Section 111A, 112A and 112 on LTCG and STCG

Section 111A, 112A and 112 of Income Tax Act apply for tax rates on:

• Transfer / sale of shares, debentures, bonds,
• Units of mutual funds, units of business trust,
• Immovable property and other capital assets.

On transfer of capital assets gain is computed as per long term or short term.

So, tax should be calculated as per section 111A, 112A and 112 as the case may be.

In the following, we have explained in details with examples about these sections:

 

How to determine LTCG and STCG under section 111A, 112A and 112?

Under Section 111A, 112A and 112 gains are taxable on the basis of long term or short term capital gain.

Capital gain tax is computed on transfer of capital assets and that gain may be long term or short term.

For determining whether the capital assets transfer contributes to LTCG or STCG, it depends on the period of assets.

Capital Assets Transferred	STCG	LTCG
1) Listed shares, debentures, bonds, units of UTI, Units of equity oriented mutual fund, zero-coupon bond	If transferred asset held for not more than 12 months	If transferred asset held for more than 12 months
2) Unlisted shares, immovable property (land or building or both)	If transferred asset held for not more than 24 months	If transferred asset held for more than 24 months
2)  Other capital asset	If transferred asset held for not more than 36 months	If transferred asset held for more than 36 months

 

Example:

If Mr. X purchases listed shares on 01-04-2019 and sells these shares on 01-06-2019 (i.e. period of assets less than 12 months of holding). So any gain arising of transfer of these shares shall be treated as short term capital gain.

Once you decide the assets transfer is long term or short term, then points come for tax rate applicable on such gain.

So, tax rate applied on capital gain is given under section 111A, 112A and 112, which are explained one by one in the following paragraphs.

 

What is Section 111A of the Income Tax Act?

As per Section 111A, if you transfer / sale of equity shares, units of equity oriented mutual fund or unit of a business trust after holding for not more than 12 months, then short term capital gain arising is taxable at flat rate i.e. 15%.

This section 111A is only for short term capital gain. If gain arises in this section then it is taxable at 15%.

Otherwise, if short term capital gain arises on transfer of other assets than section 111A is not applicable, then in such a case tax rate is applicable as per normal income tax slab rates.

Example:

If Mr. X has purchased equity shares on 01-06-2018 for Rs. 10,000 and sells on 05-09-2018 for Rs. 30,000 then Rs. 20,000 (Rs. 30,000 – Rs. 10,000) is short term capital gain because the period of holding is less than 12 months. So tax in such case is Rs. 3000 (Rs. 20,000 * 15%)

 

Important conditions for section 111A

For applying tax rate under section 111A, you must look for important conditions which need to be fulfilled:

• Only transactions upon which securities transaction tax (STT) is paid on sale of equity shares, units of equity oriented mutual funds or units of business trust is covered under this section.
• If STT is not applicable then such a transaction is not covered under section 111A.
• The condition of STT is also applicable on STCG arising from transactions undertaken in foreign currency on a recognized stock exchange located in the international finance services centre (IFSC) even if STT is not paid. In such a case the tax rate will be 15%.

 

What is section 112A of Income Tax Act?

On transfer of equity shares, units of an equity oriented mutual fund or unit of business trust, if long term capital gain arises then in such a case LTCG  upto Rs. 1 lakh shall be exempt and LTCG exceeding Rs. 1 lakh shall be taxable at 10%.

Here, long term capital gain arises if the above mentioned asset is held for more than 12 months.

Example:

If LTCG on sale of shares is Rs. 500000 then upto Rs. 100000 no tax is levied. Excess of Rs.100000 is taxable at 10%. So, here tax shall be calculated on Rs. 400000 * 10% = Rs. 40000.

 

Important conditions for section 112A

• Here the transactions must be STT (securities transaction tax) based. If STT is not applicable (paid) on transfer of above mentioned asset i.e. equity shares, unit of equity oriented mutual fund or unit of a business trust then this section 112A is not applicable.
• However, there is no requirement of STT conditions to be fulfilled in Long term capital gains arising from transactions undertaken on a recognized stock exchange located in an International Financial Service Centre (IFSC). Here the rate of tax would be 10% irrespective of the fact that STT is not paid.
• In case of transfer of equity shares, STT must be paid on both acquisition and transfer.
• In case of transfer of a unit of equity oriented mutual fund or unit of business trust, STT must be paid on transfer.
• Indexation benefit would not be available in section 112A.

Also Read: Section 269SS, 269T, and 269ST (Penalty & Limit)

 

What is section 112 of Income Tax Act?

Section 112 is applicable on long term capital gain on transfer of capital asset (other than capital asset under section 112A).

Here tax rate of long term capital gain is applicable in the following categories:

1) In case of LTCG on transfer of unlisted securities, or shares of closely held company:

• Tax rate for non-corporate non-residents; foreign company is 10% (without indexation).
• Other people's tax rate is 20% (with indexation).

2) In case of listed securities (other than a unit) or zero coupon bond tax rate is: 

• 10% (without indexation) or 
• 20% (with indexation)

whichever is more beneficial to the assessee.

3) Any other asset tax rate is 20%.

 

What is the benefit of calculating tax with indexation value under section 112?

Tax without indexation

Example:

Mr. A purchased an immovable property on 01-04-2006 for Rs. 30 lakh and sold it on 01-04-2017 for Rs. 90 lakh. In this case gain of Rs 60 lakh (Rs. 90 lakh - Rs. 30 lakh) is long term capital gain as the asset is held for more than 24 months.

Suppose, tax rate without indexation is 20%, so tax would be Rs.12 Lakhs (Rs.60 lakh * 20%)

 

Tax with indexation

If we use indexation method in the above example and tax rate is 20%, CII (cost inflation index) of 2006 - 2007 is 122 and CII of 2017-18 is 272 than calculation of tax is as under: 

Particulars	Amount Rs.
Long term Capital Gain Full value of consideration	90,00,000
(-) Indexed cost of Acquisition (3000000*272/122)	66,88,524
LTCG	23,11,476

Tax on LTCG is 20%

= Rs. 23,11,476 * 20%

= Rs. 4,62,295

So by indexation you will save high tax.

Also Read: Section 115ba, 115baa, 115bab of Income Tax Act 1961

 

What are the other benefits in section 111 A, 112 A and 112? (Comparative analysis)

Section 111A	Section 112A	Section 112
1) In case of resident individual or HUF (Deficiency to be adjusted from LTCG)
Allowed	Allowed	Allowed
2) Deduction under chapter V1-A [ 80C to 80U] from LTCG
Not Allowed	Not Allowed	Not Allowed
3) Rebate under section 87A
Allowed	Not Allowed	Allowed

 

How to adjust deficiency from LTCG under section 111A, 112A & 112?

Deficiency to be adjusted from LTCG in case of resident individual or HUF (Srl. 1 above)

Suppose, normal income is less than the basic exemption limit (i.e. Rs. 250000, Rs 300000 or Rs. 500000 as the case may be) then the amount of income which is less than the exemption limit is known as deficiency and that deficiency can be adjusted from long term capital gain as well as short term capital gain.

Example:

Mr. X has total income Rs. 300000 which includes long term capital gain under section 112 of Rs. 140000 and normal income (i.e. salary) is Rs. is 160000. And if Mr. X age is 45 years then the basic exemption limit is Rs 250000.

So, here deficiency is calculated as Rs. 90000 (Rs. 250000 – Rs. 160000) and that is to be adjusted with LTCG.

Particulars	Amount Rs.
Tax on normal income (with deficiency Rs.90,000)	NIL
Tax on LTCG under section 112 = [Rs.140000 – Rs. 90000] = Rs. 50000 * 20%	10000

So, in this way deficiency is adjusted.

 

What are the tax rate in section 111 A, section 112A and 112? (comparative view)

STCG	LTCG
Section 111A	Section 112A	Section 112
1) Transfer of Equity Shares, Unit of Equity oriented mutual fund and units of business trust
If STT Paid
15%	10% (on excess of Rs. 1 lakh)	-----
If STT not paid
Normal Slab Rate	-----	20%

Also Read: Income Tax Rate: Companies, Partnership Firm, LLP (FY 2021-2022)

Summary

Section 111A, section 112A and 112 of Income Tax is for long term / short term capital gain tax rates. After analysing capital gain, tax is applicable as per these sections.