lower of the A and C | Cost of the Acquisition – Higher of the B and D | Capital Gains |
| 300,000 | 50,000 | 150,000 | 150,000 | 150,000 | 150,000 |
| 400,000 | 100,000 | 200,000 | 200,000 | 200,000 | 200,000 |
| 300,000 | 75,000 | 150,000 | 150,000 | 150,000 | 150,000 |
| 100,000 | 120,000 | 150,000 | 100,000 | 120,000 | (20,000) |
| 100,000 | 150,000 | 180,000 | 100,000 | 150,000 | (50,000) |
| 100,000 | 170,000 | 160,000 | 100,000 | 170,000 | (70,000) |
| 13,00,000 | 6,65,000 | 9,90,000 | 8,00,000 | 9,40,000 | 3,60,000 |
A Taxpayer is required to set off the losses from the gains by using the grandfathering provisions which is Rs. 3,60,000 in the above example and the taxpayer is only required to pay the gains exceeding Rs. 1,00,000 which is Rs. 2,60,000.
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Reporting Requirements under Schedule 112A of the Income Tax Returns
The Income Tax returns for the Annual year 2024 – 2025 contain a Schedule 112A which enables the scrip-wise reporting of the long-term capital gains in the cases where the grandfathering provisions are applicable. Schedule 112A requires information ranging from the amount of the Scrip, the number of units or the shares sold, the sale price, the cost of the purchase, the ISN Code and the Fair Market Value of such shares as of 31 January 2018. These details are essential for arriving at the correct amount of long-term capital gains in the cases where grandfathering provisions are made applicable.
Under Schedule 112A a taxpayer is required to disclose the long-term capital gains in their ITRs.
Exemption on the Long-Term Capital Gain on the Sale of the Listed Shares
The long-term capital gains under Section 112A on the shares sold or after 23rd July 2024 are taxed at the rate of 12.5%. The Long Term Capital Gains Equity shares which are sold before 23rd July 2023 were taxed at 10%. In both these cases there is an exemption available which is Rs. 1,25,000 where only the amount exceeding Rs. 1,25,000 will be taxed.
For Instance: If Mr. X has earned a long-term capital gain on the listed shares of Rs. 3,00,000 then his tax liability stands as:
- Scenario A: Where the shares sold on 1st March 2024 = 3,00,000 – 1,00,000 * 10% = Rs. 20,000
- Scenario B: Where the shares sold on 1st July 2024 = 3,00,000 – 1,25,000 * 10% = Rs. 17,500
- Scenario C: Where the shares sold on 1st August 2024 = 3,00,000 – 1,25,000 * 12.5% = Rs. 21,875
What are the Long Term Capital Gains on the Transfer of the Bonus Shares and Rights Shares?
The Long Term Capital Gains on the Transfer of the Bonus Shares and the Rights Shares which are acquired on or before 31st January 2018 are calculated by taking into consideration the Fair Market Value of the shares and then exempting the gains until the date of 31st January 2018 for the computation of the taxes.
Fair Market Value of the Shares
- The fair market value of the listed securities is the highest price quote for a security on a recognised stock exchange.
- If the securities are not traded on the date of 31 January 2018, the Fair Market Value of the securities is the highest price quoted on the date which is immediately preceding before 31 January 2018 when the security traded on the recognised stock exchange.
- In the case of the unlisted securities as of 31 January 2018 and the net asset value of the units on the date,
- The fair market value of the equity share listed after 31 January 2018 or acquired via a merger or transfer under Section 47 will be the Purchase Price * Cost of the Inflation for the fiscal year.
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Rebate under Section 87A of the Income Tax Act
Rebate is not applicable under Section 87A of the Income Tax Act to the Long Term Capital gains which is taxed under Section 112A.
Conclusion
Section 112A of the Income Tax Act allows individuals to avail the benefits of tax savings accrued on the sale of the business units, the sale of the listed equity shares and units of equity-oriented mutual funds. This section provides for the exemption benefits which may be liable to be taxed under the long-term capital gains.
Frequently Asked Questions
Q1. Is 112A exemption of 1 lakh?
Ans1. Section 112A states that the long-term capital gains are charged on the sale of the listed equity shares, business trust and equity-oriented mutual funds and the rate of these long-term capital gains is 10% for gains which exceeds the threshold of Rs. 1 lakhs.
Q2. What is the basic exemption limit for long-term capital gains?
Ans2. The basic exemption limit for long-term capital gains is Rs. 1.25 lakh per year.
Q3. How do I claim deduction under 112A?
Ans. The applicability of Section 112A has to be satisfied for claiming the deductions under this Section.
Q4. What is the limit of dividend tax-free?
Ans4. The limit of dividend tax-free was removed and all the dividends are now taxable depending upon the income slab rate.
Q5. What is the difference between Section 112 and Section 112A?
Ans5. Section 112 applies to long-term capital assets while Section 112A is the overriding section of Section 112
Q6. What is the benefit of 112A?
Ans6. This section enables small investors to enjoy tax-free benefits while promoting long-term wealth creation for them.
Q7. What is the period of holding for capital gains?
Ans7. The period of holding for commuting the capital gains is 24 months or more than that.
Q8. What is the 87A rebate?
Ans8. A person is eligible to claim the rebate if their taxable income falls within the specified tax slabs.
Q9. Does FD interest come under capital gains?
Ans9. Yes, the interest earned on the Fixed Deposits is taxable, while the overall tax liability can be lower as compared to the higher taxes on the capital gains from other investments.
Q10. What is the grandfather rule of capital gains?
Ans10. The Grandfathering Clause allows the grandfathering of capital gains to exempt certain individuals from complying with the tax provisions related to the long-term capital gains on mutual funds.
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