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Section 112 of Income tax act

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June 5, 2021

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26 mins read

Section 112 of Income tax act – Tax on Long Term Capital Gains

Concessional Rate of 10% Tax Rate on shares of private company and shares of company in which public is not substantially interested

Long-term capital gains, arising to a non-resident, are taxable at concessional rate of 10% , provided the following conditions are satisfied : –

  • There is transfer of unlisted shares of an Indian company ;
  • No benefit of indexation is taken (First proviso to Section 48) ;
  • Benefit of foreign currency fluctuations is not taken (Second proviso to Section 48)

Thus, in case of long-term capital gains on 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 sale of listed shares [which do not satisfy conditions of Section 10(38)], have an option to pay tax rate @ 10% without availing 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 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 transfer of equity shares of a company or an unit of equity oriented fund or an unit of business trusts, provided certain conditions like chargeability to securities transaction tax (STT) were satisfied. It was felt by the Government, that this regime was inherently biased against manufacturing, and has encouraged 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In order to minimize economic distortions and curb erosion of tax base, the Finance Act, 2018 has withdrawn exemption u/s 10(38) and introduced a new section 112A in the Act.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 Income Tax Act provides for a  concessional tax rate on long-term capital gains,  arising from transfer of equity share or a units of an equity-oriented fund / business trust.

Section 112A of Income Tax Act override Section 112 of 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 arises from the transfer of a long-term capital asset, which is equity share in a company, or 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 case of unit of equity-oriented funds or unit of business trust , the securities Transaction Tax has been paid only at the time of transfer of shares.

International Taxation Services

The requirement of payment of STT at the time of transfer of long term capital asset, shall not apply if –

a) the transfer is undertaken on 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 Example :-

ABC International (USA), earns long-term capital gains of Rs 90,000 on 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 Example :-

XY Inc. earns long-term capital gains of Rs 1,10,000 on 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%]. Concessional rate of 10% u/s 112A shall be increased by cess of 4%. Thus, the tax shall be computed @ 10.40%.

Other Points : –

  • As per third proviso to Section 48, the long-term capital gains referred to in Section 112A of Income Tax Act will be computed without giving effect to the first and second provisos to section 48. Thus, inflation indexation in respect of 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 Income Tax Act, tax rates prescribed under Section 112 of 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.

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 benefit is not available for non-residents.

Section 112 of Income tax act Example:-

Mr. Aamir, who is 23-year-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 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 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 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 –

  1. Fair market value of such asset ; or
  2. The full value of consideration received or accruing as a result of the transfer of the capital asset.

Step 2:-

Determine cost of acquisition of such capital asset

International Taxation Services

Step 3:-

Determine 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 recognised stock exchange as on the 31st day of January, 2018 The highest price of the capital asset quoted on such exchange on the said date

Note:-

Where 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

Where the capital asset is a unit which is not listed on a recognised 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 which is

· not listed on a recognised stock exchange as on the 31st day of January, 2018 but listed on such exchange on the date of transfer, or
· listed on a recognised stock exchange on the date of transfer and which became the property of the assessee in consideration of share which are not listed on such exchange as on the 31st day of January, 2018 by way of transaction not regarded as transfer under section 47

Cost of acquisition X CII of 2017-18
CII of the year in which asset was held by assessee or 2001-02, whichever is later

Meaning of certain terms

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 which is traded on a recognised stock exchange –

  • a minimum of ninety per cent 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 per cent of its total proceeds in the equity shares of domestic companies listed on a recognised stock exchange

b. In any other case, a minimum of sixty-five per cent of the total proceeds of such fund is invested in the equity shares of domestic companies listed on a recognised 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 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 share in stock exchange as on January 31, 2018]
· Sales consideration as on May 10, 2018

Lower of fair market value or sales 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 stock exchange is Rs 4,00,000 as on January 31, 2018. He has also sold house property as 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 gains ignoring ,   the basic exemption limit  ?

Solution –

Computation of 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)

Step 3 – 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

International Taxation Services

Section 112 of Income tax act Example:-

Mr. Rahul, who is 40-year-old, had purchased 1,000 unlisted units of equity-oriented funds on March 1, 2010 for Rs 5,00,000. He has 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 capital loss of Rs 50,000. Compute total income and tax liability for the PY 2018-19.

Solution –

Computation of 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-year-old, has purchased 1,000 unlisted equity shares on March 1, 1999 for Rs 1,00,000. He has sold such units in October 10, 2018 for Rs 7,00,000. Such shares were listed for the first time in September, 2018.  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

Computation of total income and tax liability of Mr. Anuj for the PY 2018-19

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Arinjay Jain

Bio of author

Arinjay is a Chartered Accountant with more than 20 years of post-qualification experience. He worked as Director, in the M&A Tax Division at KPMG in India. Presently, he is advising several MNCs in UAE on Economic Substance Regulations and impact of the UAE Corporate Tax Law on their business and clients across globe on International Tax issues . He is a well recognised Trainer of International Tax and UAE Corporate Tax. The areas of service include the following : - Advise and Compliance relating to International Tax Issues; Advise relating to UAE Corporate Tax Issues; Advise and Compliance relating to UAE Economic Substance Regulations; Advise and Compliance relating to Indian Income Tax Issues; Other connected matters from a Regulatory perspective.

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