Section 112A of the Income Tax Act, 1961, deals with the taxation of long-term capital gains (LTCG). It simplifies the taxation process for gains on listed securities, units of equity-oriented mutual funds, and units of a business trust.
What is Section 112A?
This Section was introduced in the Finance Act, 2018. It addresses the taxation of long-term capital gains (LTCG) from the sale of listed equity shares, equity mutual funds, and business trusts. Before this, gains on such assets were tax-free if they were held for more than a year. However, with the introduction of Section 112A, there is now a tax on long-term capital gains exceeding ₹1 lakh.
Key Points of Section 112A:
- Long-Term Capital Gains (LTCG): Gains from the sale of equity shares or mutual funds held for more than one year.
- Exemption Limit: If the total LTCG exceeds ₹1 lakh in a financial year, then only the amount above ₹1 lakh is taxable.
- Tax Rate: The taxable portion of LTCG is taxed at a rate of 10% without the benefit of indexation. Indexation is the adjustment of purchase price for inflation. This is not allowed under this section.
- Grandfathering Clause: For assets acquired before February 1, 2018, the fair market value on that date is considered the acquisition cost. This ensures that gains accrued until then are not taxed.
Example:
- Investment: You bought 100 shares of Company XYZ at ₹50 each on January 1, 2015.
- Sale Date: You sold these shares on February 1, 2024, at ₹150 each.
Calculations:
- Cost of Acquisition (Grandfathering Benefit): The price of ₹50 is replaced by the fair market value on February 1, 2018, which is ₹100 per share (assumed for this example). So, the cost of acquisition is now ₹100 per share.
- Sale Price: ₹150 per share.
- Long-Term Capital Gain (LTCG) Calculation:
- Total Sale Proceeds: 100 shares x ₹150 = ₹15,000.
- Total Cost of Acquisition: 100 shares x ₹100 = ₹10,000.
- LTCG: ₹15,000 – ₹10,000 = ₹5,000.
- Taxability:
- The LTCG of ₹5,000 is less than ₹1 lakh, so it is fully exempt from tax.
Conclusion:
In summary, Section 112A offers a clear framework for taxing long-term capital gains from equity investments and mutual funds. This provision aims to balance the interests of investors and the need for tax revenue. It ensures that significant gains are taxed while smaller ones remain tax-free. Understanding how it works helps you plan your investments better and manage your tax liabilities effectively. Hence, keeping track of your gains and understanding these rules can save you from unexpected tax bills and make your investment journey smoother.
– Ketaki Dandekar (Team Arthology)
Read more about Long Term Capital Gain here – https://cleartax.in/s/long-term-capital