What is Section 112A of the Income Tax Act?

The Finance Act of 2018 created Section 112A, which is concerned with tax on long-term capital gains from the sale of listed equity shares, equity-oriented mutual fund units, and business trust units. For gains over the threshold limit of Rs 1 lakh, the long-term capital gains tax rate that is applicable to these listed securities is 10%.

For providing scrip-by-scrip information about these listed securities sold in a fiscal year, the Income Tax Return (ITR) form includes Schedule 112A. Taxpayers who have long-term capital gains under Section 112A are required to fill out Schedule 112A with specific information.

Previously, Section 10(38) allowed for the exemption of capital gains from the sales of units of mutual funds, business trusts, and listed equity shares. Schedule 112A was added to tax gains that had previously been exempt until FY 2017–18 (AY 2018–19) and Section 10(38) was eliminated.

Conditions for Capital Gains Taxation under Section 112A

According to Section 112A, only long-term capital gains are subject to tax. When utilizing Section 112A’s tax benefits for capital gains, the following requirements must be met.

• The long-term capital assets must be securities.
• The sale must be of listed equity shares, mutual fund units and units of business trust.
• Transactions relating to the purchase and sale of equity shares are subject to Securities Transaction Tax (STT). In case of equity mutual fund units or business trust, the transactions of the sale are liable to STT.
• Deductions as per Chapter VI-A cannot be availed in respect of such gains.
• A rebate under Section 87A cannot be claimed from such gains.

Long-term capital gains under Section 112A

To qualify for long-term capital gain, the securities must be held for more than a year. The applicable tax rate is 10% above the set income tax exemption threshold of Rs 1 lakh. In other words, the long-term capital gains under Section 112A are only subject to 10% taxation above Rs 1 Lakh, plus any applicable education surcharge.

For instance, a taxpayer has annual long-term capital gains of Rs. 1.70 lakh under Section 112A. 10% of Rs 70,000 (1,70,000 – 1,00,000) is the tax that will be charged.

When a resident individual’s or HUF’s total income falls below the basic exemption threshold after deducting long-term capital gains, the long-term capital gains are reduced by that amount.

Example:

Assume that a taxpayer has total income of Rs. 4,00,000 and has net long-term capital gains of Rs. 2,000 under Section 112A. After deducting capital gains, the remaining income is Rs. 2,00,000, which is less than the threshold for basic exemption. The fundamental exemption threshold is Rs. 2,50,000.

Rs 50,000 (Rs 2,50,000 – Rs 2,00,000) will be the amount by which the reduced net income falls short of the basic exemption limit. As a result, the long-term capital gains will be taxed at Rs. 1,50,000 (Rs. 2,00,000 – Rs. 50,000).

How to offset a long-term capital loss under Section 112A?

Long-term capital loss is the term used to describe the loss, if any, on the sale of long-term listed equity shares or units. According to Section 112A, the assessee may offset the loss against long-term capital gains. One may offset losses from gains in case pof losses incurred from some securities on others. Net gains are subject to taxation if total earnings surpass Rs 1,000,000. For a period of eight years following the assessment year in which the loss occurs, one may carry forward a long-term capital loss that cannot be offset.

Section 112A grandfathering provisions 

The Finance Act of 2018 included grandfathering provisions that exempted long-term capital gains earned until January 31, 2018. To determine the cost of acquisition for specified securities purchased prior to February 1, 2018, we first take the lower of the fair market value as of January 31, 2018, and the sale consideration. The result will be compared to the purchase price, and the higher of the two will be taken into account.

Example: Section 112A capital gains calculation

According to the example, the taxpayer can use the grandfathering mechanism to arrive at long-term capital gain taxable, which is Rs 3,60,000, by offsetting losses from gains. Only gains exceeding Rs 1,00,000, or Rs 2,60,000, are subject to taxation.

Fair Market Value

• The highest price for a security quoted on a reputable stock exchange is referred to as the security’s fair market value (FMV), or listed securities.

• If there hasn’t been any trading in the security on January 31, 2018, the FMV will be the highest price the security has ever been quoted at on a day that was immediately prior to January 31, 2018, when it had traded on the recognized stock exchange. 
• In the case of unlisted units as of January 31, 2018, the FMV is the net asset value of the units as of that date.
• FMV = Purchase Cost * Cost Inflation Index for FY 2017–18 / Cost Inflation Index of the year of the purchase or FY 2001–02. This formula applies to equity shares listed after January 31, 2018, or acquired through a merger or other transfer in accordance with Section 47.

How do I file an ITR under Section 112A of the Income Tax Act?

Schedule 112A, which permits an assessee, where grandfathering provisions are applicable, to report long-term capital gains by scrip, is included in the ITR filing for AY 2020–21. The required scrip-specific information will include the scrip name, ISIN code, quantity of sold units or shares, sale price, purchase cost, and FMV as of January 31, 2018. Where the grandfathering provisions are in effect, these specifics are necessary to determine the long-term capital gains’ correct value.

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