Schedule 112A of the Income Tax Act requires individuals to report any capital gains from the sale of listed equity shares or units on a recognised stock exchange. This information must be included in the individual's income tax return, along with details of any long-term or short-term capital gains.
The main objective of introducing this schedule is to improve transparency and enable the tax authorities to verify the reported capital gains. It will also help curb evading taxes by under-reporting or not reporting capital gains.
To ensure compliance, the stock exchange must furnish all investors' transaction details to the Income Tax Department every quarter. The department will then match the details furnished by the taxpayer with the pieces received from the stock exchange. In case of any discrepancy, the taxpayer will be liable to pay interest and penalties as prescribed under the Income Tax Act.
Did You Know? With Schedule 112A, taxpayers must now provide detailed information on all their transactions involving listed equity shares and units. This will help the authorities identify cases of potential tax evasion and ensure that the correct taxes are paid on capital gains.
Scope of Section 112A
As per section 112A, long-term capital gains arising from the transfer of a long-term capital asset, being equity shares in a company or units of an equity-oriented mutual fund or units of a business trust, shall be taxed at the rate of ten per cent of the capital gains.
However, such long-term capital gains shall not be included in the assessee's total income and shall be exempt from tax.
Further, as per the provisions of section 112A, long-term capital gains arising from the transfer of a long-term capital asset, being equity shares in a company or units of an equity-oriented mutual fund or units of a business trust, which are listed on a recognised stock exchange in India and which are subject to securities transaction tax, shall be taxed at the rate of ten percent of the capital gains.
Such long-term capital gains shall not be included in the assessee's total income and shall be exempt from tax.
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Long-term capital gains under Section 112A
In India, long-term capital gains (LTCG) on equity shares and mutual fund units are taxed at 10% without the benefit of indexation if they exceed ₹1 Lakh in a financial year. The tax is levied on the gains made on or after 1st April 2018.
Prior to this, long-term capital gains on equity shares and mutual fund units were exempt from taxes. The LTCG tax was introduced in the Union Budget 2018-19 by the then Finance Minister, Arun Jaitley. The tax is applicable to gains made on or after 1st April 2018.
To calculate LTCG, the cost of acquisition and improvement of the asset is first adjusted for inflation. This is known as indexation. Indexation benefits are available for gains arising on the sale of assets held for more than 12 months.
After adjusting for inflation, if the selling price of the asset is higher than the indexed cost of acquisition, the difference is treated as LTCG. This gain is taxed at 10% without the benefit of indexation.
For example, if you had purchased equity shares for ₹50,000 on 1st January 2017 and sold them on 31st March 2020 for ₹1,50,000, your LTCG would be ₹1,00,000. This gain is taxable at 10% without the benefit of indexation.
If you had purchased equity shares for ₹50,000 on 1st January 2001 and sold them on 31st March 2020 for ₹1,50,000, your LTCG would be ₹1,29,167. This gain is taxable at 10% after adjusting for inflation.
The LTCG tax is not applicable to gains arising from the sale of assets held for less than 12 months. These gains are taxed as short-term capital gains (STCG) at the applicable rate of 15%.
Requirements to Qualify for 20% Tax Rate
- The gain must be from the sale or exchange of a capital asset, and the asset must have been held for more than one year.
- The taxpayer's tax rate for ordinary income must be 25% or higher.
The tax rate on long-term capital gains may be lower than that on ordinary income, but it is still essential to consider the tax implications of selling an asset. When an asset is sold, the gain or loss is calculated by subtracting the purchase price from the sales price. The difference is a capital gain if the sales price is higher than the purchase price. The difference is a capital loss if the sales price is lower than the purchase price.
Short-term and long-term capital gains and losses are distinguished. Short-term capital gains and losses are profits or losses earned on the sale of an asset held for one year or less. Gains or losses on the sale of an asset that has been kept for longer than a year are referred to as long-term capital gains or losses. Short-term capital gains are taxed more heavily than long-term capital gains, and long-term capital gains are taxed at a rate of 20%. The taxpayer's regular income tax rate determines how much money is taxed on short-term capital gains.
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Capital Loss or Profit on Seling Assets
When an asset is sold, the gain or loss is calculated by subtracting the purchase price from the sales price. The difference is a capital gain if the sales price is higher than the purchase price. The difference is a capital loss if the sales price is lower than the purchase price.
Capital gains and losses are classified as short-term or long-term. Short-term capital gains and losses are gains or losses realised on the sale of an asset that has been held for one year or less. Long-term capital gains and losses are gains or losses realised on the sale of an asset that has been held for more than one year.
Capital gains over a long period are taxed more favourably than those over a short period, and long-term capital gains are taxed at a rate of 20%. The taxpayer's regular income tax rate determines how much money is taxed on short-term capital gains.
When determining the tax rate on a capital gain, it is essential first to determine whether the gain is short-term or long-term. Short-term capital gains are taxed at the taxpayer's ordinary income tax rate, and long-term capital gains are taxed at a reduced rate of 20%. The taxpayer's income may also affect the tax rate on a capital gain, and taxpayers with a higher income may be subject to a higher tax rate on their capital gains. Capital gains are taxed differently than ordinary income. Understanding the tax implications of selling an asset is essential before deciding to sell.
Reporting under Schedule 112A of the ITR
The income tax returns for AY 2020–21 contain Schedule 112A, which enables reporting long-term capital gains while grandfathering restrictions are in place. The information required for Schedule 112A consists of the ISIN code, the name of the scrip, the number of shares or units sold, the selling price, the purchase cost, and the FMV as of January 31, 2018. If grandfathering regulations apply, information must be provided to determine the precise amount of long-term capital gains.
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Conclusion
Schedule 112A of the Income Tax Act provides for long-term capital gains arising from the transfer of listed equity shares or units of equity-oriented mutual funds, which must be mandatorily reported in the income-tax return. The schedule provides for a lower tax rate of 10% on such long-term capital gains without allowing the benefit of indexation. The taxpayer must include the name of the company or the scheme, the date of acquisition of the shares or units, the sale consideration, and the date of transfer of the shares or units in the income-tax return to allow for scrip-by-scrip reporting of capital gains from listed equity shares and units.
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