Section 112A – 10% Long Term Capital Gains Tax on Sale of equity shares [With Example]

Under the existing provisions, long term capital gains from sale of listed equity shares or units of equity oriented fund or units of business trusts is exempt from tax by way of section 10(38).

New section 112A has been introduced in Finance Bill, 2018 which has withdrawn this exemption. The Memorandum explaining the bill stated:

“Under the existing regime, long term capital gains arising from transfer of long term capital assets, being equity shares of a company or an unit of equity oriented fund or an unit of business trusts , is exempt from income-tax under clause (38) of section 10 of the Act. However, transactions in such long term capital assets carried out on a recognized stock exchange are liable to securities transaction tax (STT). Consequently, this regime is inherently biased against manufacturing and has encouraged diversion of investment in financial assets. It has also led to significant erosion in the tax base resulting in revenue loss. The problem has been further compounded by abusive use of tax arbitrage opportunities created by these
exemptions.

In order to minimize economic distortions and curb erosion of tax base, it is proposed to withdraw the exemption under clause (38) of section 10 and to introduce a new section 112A in the Act to provide that long term capital gains arising from 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 shall be taxed at 10 per cent. of such capital gains exceeding one lakh rupees.”

The tax is charged at the rate of 10% on capital gains computed without giving the benefit of indexation. However, this concessional rate of 10% is applicable only if Securities Transaction Tax (STT) is paid on both acquisition and transfer of equity shares/equity oriented mutual fund.

Section 112A – Provisions (w.e.f. 01/04/2019 i.e. AY 2019-20)

1. Long term capital gains will be computed without giving the benefit to the first and the second proviso to section 48 i.e. benefit of indexation of cost of acquisition and cost of improvement will not be allowed. Also, benefit of computation of capital gains in foreign currency, in case of non-resident, will not be allowed.
2. The cost of acquisition in case of long term capital asset acquired before 01/02/2018, shall be deemed to be higher of the following:
   1. the actual cost of acquisition, and
   2. the lower of –
      1. the fair market value of such asset; and
      2. the full value of consideration received or accruing as a result of the transfer of the capital asset.
3. Fair Market value has been defined to mean:
   1. In case of capital asset listed on any recognized stock exchange –> Highest price quoted on such exchange on 31/01/2018. However, where there is no trading in such asset on such exchange on the 31/01/2018, the highest price of such asset on such exchange on a date immediately preceding 31/01/2018 when such asset was traded on such exchange shall be the fair market value;
   2. in a case where the capital asset is a unit and is not listed on recognized stock exchange, the net asset value of such asset as on the the 31st day of January, 2018.
4. The benefit of deduction under chapter VIA shall be allowed from the gross total income as reduced by such capital gains. Similarly, the rebate under section 87A shall be allowed from the income tax on the total income as reduced by tax payable on such capital gains. It means taxpayer cannot claim deduction u/s 80C to 80U or relief u/s 87A to the extent of such capital gains.

The new section 112A will be applicable to all the sale transaction done on or after 01/04/2018. 

Illustration

Let us understand this section with the help of an example:

Since the exemption u/s 10(38) is available only to shares sold on or before 31st day of March, 2018, it leaves investors with two options. One, to hold on to their existing investments and avail the benefit of cost escalation in future. Two, liquidate all the investments on or before 31st day of March, 2018 to claim exemption and purchase them back again.