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The Finance Act, 2018 has withdrawn the exemption under section 10(38) of the Income-tax Act, 1961 and has introduced a new section 112A in order to levy long term capital gain tax on the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