Long Term Capital Gain Tax on Shares (Section 112A)

Long Term Capital Gain Tax on Shares (Section 112A): If you sell shares or equity-oriented mutual funds after holding them for more than 12 months, the resulting gains are considered long-term capital gains. Prior to the Budget 2018, long-term capital gains on shares and securities on which Securities Transaction Tax (STT) was paid were exempt from tax. In the Budget 2018, Section 112A was introduced, which removed the exemption for long-term capital gains on shares and securities on which STT was paid. This section applies to long-term capital gains on equity shares, equity-oriented mutual funds, and units of business trusts. Long-term capital gains exceeding Rs. 1 lakh are taxed at a rate of 10%. However, gains up to Rs. 1 lakh are exempt from tax. Starting from the assessment year 2019-20, long-term capital gains on shares, securities, and mutual funds (equity-oriented) are taxable under Section 112A.

Changes of LTCG in Budget 2018

The introduction of Section 112A in the Budget 2018 amended the taxation of long-term capital gains on equity shares and equity-oriented mutual funds. Here are the correct details:

Section 112A of the Income Tax Act, 1961, introduced in the Budget 2018, applies to the following assets:

1. Equity Shares: Shares of a company listed on a recognized stock exchange in India.
2. Equity-Oriented Funds or Units of Equity Oriented Funds: This includes units of equity-oriented mutual funds.
3. Business Trusts or Units of Business Trusts: Refers to units of a business trust.

Under Section 112A, long-term capital gains arising from the transfer of these assets are subject to a special tax rate of 10% if the gains exceed Rs. 1 lakh. If the gains are below Rs. 1 lakh, they are exempt from tax. However, if the gains exceed the threshold of Rs. 1 lakh, the excess amount will be taxed at a rate of 10%.

What are long-term capital gains?

For listed equity shares, equity-oriented mutual funds/units, and units of a business trust, if the holding period is more than 12 months, the gains from the sale of these assets will be treated as long-term capital gains. To calculate the long-term capital gains, you subtract the purchase price of the asset from the sale price. The resulting amount is subject to taxation as per the applicable provisions of the Income Tax Act.

Nature of Asset	Holding Period of Short-term Capital Gain	Holding Period of Long-term Capital Gain
Listed Equity Shares in Recorginzed Stock Exchange	12 months	12 months or more
Unlisted equity shares	24 months	24 months or more
Equity shares of foreign companies whether listed or not	24 months	24 months or more
Equity-Oriented Mutual Funds	12 months	12 months or more
Debt Oriented Mutual Funds	36 months	36 months or more
Debentures or Bonds listed on a recognized stock exchange	12 months	12 months or more
Debentures or Bonds not listed in a recognized stock exchange	36 months	36 months or more
Immovable property (Land, Building, or House Property)	24 months	24 months or more
Movable Property (jewelry, Painting)	36 months	36 months or more

 Section 112A – Applicability

Section 112A of the Income Tax Act, 1961 is applicable in certain cases where capital gains arise from the transfer of specified assets. The conditions for the applicability of Section 112A are as follows:

1. Nature of Assets: The capital assets should fall into one of the following categories for applicability of section 112A

• Listed Equity Shares: Shares of a company listed on a recognized stock exchange in India.
• Equity-Oriented Mutual Funds/Units: Units of equity-oriented mutual funds or the units of a business trust.

2. Holding Period: The asset holding period should be more than 1 year. This means that the assets must be held for a minimum of 12 months from the date of acquisition.

3. Securities Transaction Tax (STT): STT should be applicable on both the sale and purchase of assets, except for equity-oriented mutual funds or business trusts. In the case of equity-oriented mutual funds or business trusts, only the sale transactions are liable to STT.

If all these conditions are fulfilled, then Section 112A will be applicable.

Treatment of Long-Term Capital Gains on Equity Shares Purchased Before February 1, 2018

Based on the provided information, here is the treatment of the equity shares purchased before February 1, 2018: In the case of listed equity shares acquired before February 1, 2018, the cost of acquisition is deemed to be the higher of the following:

a) The actual cost of acquisition.

b) The lower of the following:
(i) Fair market value of the shares as on January 31, 2018 or
(ii) Actual sales consideration on transfer.

The fair market value (FMV) of the listed equity shares is determined as the highest price quoted on the stock exchange on January 31, 2018. If there was no trading on that specific date, the highest price on the immediately preceding date when trading took place is considered as the FMV.

For unlisted equity shares, the cost of the shares increased by the cost inflation index for the financial year 2017-18 is deemed to be their FMV.

Here’s an example to illustrate the treatment of long-term capital gains on equity shares purchased before February 1, 2018:

Mr. Patel purchased 500 shares of ABC Ltd. in October 2017 at Rs. 200 per share. He sold these shares in June 2022 at Rs. 400 per share. The highest price of ABC Ltd. shares quoted on the stock exchange on January 31, 2018, was Rs. 300 per share. How will the capital gains be treated in this case?

Since Mr. Patel held the shares for more than 12 months, the gains will be classified as long-term capital gains (LTCG). Additionally, since the shares were sold through a recognized stock exchange and the transaction is liable to Securities Transaction Tax (STT), Section 112A will be applicable.

The cost of acquisition of ABC Ltd. shares will be the higher of:
a) The actual cost of acquisition: Rs. 1,00,000 (500 shares × Rs. 200 per share)
b) The lower of:
(i) The fair market value (FMV) as on January 31, 2018: Rs. 1,50,000 (500 shares × Rs. 300 per share)
(ii) The sales consideration: Rs. 2,00,000 (500 shares × Rs. 400 per share)

Therefore, the cost of acquisition of the shares is Rs. 1,50,000. The long-term capital gain in Mr. Patel’s case would be Rs. 50,000 (Rs. 2,00,000 – Rs. 1,50,000). As the capital gain is below Rs. 1,00,000, there will be no taxable amount in Mr. Patel’s hands.

Conditions for Set-off of Long-Term Capital Losses from Long-Term Capital Gains

Here is a list of the conditions mentioned in the previous text regarding the set-off of long-term capital losses from long-term capital gains:

1. Long-term capital losses can be set off only against long-term capital gains.
2. Long-term capital losses from the sale of listed equity shares or equity-related instruments are considered long-term capital losses.
3. If an investor has both losses and profits from the sale of different securities, these gains and losses can be set off against each other.
4. Only the net gains (after setting off losses against profits) will become taxable if they exceed Rs 1 lakh.

Frequently Asked Questions (FAQ) – Long-Term Capital Gains Tax on Shares (Section 112A):

Q1: What is considered as long-term capital gains in relation to shares?
A: Long-term capital gains in relation to shares are realized when shares are sold after holding them for more than 12 months.

Q2: Was there a change in the taxation of long-term capital gains on shares?
A: Yes, the introduction of Section 112A brought changes to the taxation of long-term capital gains on shares.

Q3: What does Section 112A pertain to?
A: Section 112A specifically applies to the taxation of long-term capital gains on shares.

Q4: What is the applicable tax rate for long-term capital gains under Section 112A?
A: Long-term capital gains exceeding Rs. 1 lakh are subject to a tax rate of 10% under Section 112A.

Q5: Are there any exemptions for long-term capital gains under Section 112A?
A: Yes, gains up to Rs. 1 lakh are exempt from tax under Section 112A.

Q6: When did the taxation of long-term capital gains on shares come into effect?
A: The taxation of long-term capital gains on shares under Section 112A became effective from the assessment year 2019-20.

Q7: Can long-term capital losses be set off against long-term capital gains under Section 112A?
A: Yes, long-term capital losses can be set off against long-term capital gains under Section 112A.

Q8: Can long-term capital losses be set off against short-term capital gains under Section 112A?
A: No, long-term capital losses cannot be set off against short-term capital gains under Section 112A.

Q9: How are gains and losses from different shares treated for set-off under Section 112A?
A: Gains and losses from different shares can be set off against each other under Section 112A.

Q10: What amount of gains becomes taxable after setting off losses under Section 112A?
A: Only the net gains (after setting off losses against profits) exceeding Rs. 1 lakh become taxable under Section 112A.