Decoding Long-Term Capital Gains!

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Section 112A: Long-Term Capital Gains on Listed Shares and Equity-Oriented Funds

Long-term capital gains (LTCG) arise when a long-term capital asset is transferred. The taxation of LTCG under the Income Tax Act, 1961, is categorized into two key provisions: Section 112 and Section 112A. Section 112A specifically addresses the taxation of LTCG on listed shares, equity-oriented funds, and units of business trusts. This article delves into the applicability, exemptions, examples, and recent updates related to Section 112A.

Budget 2024 Updates

Effective from FY 2024-25:

  1. Uniform Holding Period:
  2. Exemption and Tax Rate Changes:

What are Long-Term Capital Gains on Shares?

LTCG refers to the profit earned from the sale of shares or other assets held for more than 12 months at the time of sale. It is calculated as the difference between the sale price and the purchase price of assets held for more than a year.

Key Definitions:

  • Listed Equity Shares: Considered long-term if held for at least 12 months.
  • Unlisted Equity Shares: Considered long-term if held for at least 24 months.

Scope and Applicability of Section 112A

Conditions to Avail Concessional Rate:

  1. STT Requirement: Securities Transaction Tax (STT) must be paid on both acquisition and transfer of equity shares. For equity-oriented mutual funds or business trust units, STT is required only on the sale transaction.
  2. Long-Term Holding: The securities must qualify as long-term capital assets.
  3. Exemption Limit: Capital gains exceeding ₹1.25 lakh (from FY 2024-25) will be subject to tax.
  4. No Deduction: No deductions under Chapter VI-A can be claimed against these gains.
  5. No Rebate: Rebate under Section 87A is not applicable to LTCG taxed under Section 112A.

Grandfathering Clause in Section 112A

Section 112A was introduced on February 1, 2018, to tax profits from the sale of shares. Previously, such profits were exempt. To ensure prospective taxation, a grandfathering clause was introduced:

  • Cost of Acquisition (COA):

LTCG Formula:

LTCG = Sale Price – COA (as per grandfathering rule) – Transfer Expenses

Tax Liability:

Tax = 10% × (LTCG – Exemption Limit)

Exemptions and Tax Rates

Exemption on LTCG:

  • LTCG exceeding ₹1.25 lakh (from FY 2024-25) is taxable under Section 112A.

Tax Rates:

  • Until July 22, 2024: 10%
  • From July 23, 2024: 12.5%

Example:

  • LTCG: ₹3,00,000
  • Tax Liability:
  • Sold before July 23, 2024: (₹3,00,000 – ₹1,25,000) × 10% = ₹17,500
  • Sold on/after July 23, 2024: (₹3,00,000 – ₹1,25,000) × 12.5% = ₹21,875

Reconciliation of Capital Gain Statement vs AIS

The Income Tax Department now receives transaction details directly from depositories like CDSL and NSDL. This information is reflected in the Annual Information Statement (AIS). Discrepancies between the AIS and filed ITR can result in notices from the department. Hence, reconciling the two is crucial.

FAQs

1. What is the holding period for LTCG on listed shares under Section 112A?

For listed shares, the holding period must exceed 12 months to qualify as long-term.

2. How is the tax rate on LTCG determined?

  • Gains above the exemption limit are taxed at 10% (before July 23, 2024) or 12.5% (after July 23, 2024).

3. What is the grandfathering clause in Section 112A?

It ensures that gains accrued before February 1, 2018, are not taxed. The COA is adjusted as per the FMV on January 31, 2018.

4. Can LTCG losses be carried forward?

Yes, LTCG losses can be carried forward and set off against LTCG in subsequent years.

5. Does the exemption limit of ₹1.25 lakh apply to the entire year?

Yes, the exemption applies for gains accrued throughout the financial year.

Key Takeaways

  • LTCG on listed shares and equity-oriented funds is taxed under Section 112A.
  • Grandfathering provisions ensure tax applicability only on gains post-February 2018.
  • From FY 2024-25, the exemption limit increases to ₹1.25 lakh, and the tax rate increases to 12.5%.
  • Reconciliation of AIS data with ITR filings is essential to avoid discrepancies.

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