Section 112A of the Income Tax Act, 1961

Section 112A of the Income Tax Act, 1961

Capital Gain arising from transfer of a long-term capital asset being an equity share in a company listed on a recognized stock exchange, equity oriented mutual fund or units of business trust shall be subject to tax under section 112A of the Income Tax Act, 1961 if such transfer takes place on or after 01st April, 2018. Earlier, the capital gain on transfer of such capital assets were exempt under section 10(38) of the Income Tax Act,1961.

Rate of Tax – 10% of such capital gain exceeding ₹ 100,000.

Exemption – Any capital gain up to 31st January, 2018 shall be grandfathered i.e. the same shall not be taxable. Let us understand this with the help a following case:-

Case – Mr. A acquired 10,000 Nos. equity shares of Z Ltd, listed on stock exchange on 01st of September, 2017 at the rate of ₹ 100 per share. As on 31st of January 2018, the highest price quoted for such shares is ₹ 120. ₹ 20 per shares earned up to 31st January, 2018 will not be taxed but any gain in excess of ₹ 20 shall be subject to tax under the newly notified section.

Applicability – The above section applies to all persons. Further, in case of person being Individual or Hindu Undivided Family, the balance of basic exemption limit which is not exhausted by income under other heads can be adjusted against such capital gain and balance capital gain, if any shall be taxable as per the new section. Let us understand this with the help of a following case –

Case – Mr. A aged 45 years makes gain of ₹ 500,000 from transfer of equity shares. His other income excluding capital gain amounts to ₹ 187,000. Therefore basic exemption limit of ₹ 63,000 (₹ 250,000 – ₹ 187,000) can be adjusted against capital gain of ₹ 500,000 and tax will be paid only on net amount exceeding ₹ 100,000.

Benefit of Indexation: Benefit of Indexation will not be available in computing such capital gain.

Chapter VIA deduction: Deduction under Chapter VIA cannot be claimed against such income.

Rebate under section 87A: Rebate of ₹ 2,500 from tax under section 87A will not be available on tax computed under this section.

Exemption under section 10(38): Exemption under section 10(38) shall continue to be available on transfer of such capital assets on or before 31st March, 2018. Let us understand the same with the help a following case:-

Case – Mr. A purchased shares on 26th March, 2017 at the rate of ₹ 100 per shares and sells the same at the rate of ₹ 126 per share on 30th March, 2018. The above transfer will be exempt under section 10(38) of the Income Tax Act, 1961 as the transfer took place when section 112A was not into effect i.e. 30th March, 2018.

Long-term capital loss under on transfer between 1st February, 2018 and 31st March, 2018: As such capital gain is exempt under section 10(38), the capital loss on such asset will be allowed to be set-off and carried forward.

Treatment of long-term capital loss arising on transfer of such assets on or before 1st April, 2018: Such loss will be allowed to be set-off and carried forward.

Following are some more cases for better understanding:-

Case 1 – Mr. A acquired 10,000 Nos. equity shares of Z Ltd, listed on stock exchange on 01st of September, 2017 at the rate of ₹ 100 per share. As on 31st of January 2018, the highest price quoted for such shares is ₹ 120. If Mr. A sells all shares on 3rd September, 2018 at the rate of ₹ 150 per shares, then ₹ 30 (₹150 – ₹120) per shares will be taxable as per provisions of new section.

Case 2 – Other facts remaining same as in case 1, Mr. A sells all his holding on 27-Mar-2018 at the rate of ₹ 125 per share. Period of holding being less than 12 months, gain of ₹ 25 (₹ 125-₹ 100) per share will be taxed under section 111A at the rate of 15% and not as per the new section.

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