Section 112 Income Tax Act: Tax on Long-Term Capital Gains

Section 112 of the Income-tax Act, 1961 prescribes the special rate of income-tax on long-term capital gains that are not governed by a more specific provision such as Section 112A. For transfers on or after 23 July 2024, the general Section 112 rate is 12.5%, subject to the statutory rules and exceptions explained below.

What is a long-term capital gain?

Section 2(29AA) defines a long-term capital asset as a capital asset that is not a short-term capital asset. Section 2(29B) defines a long-term capital gain as a capital gain arising from the transfer of a long-term capital asset.

For transfers under the present capital-gains framework, the holding period is generally simplified to two periods: 12 months for specified listed securities and certain specified units or bonds, and 24 months for other capital assets. The exact classification must be checked against Section 2(42A) and any special provision applicable to the asset.

What does Section 112 cover?

Section 112 applies where an assessee's total income includes income arising from the transfer of a long-term capital asset that is chargeable under the head "Capital gains". It then determines the special tax component attributable to that long-term capital gain.

The provision contains separate computational clauses for a resident individual or HUF, a domestic company, a non-resident or foreign company, and other resident assessees. The post-23 July 2024 rate is generally uniform at 12.5% for long-term capital gains falling under Section 112.

Tax rate under Section 112

For a non-resident or foreign company, long-term capital gains from unlisted securities that fell within Section 112(1)(c)(iii) were taxed at 10% for transfers before 23 July 2024 under the prescribed computation. For transfers on or after that date, the statutory rate is 12.5%.

Special relief for land or building acquired before 23 July 2024

A resident individual or Hindu undivided family receives transitional protection where a long-term capital asset being land or building, or both, was acquired before 23 July 2024 and is transferred on or after that date.

If the income-tax computed under the new 12.5% rule exceeds the income-tax that would have been computed under the provisions as they stood immediately before the Finance (No. 2) Act, 2024 amendment, the excess is ignored. In practical terms, this protects an eligible resident individual or HUF where the old 20% computation with indexation produces a lower tax amount.

Adjustment against the basic exemption limit

For a resident individual or HUF, where total income excluding the Section 112 long-term capital gain is below the maximum amount not chargeable to income-tax, the long-term capital gain is reduced by that shortfall. Tax at the applicable Section 112 rate is then calculated on the balance.

The maximum amount not chargeable to tax depends on the tax regime and the law applicable for the relevant assessment year. It should therefore be checked for the year concerned rather than treated as a fixed figure.

Chapter VI-A deductions and Section 112(2)

Section 112(2) provides that where gross total income includes income arising from the transfer of a long-term capital asset, the gross total income is reduced by that income for the purpose of allowing deductions under Chapter VI-A. Accordingly, a Chapter VI-A deduction cannot be used to reduce the long-term capital gain taxed under Section 112.

Difference between Section 112 and Section 112A

Section 112 should not be confused with Section 112A. Section 112A specifically deals with long-term capital gains from specified equity shares, units of equity-oriented funds and units of business trusts where its statutory conditions are satisfied.

For transfers on or after 23 July 2024, qualifying Section 112A gains are taxed at 12.5% on the amount exceeding the statutory aggregate threshold of Rs. 1,25,000. Other long-term capital gains generally fall for consideration under Section 112, subject to any other special provision of the Act.

Simple illustration

Assume a long-term capital gain of Rs. 4,00,000 falls under Section 112 and the transfer takes place on or after 23 July 2024. Ignoring any basic-exemption adjustment, surcharge, cess, exemption, special computation rule or property transitional relief, the Section 112 income-tax component at 12.5% would be Rs. 50,000.

This illustration is only to explain the rate. Actual capital-gain computation may require consideration of Sections 45 to 55A, cost of acquisition, transfer expenses, exemptions such as Sections 54 to 54F where applicable, residential status, special asset rules and the relevant Finance Act.

Legal position before 23 July 2024

For historical transfers before 23 July 2024, the pre-amendment provisions remain relevant. The general Section 112 rate was 20%, while specified categories could receive concessional treatment under the law then in force. The applicable law must therefore be selected by the date of transfer.

Official references

For the statutory text and current guidance, refer to the Income Tax Department's official Section 112 page and its capital-gains guidance. The Finance (No. 2) Act, 2024 introduced the principal rate and indexation changes effective from 23 July 2024.

This article is a general legal and tax information resource. Tax consequences depend on the asset, date of acquisition and transfer, residential status, applicable assessment year and other facts.