As we all know that the exemption provided under section 10(38) is being misused by certain persons for declaring their unaccounted income as exempt long-term capital gains by entering into sham transactions. Many judgements of various court were also pronounced in favour of assessee on account of long term capital gain on penny stocks.

With a view to prevent this abuse, the Government has come up with New Regime of Taxation of Long Term Capital Gains on sale of equity share, unit of equity oriented funds and unit of the business trust u/s 112A of the Income Tax Act, 1961 with effect from 01.04.2018

The Finance Act, 2018 has withdrawn the exemption under section 10(38) of the Income-tax Act, 1961 and has introduced a new section 112A in order to levy long term capital gain tax on the transfer of a long term capital asset being an equity share in a company or a unit of an equity oriented funds or unit of a business trust w.e.f A.Y 2019-20 and onwards.

The main object behind the introduction of new section 112A, as explained by the Government is that the exemption from long-term capital gain tax on transfer of equity share or unit of equity oriented fund or units of business trust has led to significant erosion in the tax base resulting in loss of revenue and due to abusive use of tax arbitrage opportunities created because of the said exemption.

Long Term Capital gains

Before Insertion of Section 112A

Before F.Y 2018-2019, long-term capital gain on transfer of equity share, unit of equity oriented fund and unit of business trust was exempt as per the provisions of section 10(38) of the Income Tax Act, 1961.

After Insertion of Section 112A

  • With effect from 1st April, 2018 i.e from F.Y 2018-19, provisions of section 10(38) will not be applicable to any income arising from transfer of equity share, unit of a equity oriented fund or units of business trust.
  • From 1st April, 2018 i.e from A.Y 2019-20, provisions of section 112A shall be applicable to tax income arising from transfer of a long term capital asset in the nature of an equity share in a company, unit of equity oriented fund and unit of business trust.
  • Section 112A shall be applicable only in case where Securities Transaction Tax (STT) has been paid at the time of transfer. Further, in case of equity share in a company sec 112A shall be applicable where STT has been paid both at the time of acquisition and transfer of equity shares.

Rate of Tax u/s 112A

As per the provisions of sub section (2) of section 112A, long-term capital gain tax @10% (plus applicable surcharge and cess) shall be levied on the amount of capital gains exceeding one lakh rupees.

Salient Features of section 112A:

1. As per First proviso to section 48 in case of Non-resident Indian i.e benefit of calculation of capital gain by converting in foreign currency will not be allowed in cases where section 112A is applicable.

2. Second proviso to section 48, i.e. benefit of indexation of cost of acquisition and indexation of cost of improvement shall not be allowed while calculating long term capital gain tax under section 112A in case of resident tax payer.

3. As per sub section (5) and (6) of Section 112A, deductions u/s 80C to 80U and/or rebate u/s 87A shall not be allowed on the amount of capital gain tax chargeable as per the provisions of section 112A.

4. Section 55(2)(ac) states that cost of acquisition for the purpose of calculating Tax payable u/s 112A shall be as under:

Cost of acquisition for the assets acquired before 1st February, 2018, shall be higher of the following :

      • The actual cost of acquisition of such asset, and
      • The lower of: (i) the fair market value of such assets; and (ii) the full value of consideration received or accruing as a result of the transfer of the capital asset

Extract of Amended Section 10(38):

“10(38) any income arising from the 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 where—

(a) the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No. 2) Act, 2004 comes into force; and

(b) such transaction is chargeable to securities transaction tax under that Chapter :

Provided that the income by way of long-term capital gain of a company shall be taken into account in computing the book profit and income-tax payable under section 115JB :

Provided also that nothing contained in sub-clause (b) shall apply to a transaction undertaken on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transaction is paid or payable in foreign currency:

Provided also that nothing contained in this clause shall apply to any income arising from the transfer of a long-term capital asset, being an equity share in a company, if the transaction of acquisition, other than the acquisition notified by the Central Government in this behalf, of such equity share is entered into on or after the 1st day of October, 2004 and such transaction is not chargeable to securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004 (23 of 2004):

18[Provided also that nothing contained in this clause shall apply to any income arising from the transfer of 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, made on or after the 1st day of April, 2018.]

Explanation.—For the purposes of this clause,—

(a) “equity oriented fund” means a fund—

(i) where the investible funds are invested by way of equity shares in domestic companies to the extent of more than sixty-five per cent of the total proceeds of such fund; and

(ii) which has been set up under a scheme of a Mutual Fund specified under clause (23D):

Provided that the percentage of equity share holding of the fund shall be computed with reference to the annual average of the monthly averages of the opening and closing figures;

(b) “International Financial Services Centre” shall have the same meaning as assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005);

(c) “recognised stock exchange” shall have the meaning assigned to it in clause (ii) of the Explanation 1 to sub-section (5) of section 43”

Author is a Chartered Accountant and can be reached at harchandanimanish@gmail.com

Disclaimer: The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor Taxguru.in and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.

Download Section 10(38) – Tax on Long Term Capital gains from on the transfer of equity oriented funds

Author Bio

Qualification: CA in Practice
Company: Harchandani & Associates (https://harchandani.in/)
Location: AHMEDABAD, Gujarat, IN
Member Since: 09 Jun 2017 | Total Posts: 12
Manish Harchandani (founder of Harchandani & Associates) is practicing Chartered Accountant and mainly practice in Direct Tax, International Taxation, Transfer Pricing & FEMA related advisory, litigation & compliance matters. View Full Profile

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12 Comments

  1. Jitender Sharma says:

    Under 112A, LTCG is not be paid upto one lakh. If I fill 112A, and the LTCG is Rs65,552.00. will the computation ignore it, or its not be entered and exemption claimed.

  2. Jiwat says:

    I am the holder of mutual fund of rupees 50000 only of HDFC since 2005. My annual return is Rs 3872 only. Am I liable to pay any tax on this income under Income tax act ?

  3. Alok 9648939091 says:

    Under what section of IT , is the short term & long term losses from sale of equity & debt mutual funds , will be treated ???

  4. Anuj Tandon says:

    your opininon “Shares of private company / unlisted public company acquired by person / promoters without paying STT and later company become listed company, are eligible for exemption u/s 10(38) at the time of sale?

    Yes, if company is listed as on 31/03/2017

    No, if company become listed on or after 01/04/2017”
    my opnion pls rectify me if am incorrect
    1.date of listing of co. is irrelevant date of sale is relevant.
    2. if promoter offloads it share in ipo just discuss above it will exempt if long term otherwise 15% taxable.
    3. if continue to hold after listing then taxable no exemption is given in notification.

  5. a.mohamed says:

    Share acquired before .01.10.2004 by the person under ESOP Scheme of an Unlisted Company whether eligible for Exemption Under section 10(38) – at the time of Sale ?

  6. Riddhesh Shah says:

    I wish to know the meaning of existing listed equity shares?
    Does it mean that the shares should be listed at the time of acquistion or as on the date of notification?
    As per the answer given by you for FAQ 3 of this article you seem to interpret it as on the date of applicability of this notificatio.

  7. Joseph Mathew says:

    Hello Manish, I was allotted Rights Issue equity shares in unlisted Ratnakar Bank. Subsequently RBL went for an IPO and the shares are locked in for a year. If I sell after that am I exempt from LTCG tax? No STT was paid at rights issue stage. Thanks!

  8. Vaidhya says:

    Hello Manish, Thanks for the detailed post. Can you please clarify on the LTCG approach for foreign company shares sold on international stock exchanges? Below is the phrase from page 8 of the LTCG document in Income tax India website

    http://www.incometaxindia.gov.in/tutorials/15-%20ltcg.pdf

    Exemption from long term capital gains under section 10(38) shall be available w.e.f
    April 1, 2017 even where STT is not paid, provided that –
    ‐ transaction is undertaken on a recognised stock exchange located in any
    International Financial Service Centre, and
    ‐ consideration is paid or payable in foreign currency

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