Section 112A Tax on transfer of certain long term capital assets

Finance Act, 2018 inserted a new section 112A to provide for the rate of tax on long term capital gains arising on the transfer of certain assets. The capital assets on which the provisions of Section 112A applies include Equity Shares in a Company or unit of Equity oriented fund or units of a business trust. We shall call these assets as ‘Specified Assets’ for the limited purpose of this article alone.

Before the insertion of this section, long term capital gain on the transfer of the Specified Assets on which securities transaction tax (STT) is payable was exempt under clause 38 of section 10. However, with the insertion of Section 112A, the provisions of section 10(38) have been withdrawn and LTCG on the transfer of the Specified Assets will be taxed as per Section 112A.

Let us now examine the provisions of section 112A.

Notwithstanding anything contained in section 112, the tax payable by an assessee on his total income shall be determined in accordance with the provisions of sub-section (2), if—

 (i)  the total income includes any income chargeable under the head “Capital gains”;

(ii)  the capital gains arise 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;

(iii)  securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004 (23 of 2004) has,—

(a)  in a case where the long-term capital asset is in the nature of an equity share in a company, been paid on acquisition and transfer of such capital asset; or

(b) in a case where the long-term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust, been paid on transfer of such capital asset.

Examination of the above provision reveal:-

• There should be a transfer of LONG TERM Capital Asset.
• The Asset transferred should be EQUITY SHARES of a Company or UNITS OF AN EQUITY ORIENTED FUND or UNITS OF A BUSINESS TRUST.
• STT should be paid as per the below table:-

If the above conditions are satisfied, only then the provisions of section 112A shall apply.

Rate of LTCG

The provisions of sub section 2 of section 112A, provide that where the Long Term Capital Gain on the transfer of the Specified Assets exceeds Rs. 1,00,000, then the amount in excess of Rs. 1,00,000 shall be chargeable to tax at the rate of 10%.

Thus, for example, where a person makes a capital gain of Rs. 3,00,000, then the Capital Gain in excess of Rs. 1,00,000 i.e. Rs. 2,00,000 shall be chargeable at the rate of 10% and the Capital Gain Tax shall be Rs. 20,000 (being 10% of Rs. 2,00,000).

In short, whereas, earlier under section 10(38), the entire Long Term Capital Gain was exempt, under the current regime of Section 112A, exemption is only Rs. 1,00,000.

Deduction under Chapter VIA

Section 112 prescribes the rate of tax in case of Long Term Capital Gain. The section further provides that when an assessee has income from Long Term Capital Gain, no deduction under chapter VI A will be allowed against LTCG.

Contrary to Section 112, under section 112A, in the case of a Resident Individual or HUF having LTCG under section 112A, then chapter VIA deductions can be claimed against such income.

Thus, an additional benefit is given under section 112A by way of deduction under chapter VI A.

Unexhausted Basic Exemption Limit

An individual aged less than 60 years is not required to pay tax if his taxable income is less than Rs. 2,50,000. Similarly a senior citizen (aged more than 60 years but less than 80 years) is given an exemption up to Rs. 3,00,000 of his taxable income and for a super senior citizen (aged more than 80 years) the exemption is up to Rs. 5,00,000.

Now what is the importance of the above exemption limits in Section 112A? Let us analyze

Section 112A provides that where the total income reduced by income under section 112A is less than the above exemption limits, the unexhausted exemption limit shall be reduced from the Capital Gain under section 112A.

Take an example of an assessee who is less than 60 years of age having the following income:

 Computation of Total Income for the assessee

Here, a question arises, whether the assessee is required to pay any tax, since the income of the assessee under 112A is Rs. 1,00,000 and also section 112A provides that up to Rs. 1,00,000 the assessee need not pay any tax.

Let us see what the provisions of the section say in this regard.

(2) The tax payable by the assessee on the total income referred to in sub-section (1) shall be the aggregate of—

 (i)  the amount of income-tax calculated on such long-term capital gains exceeding one lakh rupees at the rate of ten per cent; and

(ii)  the amount of income-tax payable on the total income as reduced by the amount of long-term capital gains referred to in sub-section (1) as if the total income so reduced were the total income of the assessee:

Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, the long-term capital gains, for the purposes of clause (i), shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax.

A simple meaning of the above provisions is that the tax rate for:

• Long term capital gain under section 112A in excess of Rs. 1,00,00 is 10%
• Income other than LTCG under 112A shall be chargeable as per the other applicable provisions of the act.

The proviso above states that the unexhausted exemption limit can be reduced from the income under 112A.

The above proviso answers our question, whether the exemption of Rs. 1,00,000 can be claimed in the above example. The wordings of the proviso state that, “the Long Term Capital Gain for the purpose of clause (i)”. This simply means that the exemption of Rs. 1,00,000 is allowed in addition to the reduction of basic exemption limit.

Thus in our example, the assessee will be allowed to claim the exemption of Rs. 1,00,000 and thereby no tax is to be paid by him.

The point to be kept in mind is that first the basic exemption limit is to be adjusted against income other than LTCG and only any balance left after that can be adjusted against LTCG. An assessee cannot argue that he will adjust the LTCG first and pay tax on the other income as per the slab rate applicable to him.

This benefit of deducting the basic exemption limit against LTCG is also given under section 112. 

Just to know the benefits of section 112A, let us compare Section 112A and Section 112

Consider the same example as given above. The tax on the total income will be calculated as given in the below table:

Thus it is clear from the above that Section 112A is more beneficial when compared to Section 112 in the sense that for an income of Rs. 4,50,000, an assessee will pay tax of Rs. 40,000 under section 112 and no tax under section 112A.

Grandfathering of the Capital Gains

The provisions of section 112A were inserted with effect from 01^st April 2018. With the insertion of this section, a corresponding clause was also inserted in section 55. Clause (ac) of subsection 2 of section 55 provides for the determination of Cost of Acquisition of an asset referred to in Section 112A.

Accordingly, where a Capital asset referred in section 112A is acquired before 01^st February, 2018, the Cost of Acquisition of such asset shall be the higher of:-

• Cost of Acquisition of the asset and
• Lower of

1. Fair market value of the asset as on 31^st January, 2018 and

2. Full value of consideration received or receivable as a result of the transfer

Here, four scenarios can arise

• Asset acquired before 01^st February, 2018 and transferred at any time after 01^st February, 2018 but before 01^st April, 2018

In the above case, the Cost of Acquisition of the Asset will be determined as per clause (ac) of section 55 as the asset is purchased before 01^st February, 2018. However, the provisions of Section 112A will not apply in the above circumstance since the transfer has taken place before 01^st April, 2018. In this case, the entire Capital Gain shall be exempt under section 10(38).

• Asset acquired after 01^st February, 2018 and transferred at any time after 01^st February, 2018 but before 01^st April, 2018

In the above scenario, the provisions of section 112A and also 10(38) shall not apply. Since the asset is transferred within a period of 3 months, the same shall be considered as Short Term Capital Asset and any gain shall be charged to tax in accordance with the provisions of Section 111A.

• Asset acquired before 01^st February, 2018 and transferred after 01^st April, 2018

In the above case, the Cost of Acquisition of the Asset will be determined as per clause (ac) of section 55, since the Capital Asset is acquired before 01^st February, 2018. Further, the provisions of Section 112A will also apply since the transfer has taken place after 01^st April, 2018. Any Capital Gain in excess of Rs. 1,00,000 shall be taxed at the rate of 10% under section 112A.

• Asset acquired after 01^st February, 2018 and transferred after 01^st April, 2018

In the above case, the Cost of Acquisition of the Asset will not be determined as per clause (ac), since the Capital Asset is acquired before 01^st February, 2018. Further, the provisions of Section 112A will also apply since the transfer has taken place after 01^st April, 2018. Any Capital Gain in excess of Rs. 1,00,000 shall be taxed at the rate of 10% under section 112A.

An important point to be kept in mind in all the four scenarios is that the benefit of Indexation is not available for an asset which is getting taxed as per Section 112A. Thus, the cost of acquisition will be directly reduced from the Full Value of Consideration to arrive at any gain or loss.

Determining Cost of Acquisition in case asset is purchased before 01/04/2001

The base year for calculating indexation has been revised to FY 2001-02. We shall try and understand the significance of the base year now. Take a look at the below example:

Since the asset is acquired before 01/02/2018, the cost of Acquisition of the asset will be determined as per clause (ac). Now the Cost of Acquisition as per clause (ac) will be

Thus the cost of acquisition as per clause (ac) will be Rs. 1,10,000. Now clause (b) of subsection 2 of section 55 states that if an asset is acquired before 01/04/2001, the cost of acquisition of the asset shall the higher of the cost of acquisition of the asset and the FMV as on 01/04/2001.

Now assume that there is no clause (ac), the cost of acquisition will be the higher of Rs. 1,00,000 (purchase cost) and Rs. 1,20,000 (FMV as on 01/04/2001). In this case, the Cost of Acquisition will be Rs. 1,20,000.

Let’s come back to clause (ac). Clause (ac) starts with the wordings “subject to the provisions of clause (b)”. Since clause (ac) is subject to the provisions of clause (b), the Cost of Acquisition determined as per clause (ac) cannot be lower than the cost of acquisition of clause (b).

In the example, the cost of acquisition shall be Rs. 1,20,000 as determined under clause (b) since it is higher than what is determined under clause (ac).