Concessional Rate of 10% Tax Rate on shares of a private company and shares of a company in which the public is not substantially interested- Section 112 of Income Tax Act, 1961
Long-term capital gains, arising tp a non-resident, are taxable at a concessional rate of 10%, provided the following conditions are satisfied: –
- There is a transfer of unlisted shares of an Indian company ;
- No benefit of indexation is taken (First proviso to Section 48) ;
- The benefit of foreign currency fluctuations is not taken (Second proviso to Section 48)
Thus, in case of long-term capital gains on the sale of unlisted shares, a non-resident assessee has two options: –
Concessional Tax Rate of 10% on Listed Shares
An Indian tax resident, who derives long-term capital gains on the sale of listed shares [which do not satisfy conditions of Section 10(38)], has the option to pay tax rate @ 10% without availing of indexation benefit.
Non-residents do not have this option and need to pay tax @ 20% on long-term capital gains on listed shares [which do not satisfy conditions of Section 10(38)]
No Deduction under Chapter VI-A against LTCG
Deductions under Chapter VIA cannot be availed in respect of the long-term capital gains, for which the benefit of concessional tax u/s 112 has been claimed by the assessee.
Taxation of Capital Gains at Concessional Rate of 10% [Section 112A of Income Tax Act] – Inserted by the Finance Act 2018.
Under the existing regime of the Income-Tax Act (the Act), there was an income-tax exemption u/s 10(38) of the IT Act on long-term capital gains from the transfer of equity shares of a company or a unit of an equity-oriented fund or a unit of business trusts, provided certain conditions like changeability to securities transaction tax (STT) were satisfied. It was felt by the Government, that this regime was inherently biased against manufacturing, and has encouraged the diversion of investment in financial assets. It has also led to significant erosion in the tax base resulting in revenue loss.
In order to minimize economic distortions and curb the erosion of the tax base, the Finance Act, 2018 has withdrawn exemption u/s 10(38) and introduced a new section 112A in the Act.
Section 112A of the Income Tax Act provides for a concessional tax rate on long-term capital gains, arising from the transfer of equity shares or units of an equity-oriented fund/business trust.
Section 112A of the Income Tax Act overrides Section 112 of the Income Tax Act and provides that the tax payable by an assessee on long-term capital gains exceeding Rs 1 lakh (Long-term capital gains on equity shares, etc. are not taxable at 10% u/s 112A if the amount of capital gains is Rs. 1 lakh or less) shall be @ 10%, subject to the following conditions: –
- The total income of an assessee includes any income chargeable under the head “Capital gains;
- The capital gains arising from the transfer of a long-term capital asset, which is an equity share in a company, a unit of an equity-oriented fund, or a unit of a business trust;
- Securities Transaction Tax has been paid at the time of acquisition and transfer of such equity shares. In the case of a unit of equity-oriented funds or a unit of business trust, the securities Transaction Tax has been paid only at the time of the transfer of shares.
The requirement of payment of STT at the time of transfer of a long-term capital asset, shall not apply if –
a) the transfer is undertaken on a recognized stock exchange located in any International Financial Services Centre (IFSC), and
b) Consideration of such transfer is received or receivable in foreign currency.
Section 112 of Income Tax Act, 1961 Example:-
ABC International (USA), earns long-term capital gains of Rs 90,000 on the transfer of listed equity shares during the PY 2018-19. Such gains are not taxable u/s 112A as it does not exceed Rs 1 lakh.
Section 112 of Income Tax Act, 1961 Example:-
XY Inc. earns long-term capital gains of Rs 1,10,000 on the transfer of listed equity shares during the PY 2018-19. Tax liability on such gains would be Rs 1040 [(Rs 1,10,000- 1,00,000)*10.4%]. The concessional rate of 10% u/s 112A shall be increased by a cess of 4%. Thus, the tax shall be computed @ 10.40%.
Other Points: –
- As per the third proviso to Section 48, the long-term capital gains referred to in Section 112A of the Income Tax Act will be computed without giving effect to the first and second provisos to Section 48. Thus, inflation indexation in respect of the cost of acquisition and cost of improvement, if any, and the benefit of computation of capital gains in foreign currency in the case of a non-resident, will not be allowed.
- As Section 112A overrides Section 112 of the Income Tax Act, tax rates prescribed under Section 112 of the Income Tax Act for long-term capital gains arising from listed equity shares would not be applicable where the matter is covered u/s 112A.
The benefit of unutilized exemption limit
In the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, the long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax.
Note:- This benefit is available only for resident Individuals and HUF. Thus, such a benefit is not available for non-residents.
Section 112 of Income Tax Act, 1961 Example:-
Mr. Aamir, who is 23 years old, earns long-term capital gains of Rs 2,50,000 during the PY 2018-19. He also earns other income of Rs 2,00,000 during the same year. In such a case, his tax liability would be computed as under:-
| Particulars | Amount | |
| Income from other sources | ||
| Other income | 2,00,000 | |
| Capital gains | 2,50,000 | |
| Unutilized exemption limit (2,50,000 – 2,00,000) | (50,000) | 2,00,000 |
| Total income | 4,00,000 | |
| Computation of tax liability | ||
| Tax on other income | Nil | |
| Capital Gains [(2,00,000 – 1,00,000)*10.4%] | 10,400 |
Section 112 of Income Tax Act, 1961 Example:-
Mr. Samir, who is a 62-year-old person, earns long-term capital gains of Rs 2,50,000 during the PY 2018-19. He also earns other income of Rs 2,00,000 during the same year. Now his tax liability would be computed as under:-
| Particulars | Amount | |
| Income from other sources | ||
| Other income | 2,00,000 | |
| Capital gains | 2,50,000 | |
| Unutilized exemption limit (3,00,000 – 2,00,000) | (1,00,000) | 1,50,000 |
| Total income | 3,50,000 | |
| Computation of tax liability | ||
| Tax on other income | Nil | |
| Capital Gains [(1,50,000 – 1,00,000)*10.4%] | 5200 |
Deduction under Chapter VI-A
Deductions under Chapter VIA cannot be availed in respect of the long-term capital gains, for which the benefit of concessional tax u/s 112A has been claimed by the assessee.
Rebate under Section 87A
Where the total income of an assessee includes any long-term capital gains as referred to in Section 112A, the rebate under Section 87A shall not be available from the income tax calculated on such capital gains.
Special method to compute the cost of acquisition [Section 55]
Where equity share or unit, etc. is acquired before February 1, 2018, then its cost of acquisition shall be computed by the following method:-
Step 1:-
Determine the lower of –
- The Fair Market Value of such asset; or
- The full value of the consideration received or accruing as a result of the transfer of the capital asset.
Step 2:-
Determine the cost of acquisition of such capital asset
Step 3:-
Determine the higher of Step 1 or Step 2, which shall be the cost of acquisition for computing capital gains
Notes:-
Meaning of fair market value
| Category | Fair Market Value |
| Where the capital asset is listed on any recognized stock exchange as of the 31st day of January 2018 | The highest price of the capital asset quoted on such exchange on the said date
Note:- When there is no trading in such asset on such exchange on the 31st day of January 2018 the fair market value would be the highest price of such asset on such exchange on a date immediately preceding the 31st day of January 2018 when such asset was traded on such exchange shall be the fair market value |
| When a capital asset is a unit that is not listed on a recognized stock exchange as on the 31st day of January 2018, | The net asset value of such unit as on the said date; |
| Where the capital asset is an equity share in a company that is
· not listed on a recognized stock exchange as on the 31st day of January 2018 but listed on such exchange on the date of transfer, or |
Cost of acquisition X CII of 2017-18 CII of the year in which the asset was held by the assessee or 2001-02, whichever is later |
Meaning of certain terms under Section 112 of Income Tax Act, 1961
Equity-oriented fund:-
“Equity-oriented fund” means a fund set up under a scheme of a mutual fund specified under clause (23D) of Section 10 and,
a. In a case where the fund invests in the units of another fund that is traded on a recognized stock exchange –
- a minimum of ninety percent of the total proceeds of such fund is invested in the units of such other fund; and
- such other fund also invests a minimum of ninety percent of its total proceeds in the equity shares of domestic companies listed on a recognized stock exchange
b. In any other case, a minimum of sixty-five percent of the total proceeds of such fund is invested in the equity shares of domestic companies listed on a recognized stock exchange.
Provided that the percentage of equity shareholding or unit held in respect of the fund, as the case may be, shall be computed with reference to the annual average of the monthly averages of the opening and closing figures.
Section 112 of Income tax act Example:-
Consider the following data for computation of the cost of acquisition of listed equity shares:-
| Particulars | Scenario 1 (amount in lakhs) | Scenario 2 (Amount in lakhs) | Scenario 3
(Amount in lakhs) |
| Step 1
· Fair market value of shares [highest price of a share in the stock exchange as on January 31, 2018] Lower of fair market value or sale consideration |
100
200 100 |
300
200 200 |
250
150 150 |
| Step 2
Cost of acquisition of shares as on March 1, 2014 |
50 |
300 |
50 |
| Step 3
Cost of acquisition for the purpose of Section 112A (Step 1 or Step 2, whichever is high) |
100 | 300 | 150 |
| Capital Gains | 100 | -100 | Nil |
Section 112 of Income Tax Act Example:-
Mr. Kapil has purchased 10,000 listed equity shares on March 1, 2013, for Rs 1,00,000. He has sold such shares on August 10, 2018, for Rs 10,00,000. The highest price of such shares on the stock exchange is Rs 4,00,000 as on January 31, 2018. He also sold the house property on July 1, 2018, for Rs 10,00,000 (CII – 280). Such house property was purchased on July 1, 2012, for Rs 2,00,000 (CII 200). Compute the tax liability for the PY 2018-19 on each individual gain ignoring, the basic exemption limit.
Solution –
Computation of the total income of Mr. Kapil for the PY 2018-19
| Particulars | Capital Gains | House Property |
| Sales consideration (A) | 10,00,000 | 10,00,000 |
| Cost of Acquisition (B) | (4,00,000) | (2,80,000)
(2,00,000 X 280)/200
|
| Step 1 – Rs 4,00,000 (i.e., lower of fair market value as on January 31, 2018, or sales consideration)
Step 2 – Rs 1,00,000 (i.e., cost of acquisition) Final Step – Higher of Step 1 or Step 2 |
||
| Long-term capital gains (A – B) | 6,00,000 | 7,20,000 |
| Tax on long-term capital gains | ||
| Under section 112A [(6,00,000 – 1,00,000) * 10%] | 50,000 | ——- |
| LTCG on HP [ 7,20,000 * 20%] | ———- | 1,44,000 |
| Add: Health and Education Cess [4%] | 2,000 | 5,760 |
| Total Tax Liability | 52,000 | 1,49,760 |
Section 112 of Income Tax Act Example:-
Mr. Rahul, who is 40 years old, purchased 1,000 unlisted units of equity-oriented funds on March 1, 2010, for Rs 5,00,000. He sold such units in April 2018 for Rs 8,00,000. The net asset value of such units is Rs 3,00,000 as on January 31, 2018. He has also earned other income of Rs 2,00,000 during the PY 2018-19. He also has brought forward a capital loss of Rs 50,000. Compute total income and tax liability for the PY 2018-19.
Solution –
Computation of the total income of Mr. Rahul for the PY 2018-19
| Particulars | Amount | |
| Income from other sources | 2,00,000 | |
| Computation of capital gains | ||
| Sales consideration | 8,00,000 | |
| Cost of acquisition
(Rs 3,00,000 or Rs 5,00,000, whichever is high) |
5,00,000 | |
| Capital Gains | 3,00,000 | |
| Unutilized exemption limit
(2,50,000 – 2,00,000) |
(50,000) | |
| Brought forward capital loss | (50,000) | 2,00,000 |
| Total income | 4,00,000 | |
| Computation of tax liability | ||
| On income from other sources | Nil | |
| Long-term capital gains under section 112A [(2,00,000 – 1,00,000) *10%] | 10,000 | |
| Add: Health and Education Cess (4%) | 400 | |
| Total tax liability | 10,400 |
Section 112 of Income tax act Example:-
Mr. Anuj, who is 25 years old, purchased 1,000 unlisted equity shares on March 1, 1999, for Rs 1,00,000. He sold such units on October 10, 2018, for Rs 7,00,000. Such shares were listed for the first time in September 2018. The fair market value of such shares was Rs 1,50,000 on the basis of net assets value as on April 1, 2001. Compute total income and tax liability for the PY 2018-19.
Solution –
Computation of total income and tax liability of Mr. Anuj for the PY 2018-19
For any queries, please write them in the Comment Section or Talk to our tax expert
Related Content
- Capital Gains – Section 45 of the Income Tax Act
- No Exemption u/s 10 on Urban Agricultural Land – Explanation 1 to Section 2(1A)
- Short Term and Long Term Capital Assets
- Section 47 of Income tax act – Transactions not regarded as transfer
- Section 48 of Income Tax Act – Mode of Computation of Capital Gains
- Section 111a of the Income tax act
