Long-Term Capital Gains under Section 112A with some common questions.

Long-Term Capital Gains under Section 112A

Before the Assessment Year 2018-19, Section 10(38) of the Income Tax Act, 1961 granted an exemption from the tax applicable on long-term capital gains resulting from the transfer of listed equity shares, equity-oriented mutual funds, and units of a business trust. Then Section 112A was introduced in Budget 2018 after the removal of exemption under section 10(38). It is applicable from the financial year 2018-19. It provides for taxation of long-term capital gains on listed securities at 10% for gains exceeding the threshold limit of Rs. 1 lakh. 

Let’s understand the Key Provisions of Section 112A:

As per Section 112A capital gains arising from transfer of a long term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust shall be taxed at the rate of 10 per cent of such capital gains exceeding Rs. 1,00,000.

The concessional rate of 10% will be applicable if:

a) In a case of an equity share in a company, securities transaction tax has been paid on both acquisition and transfer of such capital asset; and

b) In a case a unit of an equity-oriented fund or a unit of a business trust, STT has been paid on transfer of such capital asset.

The requirement of payment of STT at the time of transfer of long term capital asset, being a unit of equity oriented fund or a unit of business trust, shall not apply if the transfer is undertaken on recognized stock exchange located in any International Financial Services Centre (IFSC) and the consideration of such transfer is received or receivable in foreign currency

Further, the new provision of section 112A also provides the following:-

a) To be classified as a long-term capital gain, the securities must be held for at least 12 months. Gains on assets held for less than 12 months are considered short-term capital gains.

b)  The cost of acquisitions in respect of the long-term capital asset acquired by the assessee before the 1st day of February,2018, shall be deemed to be the higher of –

- The actual cost of acquisition of such asset; and

- Lower of:

1. The fair market value of such asset as on 31/01/2018 or
2. Sale Consideration

c) No deduction under chapter VIA shall be allowed against LTCG taxable under section 112A.

d) The rebate under section 87A shall not be allowed against LTCG taxable under section 112A. 

e) There are no indexation benefits available under Section 112A.

f) If the LTCG exceeds Rs. 1 lakh, the buyer is required to deduct TDS at a rate of 10% before making the payment.

 

Now, let’s address some common questions regarding Section 112A:

Q1. What is the meaning of long term capital gains under the new tax regime for long term capital gains?

Ans 1. Long term capital gains mean gains arising from the transfer of long-term capital asset.

It provides for a new long-term capital gains tax regime for the following assets -

(I).Equity Shares in a company listed on a recognised stock exchange;

(ii).Unit of an equity oriented fund; and

(iii). Unit of a business trust.
 

The new tax regime applies to the above assets, if-

1. the assets mentioned in (i) & (ii) are held for a minimum period of twelve months from the date of acquisition; and the asset mentioned in (iii) is held for a minimum period of thirty six months; and
2. the Securities Transaction Tax (STT) is paid at the time of transfer. However, in the case of equity shares acquired after 1.10.2004, STT is required to be paid even at the time of acquisition (subject to notified exemptions).
    

Q2. What is the point of chargeability of the tax?

Ans 2. The tax will be levied only upon transfer of the long-term capital asset on or after 1st April,2018, as defined in section 2(47) of the Act.
 

Q3. What is the method for calculation of long-term capital gains?

Ans 3. The long-term capital gains will be computed by deducting the cost of acquisition from the full value of consideration on transfer of the long-term capital asset.

Q4. How do we determine the cost of acquisition for assets acquired on or before 31st January, 20182

Ans 4. The cost of acquisition for the long-term capital asset acquired on or before 31st January, 2018 will be the actual cost.

However, if the actual cost is less than the fair market value of such asset as on 31st January, 2018, the fair market value will be deemed to be the cost of acquisition.

Further, if the full value of consideration on transfer is less than the fair market value, then such full value of consideration or the actual cost, whichever is higher, will be deemed to be the cost of acquisition.

Q5. Please provide illustrations for computing long-term capital gains in different scenarios, in the light of answer to question 4.

Ans 5. The computation of long-term capital gains in different scenarios is illustrated as under

Scenario 1 - An equity share is acquired on 1st January, 2017 at ? 100, its fair market value is Rs 200 on 31st January, 2018 and it is sold on 1st April, 2023 at Rs 250. As the actual cost of acquisition is less than the fair market value as on 31st January, 2018, the fair market value of Rs 200 will be taken as the cost of acquisition and the long-term capital gain will be Rs 50 (Rs 250 - Rs 200).

Scenario 2 - An equity share is acquired on 1st January, 2017 at Rs 100, its fair market value is Rs 200 on 31st January, 2018 and it is sold on 1st April, 2023 at Rs 150. In this case, the actual cost of acquisition is less than the fair market value as on 31st January, 2018.However, the sale value is also less than the fair market value as on 31st January, 2018. Accordingly, the sale value of Rs 150 will be taken as the cost of acquisition and the long-term capital gain will be NIL (Rs 150 - Rs 150).

Scenario 3 - An equity share is acquired on 1st January, 2017 at Rs 100, its fair market value is Rs 50 on 31st January, 2018 and it is sold on 1st April, 2023 at Rs 150. In this case, the fair market value as on 31st January, 2018 is less than the actual cost of acquisition, and therefore, the actual cost of Rs 100 will be taken as actual cost of acquisition and the long-term capital gain will be Rs 50 (Rs 150 - Rs 100).

Scenario 4 - An equity share is acquired on 1st January, 2017 at Rs 100, its fair market value is Rs 200 on 31st January, 2018 and it is sold on 1st April, 2023 at Rs 50. In this case, the actual cost of acquisition is less than the fair market value as on 31st January, 2018. The sale value is less than the fair market value as on 31st January, 2018 and also the actual cost of acquisition. Therefore, the actual cost of Rs 100 will be taken as the cost of acquisition in this case. Hence, the long-term capital loss will be Rs 50 (Rs 50 - Rs 100) in this case.

Q6. Whether the cost of acquisition will be inflation indexed?

Ans 6.Third proviso to section 48, provides that the long-term capital gain will be computed without giving effect to the provisions of the second proviso of section 48. Accordingly, it is clarified that the benefit of inflation indexation of the cost of acquisition would not be available for computing long-term capital gains under the new tax regime.
 

Q7. What will be the tax treatment of transfer made on or after 1st April 2018?

Ans 7.The long-term capital gains exceeding ? 1 lakh arising from transfer of these assets made on after 1st April, 2018 will be taxed at 10 per cent. However, there will be no tax on gains accrued upto 31st January, 2018.

Q8. What is the date from which the holding period will be counted?

Ans 8. The holding period will be counted from the date of acquisition.

Q9. Whether tax will be deducted at source in case of gains by resident tax payer?

Ans 9.No. There will be no deduction of tax at source from the payment of long-term capital gains to a resident tax payer.

Q10. What will be the cost of acquisition in the case of bonus shares acquired before 1st February 2018?

Ans 10. The cost of acquisition of bonus shares acquired before 31st January, 2018 will be determined as per section 55(2)(ac). Therefore, the fair market value of the bonus shares as on 31st January, 2018 will be taken as cost of acquisition (except in some typical situations explained in  Ans 5), and hence, the gains accrued upto 31st January, 2018 will continue to be exempt°.

Q11. What will be the cost of acquisition in the case of right share acquired before 1st February 2018?

Ans 11. The cost of acquisition of right share acquired before 31st January, 2018 will be determined as per section 55(2)(ac). Therefore, the fair market value of right share as on 31st January, 2018 will be taken as cost of acquisition (except in some typical situations explained in Ans 5), and hence, the gains accrued upto 31st January, 2018 will continue to be exempt.

Q 12. What will be the treatment of long-term capital loss arising from transfer made on or after 1st April, 2018?

Ans 12. Long-term capital loss arising from transfer made on or after 1st April, 2018 will be allowed to be set-off and carried forward in accordance with existing provisions of the Act.Therefore, it can be set-off against any other long-term capital gains and unabsorbed loss can be carried forward to subsequent eight years for set-off against long-term capital gains.

CA Kavita Dhingra

cakavitadhingra@gmail.com