Finance Act, 2018 added a new Section 112A to set the rate of tax on long-term capital gains arising from the transfer of certain assets. Investments to which the provisions of Section 112A apply include equity interests in a corporation or units in an equity fund or units in a business trust. We will refer to these assets as “Specified Assets” solely for the limited purpose of this article.
Before the insertion of this section, long-term capital gain from the transfer of the specified assets to whichSecurities Transaction Tax (STT)is payable has been exempted from Section 10 by paragraph 38. However, with the insertion of Section 112A, the provisions of Section 10(38) have been withdrawn and LTCG on the transfer of the specified property will be taxed under Section 112A.
Now let's examine the provisions of Section 112A.
Regardless of what is in itSection 112, the tax payable by a beneficiary on his total income shall be determined in accordance with the provisions of paragraph 2 if -
(I) Total income includes all income that is taxable under the heading "Capital gains";
(ii) the capital gains arise on the transfer of a long-term investment which is an interest in a company or an interest in an equity fund or an interest in a business trust;
(iii) Securities Transaction Tax pursuant to Chapter VII of the Finance Act (No. 2) of 2004 (23 of 2004),—
(A) in a case where the long-term capital property is in the form of an equity interest in a company, was paid up upon acquisition and transfer of that capital property; or
(B) in a case where the long-term capital property is of the nature of a share in an equity-oriented fund or a share in a corporate foundation, has been paid upon transfer of that capital property.
Examination of the above provision shows:-
- A transfer should be madeLONG TERMasset.
- The transferred assets should beSHARESof a company orUNITS OF AN EQUITY-LINK FUNDorUNITS OF A CORPORATE TRUST.
- STTshould be paid according to the following table:-
|type of asset||STT payable at the time of:-|
|shares in a company||acquisition and transfer|
|Shares in an equity fund or business trust||Bank transfer only|
If the above requirements are met, the provisions of § 112A only apply.
The provisions of Subsection 2 of Section 112A provide that if the long-term capital gain on the transfer of the specified assets is Rs. 1,00,000, then the amount in excess of Rs. 1,00,000 shall be taxable at a rate of 10%.
So, for example, if a person has a capital gain of Rs. 3,00,000 then the capital gain over Rs 1,00,000 i.e. Rs 2,00,000 will be charged at a rate of 10% and the capital gains tax will be Rs 20,000 (which is 10% of Rs 2,00,000).
In short, while earlier under Section 10 (38) the entireLong term capital gainwas exempt, the exemption under the current rule of Section 112A is only Rs. 1,00,000.
Deduction according to Chapter VIA
Section 112 prescribes the tax rate in the case of long-term capital gains. The section further provides that if a beneficiary has income from long-term capital gains, no deduction is permitted under Chapter VI A of LTCG.
Deviating from § 112, according to § 112A applies to aresidentsIndividuals or HUF with LTCG under Section 112A, then Chapter VIA deductions may be claimed against such income.
This results in an additional benefit according to § 112A by way of deduction according to Chapter VI A.
Unused basic exemption limit
A person under the age of 60 need not pay tax if their taxable income is less than Rs. 2,50,000. Similarly, a senior (aged over 60 but under 80) is granted an exemption of up to Rs. 3,00,000 of his taxable income and for a super senior (over the age of 80) the exemption is up to Rs. 5,00,000.
What is the significance of the exemption limits mentioned above in Section 112A? Let's analyze
Section 112A provides that if total income less Section 112A income is less than the above exemption limits, the unused exemption limit will be deducted from Section 112A capital gains.
As an example, let’s take an assessee who is younger than 60 and has the following income:
|Income other than LTCG under 112A||1.00.000|
|LTCG below 112A||2.50.000|
Calculation of total income for the assessee
|Income other than LTCG under 112A||1.00.000|
|LTCG below 112A||2.50.000|
|Less: basic allowance||2.50.000|
Here the question arises whether the beneficiary has to pay tax as the beneficiary's income under 112A is Rs. 1,00,000 and also Section 112A provides that up to Rs. 1,00,000 the beneficiary does not have to pay any tax.
Let's see what the provisions of the section say in this regard.
(2) The tax payable by the beneficiary on the total income referred to in paragraph (1) is the sum of -
(I) the rate of income tax charged on such long-term capital gains in excess of one lakh rupees at a rate of ten per cent; And
(ii) the amount of income tax payable on the total income reduced by the amount of the long-term capital gains referred to in paragraph (1), as if the total income so reduced were the total income of the beneficiary:
Providedthat in the case of an individual or an undivided Hindu resident family, if the total income less such long-term capital gains is less than the maximum not subject to income tax, then the long-term capital gains within the meaning of clause (I) reduced by the amount by which the total income thus reduced falls below the maximum income tax-free amount.
A simple meaning of the above provisions is that the tax rate for:
- Long Term Capital Gain under Section 112A above Rs. 1,00,00 is 10%
- Income other than LTCG under 112A is taxable under the other applicable provisions of the Act.
The above stipulation states that the unused exemption limit can be reduced by the income according to 112A.
The above caveat answers our question as to whether the exemption of Rs. 1,00,000 can be claimed in the example above. The wording of the caveat states that"the long-term capital gain for the purposes of clause (i)". This simply means that Rs. 1,00,000 exemptions are allowed on top of lowering the basic exemption limit.
So in our example, the assessee is allowed to claim the exemption from Rs. 1,00,000 and therefore no tax has to be paid by him.
It should be noted that the basic tax-free allowance must first be offset against income other than LTCG and only then can the remainder be offset against LTCG. An assessee cannot argue that he will first adjust the LTCG and tax the other income at his plate tax rate.
This advantage of deducting the basic allowance over LTCG also exists under Section 112.
To understand the benefits of Section 112A, let's compare Section 112A and Section 112
Consider the same example given above. Total income tax is calculated as shown in the table below:
|details||Section 112||Section 112A|
|Income below LTCG||1.00.000,00||1.00.000,00|
|Section 112 LTCG||3.50.000,00||–|
|LTCG under Section 112A||–||3.50.000,00|
|Taxable Income Before 112A Exemption and Chapter VIA Deduction||2.00.000,00||2.00.000,00|
|Fewer:Befreiung u/s 112A||–||1.00.000,00|
|Less: deduction according to Chapter VIA||–||1.00.000,00|
|Tax rate according to the applicable section||20%||10%|
|Tax on the above income||40.000,00||NULL|
Thus, from the above it can be seen that Section 112A is more advantageous compared to Section 112 in the sense that for an income of Rs. 4,50,000, an Assesse pays Rs. 40,000 tax under section 112 and no tax under section 112A.
Grandfathering of capital gains
The regulations of § 112A were effective as of 01.01stApril 2018. With the addition of this section, a corresponding clause has also been added to section 55. Section (ac) of subsection 2 of Section 55 provides for determining the cost of an asset in accordance with Section 112A.
Accordingly, if any capital property referred to in section 112A is acquired prior to 01.01stFebruary 2018 is the acquisition cost of such an assethighervon:-
- acquisition cost of the asset and
1. Fair market value of the asset at 31stJanuary 2018 u
2. Full value of consideration received or to be received as a result of the transfer
Four scenarios can occur
- Asset acquired before 01.01stFebruary 2018 and anytime after 01stFebruary 2018, but before 01stApril 2018
In the above case, the cost of the asset is determined in accordance with section (ac) of Section 55 because the asset was acquired before 01.01stFebruary 2018. However, the provisions of Section 112A do not apply in the above circumstances as the transfer occurred before 01.01stApril 2018. In this case the entire capital gain will be exempt from tax under Section 10(38).
- Asset acquired after 01.01stFebruary 2018 and anytime after 01stFebruary 2018, but before 01stApril 2018
In the above scenario, the provisions of Section 112A and also 10(38) do not apply. As the asset will be transferred within a 3 month period, it qualifies as a short-term capital asset and any gain will be taxed under the provisions of Section 111A.
- Asset acquired before 01.01stFebruary 2018 and transferred after 01stApril 2018
In the above case, the cost of the asset is determined in accordance with section (ac) of Section 55 because the capital value was before 01.01stFebruary 2018. In addition, since the transfer was made after January 1, 2018, the provisions of Section 112A also applystApril 2018. Any capital gains over Rs. 1,00,000 will be taxed at the rate of 10% under Section 112A.
- Asset acquired after 01.01stFebruary 2018 and transferred after 01stApril 2018
In the above case, the cost of the asset is not determined in accordance with clause (ac) because the capital value was calculated before 01.01stFebruary 2018. In addition, since the transfer was made after January 1, 2018, the provisions of Section 112A also applystApril 2018. Any capital gains over Rs. 1,00,000 will be taxed at the rate of 10% under Section 112A.
An important point to note in all four scenarios is that the benefit of indexation is not available for an asset taxed under Section 112A. This reduces the acquisition costs directly from thefull valueto make a profit or a loss.
Determination of acquisition costs for acquisition before 04/01/2001
The base year for calculating indexation has been revised to FY 2001-02. We will now try to understand the meaning of the base year. Look at the following example:
|year of employment||– 1995|
|Acquisition cost of the asset||– Rs. 1.00.000|
|Market value of the asset on 01/04/2001||– Rs. 1,20,000|
|Market value of the asset on 01/31/2018||– Rs. 1.10.000|
|Consideration received in the transfer of the asset||– Rs. 1.50.000|
As the asset is acquired prior to 02/01/2018, the cost of the asset is determined in accordance with clause (ac). Now the acquisition costs are calculated according to clause (ac).
|B)||FMV am 31.01.2018||1.10.000,00|
|D)||Lower of b) and c)||1.10.000,00|
|e)||Higher of a) and d)||1.10.000,00|
Thus, the acquisition cost under clause (ac) is Rs. 1,10,000. Now, section (b) of subsection 2 of Section 55 states that if an asset is acquired before 04/01/2001, the cost of the asset is the higher of the cost of the asset and the FMV at 04/01/2001.
Assuming now that there is no clause (ac), the acquisition cost is the higher of Rs. 1,00,000 (acquisition cost) and Rs. 1,20,000 (FMV as of 04/01/2001). In this case, the acquisition cost is Rs. 1,20,000.
Let's go back to clause (ac). Clause (ac) begins with the words "subject to the provisions of clause (b)". As clause (ac) is subject to the provisions of clause (b), the historical cost determined pursuant to clause (ac) shall not be less than the historical cost of clause (b).
In the example the acquisition cost is Rs. 1,20,000 as determined under clause (b) as it is higher than what is determined under clause (ac).
Is basic exemption limit available for long-term capital gain 112A? ›
Long-term capital gains under Section 112A
The period of holding should be more than one year to qualify for taxation under section 112A. The tax rate is 10% above a threshold exemption of Rs 1 lakh. This means the long-term capital gains covered under section 112A are not taxable up to Rs 1 lakh per financial year.
In order to avail of the concessional rate under section 112A, the period of holding of the assets should be greater than one year. The tax payable on the total income is 10% exceeding Rs. 1,00,000. Education cess and surcharge would be applicable on the taxable gains.How do you calculate long-term capital gains tax on shares? ›
- Long-term capital gains tax is levied on the capital gains from shares and equity-oriented mutual funds, that are held for one year or more.
- The long-term capital gains tax is charged at the rate of 10%, on the gains above Rs 1 lakh in a financial year. Short-term capital gains tax is charged at the rate of 15%.
The sale of listed equity shares, equity-oriented mutual funds, and business trusts are subject to long-term capital gains tax under Section 112A. For gains over Rs. 1 lakh, these listed assets are subject to a 10% long-term capital gains tax.What is not covered under 112A? ›
Section 112 does not apply to the capital gains on the sale of the following long-term capital assets to which Section 112A applies: Listed equity shares where STT is paid on acquisition or transfer. Units of equity-oriented mutual funds where STT is paid on transfer. Units of business trust where STT is paid on ...How to claim 1 lakh exemption on ltcg in itr? ›
You don't incur LTCG tax on capital gains from ELSS up to Rs 1 lakh. However, you have to pay long-term capital gains tax on (Rs 1,50,000 – Rs 1,00,000) Rs 50,000 at 10%. You will incur an LTCG tax of Rs 5,000 (10% of Rs 50,000) on your capital gains from ELSS.What is the cost of acquisition for Section 112A? ›
Section 112A -Applicability
Capital gain is exceeding Rs. 1 lakh. The transactions of purchase and sale of equity share are subject to STT (Securities Transaction Tax). In the case of equity-oriented mutual fund units or business trust, the transaction of the sale is liable to STT.
Further, a new Section 112A of Income Tax Act was introduced to levy a 10% income tax on Long Term Capital Gains on the sale of equity shares, equity mutual funds, and units of business trust in excess of Rs. 1 lac for a financial year. Section 112A was applicable from FY 2018-19 (AY 2019-20) onwards.How do I get exemption from long term capital gains? ›
Exemption under section 54 can be claimed in respect of capital gains arising on transfer of capital asset, being long-term residential house property. The period of holding in case of immovable property, being land or building or both, is reduced 24 months, to qualify as long-term capital asset.What is an example of long term capital gains tax? ›
Example: Say you bought ABC stock on March 1, 2010, for $10,000. On May 1, 2022, you sold all the stock for $20,000 (after selling expenses). You now have a $10,000 capital gain ($20,000 – 10,000 = $10,000). If you're single and your income is $65,000 for 2022, you would be in the 15 percent capital gains tax bracket.
What percentage of long term capital gains is taxable? ›
Long-term capital gains tax is a tax on profits from the sale of an asset held for more than a year (also known as a long term investment). The long-term capital gains tax rate is 0%, 15% or 20%, depending on your taxable income and filing status.How much of long term capital gains is tax free? ›
Exemptions on Long-Term Capital Gains Tax
Residential Indians between 60 to 80 years of age will be exempted from long-term capital gains tax in 2021 if they earn Rs. 3,00,000 per annum. For individuals of 60 years or younger, the exempted limit is Rs. 2,50,000 every year.
Q: ️Is Sec 112A compulsory? Ans: It is mandatory to complete Schedule 112A for the assessment year 2020–2021 to give information about each sale or redemption of listed equity shares and equity-oriented mutual funds.What is Rule 112 of income tax rules? ›
Under Section 112 of the Income Tax Act, an assesses is required to pay a tax at the rate of 20% or 10% after and before indexation respectively on the capital gained by him on long-term capital assets defined under Section 2 (29A) of the IT Act, 1961.How to fill long term capital gains in ITR 2? ›
For long-term capital gains, individuals have to provide scrip-wise details while they file ITR 2. This will include ISIN, selling price, purchase price, date of different transactions and more. After providing these details in 'Schedule 112A', one has to click on 'Add'.What is difference between 111A and 112A? ›
Section 111A is for Short Term Capital Gains (STCG). Section 112A is for Long Term Capital Gain (LTCG). If your total income after all relevant tax deductions, including STCG (Short Term Capital Gain), is less than INR 2.5 lakh, you will have no tax burden and no liability under Section 111A.Do I have to pay capital gains tax immediately? ›
You don't have to pay capital gains tax until you sell your investment. The tax paid covers the amount of profit — the capital gain — you made between the purchase price and sale price of the stock, real estate or other asset.What capital assets are not liable to capital gains? ›
Capital gains accrued through a transfer of long-term capital assets come under this capital gains exemption. Individuals can avail such long-term capital gain exemption, if they reinvest in specific securities like UTI units, government securities, targeted debentures, government bonds, etc.Do I need to pay capital gains tax if my income is less than 2.5 lakhs? ›
As there is a shortfall in the absorption of the basic income tax exemption limit of Ajay by Rs 1 lakh, short-term capital gain on the sale of equity can be adjusted to the extent of Rs 1 lakh. Tax will be applicable on a short-term capital gain of Rs 3 lakh (Rs 4 lakh – Rs 1 Lakh) at a flat rate of 15%.Do I need to pay Ltcg and income tax both? ›
You have to now stay invested for 3 years for the investment to be considered as long term capital gain. All gains made on investments in such funds held for less than 3 years are now considered as STCG. STCG, in this case, has to be added to your other business income and tax paid according to your income tax slab.
How many times can I claim capital gains exemption? ›
You can sell your primary residence and avoid paying capital gains taxes on the first $250,000 of your profits if your tax-filing status is single, and up to $500,000 if married filing jointly. The exemption is only available once every two years.How do you calculate acquisition for capital gains? ›
Long-term capital gain = Final Sale Price – (indexed cost of acquisition + indexed cost of improvement + cost of transfer), where: Indexed cost of acquisition = cost of acquisition x cost inflation index of the year of transfer/cost inflation index of the year of acquisition.How do you calculate cost of acquisition of shares? ›
Cost of Acquisition –
The lesser value between the fair market value and the actual sale value of the investment is chosen. It is then compared with purchase value of the share, and the higher value between the two is chosen. This value is the cost of acquisition of the asset.
The long-term capital gains from equity-oriented mutual funds need to be reported in 'Schedule 112A'. If you have short-term capital gains, that needs to be reported in Schedule CG.What is long term capital gains tax 112A? ›
Therefore, section 112A is applicable in this case. Shares were purchased in July, 2017 and were sold in June, 2022, i.e., sold after holding them for a period of more than 12 months and, hence, the gain will be long-term capital gain (LTCG).How do you avoid long term capital gains tax on stocks? ›
Exemptions for Long-Term Capital Gains
First, under section 112A, any capital gains under the value of ₹1lakh is not taxable. So one of the best ways to avoid paying capital gains tax when you sell your stock is to make sure that you keep your capital gains within the exemption bracket.
If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse.Can you bypass capital gains tax? ›
How do I avoid capital gains taxes on stocks? There are a few ways to lower the capital gains tax bill you pay on profits from the sale of stock. You can claim your fees as a tax deduction, use tax-loss harvesting, or invest in tax-advantaged retirement accounts.What investments are considered long term capital gains? ›
Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.How much capital gains on $50,000? ›
Say your taxable income for 2022 was $50,000 and you file your tax return as single. Your capital gains will be taxed at 15%, unless the asset is a collectible or real estate.
Do long term capital gains count toward gross income? ›
While capital gains may be taxed at a different rate, they are still included in your adjusted gross income, or AGI, and thus can affect your tax bracket and your eligibility for some income-based investment opportunities.Is basic exemption limit applicable on long term capital gain? ›
Residential Indians between 60 to 80 years of age will be exempted from long-term capital gains tax in 2021 if they earn Rs. 3,00,000 per annum. For individuals of 60 years or younger, the exempted limit is Rs. 2,50,000 every year.Is basic exemption limit available for long term capital gain on shares? ›
At what limit long term capital gain on stocks is tax free? A long term capital gain on stocks is exempt or tax free up to Rs 1 lakh. Any capital gain exceeding Rs 1 lakh is taxable at a rate of 10%. Moreover, the stocks or shares being sold must be listed on the stock exchange and STT must be paid.Is capital gain included in basic exemption limit? ›
A resident individual or HUF can perform the adjustment of the short-term capital gain as provided under section 111A against the basic exemption limit but such adjustment is feasible only after performing the adjustment of other income.Is there any exemption for long term capital gain? ›
Exemption under section 54 can be claimed in respect of capital gains arising on transfer of capital asset, being long-term residential house property. The period of holding in case of immovable property, being land or building or both, is reduced 24 months, to qualify as long-term capital asset.What is the limit for long term capital gains on shares? ›
You do not have to report the sale of your home if all of the following apply: Your gain from the sale was less than $250,000. You have not used the exclusion in the last 2 years. You owned and occupied the home for at least 2 years.How much tax do you pay on long term stock gains? ›
Long-term capital gains taxes are a tax on profits from the sale of an asset held for more than a year. The long-term capital gains tax rate is 0%, 15% or 20%, depending on your taxable income and filing status. Long-term capital gains tax rates are generally lower than short-term capital gains tax rates.How do you avoid long term capital gains on stocks? ›
- Invest for the Long Term. ...
- Contribute to Your Retirement Accounts. ...
- Pick Your Cost Basis. ...
- Lower Your Tax Bracket. ...
- Harvest Losses to Offset Gains. ...
- Move to a Tax-Friendly State. ...
- Donate Stock to Charity. ...
- Invest in an Opportunity Zone.
Capital Gain Tax Rates
Some or all net capital gain may be taxed at 0% if your taxable income is less than or equal to $41,675 for single and married filing separately, $83,350 for married filing jointly or qualifying surviving spouse or $55,800 for head of household.
Is only 50% of capital gains taxable? ›
The income is considered 50% of the capital gain. For example, if you sold an asset for $2,000 that has an ACB of $1,000, the taxable income is $500. ($1,000 gain x 50%). The $500 will need to be added as taxable income and you'll be taxed at your marginal tax rate based on your tax bracket.