The Finance Act,2018 withdrew the exemption provided under section 10(38) of the Income Tax Act,1961 and inserted section 112A to tax Long term capital gain arising from transfer of listed shares, units of equity oriented mutual fund and units of business trust.
Applicability of section 112A
1. The provision of this section will apply from the Financial year 2018-19 i.e. AY 2019-20. This means any transfer of capital asset on or after 1 April 2018, resulting in Long term capital gain will attract tax under section 112A.
2. Long Term Capital Gain should arise from the transfer of the following:
- A. Equity shares in a company (STT paid on acquisition and transfer);
- B. Unit of an equity-oriented mutual fund (STT paid on transfer); and
- C. Unit of a business trust (STT paid on transfer).
3. when provisions of section 112A are applicable, long term capital gain tax @10% shall be levied. In order to levy capital gain tax @ 10%, capital gain should be exceeding Rs. 1 lakh.
4. Long term capital gain will be computed without giving effect to the first and second proviso of section 48 i.e. benefit of indexation of cost of acquisition and cost of improvement will not be allowed.
5. Cost of acquisition in case of long term capital asset acquired before 01/02/2018, shall be deemed to be the higher of the following:
- A. Actual cost of acquisition, and
- B. The lower of-
- The fair market value of such asset; and
- The full value of consideration received or accruing as a result of transfer of capital asset.
6. Fair market value should be calculated in following manner:
- A. In case of capital asset listed on recognized stock exchange
- Highest price quoted on such stock exchange on 31/01/2018
- However, where there is no trading in such asset on such stock exchange on 31/01/2018, the highest price on such stock exchange on a day immediately quoted
- B. In 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 31/01/2018.
7. The benefit of deduction under chapter VIA and rebate under section 87A shall be allowed from the income tax on the total income as reduced by tax payable on such capital gain. It means taxpayer can’t claim deduction u/s 80C to 80U or relief u/s 87A to the extent of such capital gain.
8. Let’s understand the provisions with the help of few example:
| Particulars | Before | Now |
|---|---|---|
| Date of Purchase | 15th-Nov-2016 | 15th-Nov-2016 |
| Date of Sale | 30th-April-2018 | 30th-April-2018 |
| Purchase Price | 2,00,000 | 2,00,000 |
| Sale Price | 6,00,000 | 6,00,000 |
| FMV on 31 /01/ 2018 | 4,50,000 | 4,50,000 |
| Computation of LTCG: | ||
| Sale Consideration | 6,00,000 | 6,00,000 |
| Less: Cost of Acquisition | 2,00,000 | 4,50,000 |
| Capital Gain/(Loss) | 4,00,000 | 2,50,000 |
| Exemption u/s 10(38) | 4,00,000 | – |
| Total Capital Gain | – | 2,50,000 |
| Exemption u/s 112A | – | 1,00,000 |
| Taxable Long term Capital gain | – | 1,50,000 |
| Tax @ 10% | – | 15,000 |
In the above example, if the tax would have been below Rs, 1,00,000, then the whole gain amount would have been exempt.
Summary
The various scenarios which will help you understand the amendment in better way have been summarized as below:
Q.1 If purchase and sale both done before 31/01/2018?
Ans:- Exempt u/s 10(38) of income tax act 1961
Q 2. If purchased before 31/012018, Sold after 31/01/2018 but before 01/04/2018?
Ans: – Exempt u/s 10(38) of income tax act 1961.
Q 3. If purchased before 31/01/2018 but sold on or After 01/04/2018?
Ans :- LTCG Taxable under Section 112A. However, Gains accrued till 31/01/2018 shall be exempt.
Q 4. If purchased after 31/01/2018 but sold on or after 01/04/2018?
Ans: – LTCG Taxable u/s 112A of income Tax 1961.