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The Finance Act, 2018 has withdrawn the exemption under section 10(38) of the Income-tax Act, 1961 and has introduced a new section 112A in order to levy long term capital gain tax on the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.

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

5. Fair market value should be calculated in following manner –

  • Fair market value for capital assets listed on recognized stock exchange as on 31st January, 2018 shall be –

(i) Fair market value shall be the highest price of the capital asset quoted on any stock exchange in India on 31st  January, 2018.

(ii) Fair market value in case if there is no trading of the capital asset on 31st January, 2018 will be highest price of the capital asset quoted on date immediately preceding 31st January, 2018 when the asset was last traded.

  • Fair market value of a capital assets being a unit which is not listed on a recognized stock exchange as on 31st January, 2018 shall be net asset value of the capital asset as on 31st January, 2018.
  • Fair market value in other case shall be –

In case of equity share which are not listed on the stock exchange as on 31st January, 2018, however, the same has been listed on stock exchange on the date of transfer – Fair market value in such case shall be an amount which bears to the cost of acquisition the same proportion as cost inflation index for the F.Y. 2017-18 bears to the cost inflation index for the first year in which the asset was held or for the year beginning on 1st April, 2001, whichever is later.

1. Basically the Benefit of Grandfathering has been given in sec 112A while calculating capital gains. Further, in budget speech, Hon’ble Finance Minister cleared the position by stating that ,” However, all gains up to 31st January, 2018 will be grandfathered. For example, if an equity share is purchased six months before 31st January, 2018 i.e before 31st July, 2017 at Rs. 100 and the highest price quoted on 31st January, 2018 in respect of this share is Rs. 120, there will be no tax on the gain of Rs. 20 if this share is sold after one year from the date of purchase i.e on or after 31st July, 2018. However, any gain in excess of Rs. 20 earned after 31st January, 2018 will be taxed at 10% if this share is sold after 31st March, 2018.”

2. The newly inserted section 112A can be better understood from the following illustration:

Particulars Case 1 Case 2 Case 3 Case 4
Date of acquisition 01.01. 2017
Date of sale 01.04.2018
(A) Actual cost of acquisition of shares 100 100 100 100
(B) FMV as on 31 January, 2018 200 200 200 50
(C) Sale consideration 250 150 50 150
(D) Condition 1:Lower of FMV or sales consideration 200 150 50 50
(E) Condition 2: Deemed cost of acquisition – Higher of A or D 200 150 100 100
Long term capital gain/(loss) (C – E) 50 Nil (50) 50

3. Long Term Capital Loss arising from transfer made between 1st Feb 2018 and 31st March, 2018 will not be allowed to set off and carried forward as the provision under clause (38) of section 10 will be applicable during this period.

4. 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.

5. Further, the CBDT has issued FAQ regarding Taxation of Long Term Capital Gains u/s 112A vide its notification no. F.No.370149/20/2018-TPL dated 04.02.2018 to resolve various queries which were raised on various issues related to new tax regime for taxation of Long Term Capital Gains u/s 112A.

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7 Comments

  1. AK Das says:

    30 bajaj auto shares sold in December 2019.20 shares bought before01/02/2018 & 10 bought in June 2018. 20 purchased before January 2018 showed in sch112A as per Gr father principle,where to show the 10 bought after January 2018?

  2. V K Manchanda says:

    I have filed ITR-2 for AY 2019-20 and there was long term capital loss of 57938 since I have entered Rs 586139 in full value of consideration column and Rs Rs 644077 in cost of acquisition column .This LTCG is against the shares acquired before 31-1-2018 from 2016 on various occasions .Grandfathering was one .
    IT after processing has indicated u/s 143(1)(a)(ii) has stated as incorrect claim as under in CG which is as under
    “There is inconsistency in the amounts
    /Totals entered in schedule CG OR
    Taxpayer is claiming deductions u/s 54
    which are more than the amounts
    allowable as per the respective sections.”

    Amount in Income Tax Return — Rs – 57938
    Amount as computed-Rs 586139
    Variance on account of proposed adjustment -Rs 644077
    Now I have to file revised return .
    Please help me how to enter the data to claim long term capital loss of 57938

    1. V K Manchanda says:

      I have filed ITR-2 for AY 2019-20 and there was long term capital loss of 57938 since I have entered Rs 586139 in full value of consideration column and Rs Rs 644077 in cost of acquisition column .This LTCG is against the shares acquired before 31-1-2018 from 2016 on various occasions .Grandfathering was one .
      IT after processing has indicated u/s 143(1)(a)(ii) has stated as incorrect claim as under in CG which is as under
      “There is inconsistency in the amounts
      /Totals entered in schedule CG OR
      Taxpayer is claiming deductions u/s 54
      which are more than the amounts
      allowable as per the respective sections.”

      Amount in Income Tax Return — Rs – 57938
      Amount as computed-Rs 586139
      Variance on account of proposed adjustment -Rs 644077
      Now I have to file revised return .
      Please help me how to enter the data to claim long term capital loss of 57938

  3. THAKKAR says:

    For FY2018-19, I have incurred short term capital loss and long term capital gain (taxable at 10%) in my share trading account. I want to carry forward the short term capital loss and pay tax on the long term capital gain. But while filing return through software, the short term capital loss is getting set-off against the taxable long term capital gain. Is this correct according to Income Tax rules ? As Long Term Capital Gain and Short Term Capital Gain are taxed at different rates (10% and 15% respectively) is it correct to set-off Short term capital loss against long term capital gain ? If not, how to carry forward the short term capital loss ?

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