Section 112A: Tax on Long-Term Capital Gains on Equity Shares and Equity Funds

What does Section 112A cover?

Section 112A operates notwithstanding Section 112. It applies where total income includes income chargeable under the head "Capital gains" and the gain arises from the transfer of a qualifying long-term capital asset.

STT conditions under Section 112A

The concessional treatment is linked to payment of Securities Transaction Tax (STT) under Chapter VII of the Finance (No. 2) Act, 2004.

• Equity shares: STT is ordinarily required on both acquisition and transfer, subject to notified exceptions for specified modes of acquisition.
• Units of an equity-oriented fund or business trust: STT is required on transfer.

The Central Government may notify classes of acquisition for which the acquisition-side STT condition for equity shares does not apply.

Section 112A tax rate and Rs. 1.25 lakh threshold

The tax payable under Section 112A is combined with the tax payable on the remaining total income after reducing it by the qualifying long-term capital gains.

Adjustment of the basic exemption limit

For a resident individual or resident Hindu undivided family, where total income excluding the qualifying Section 112A long-term capital gains is below the maximum amount not chargeable to income-tax, the qualifying gains are reduced by the amount of that shortfall before applying the special rate.

Exception for certain IFSC transfers

The STT condition in Section 112A(1)(iii) does not apply to a transfer undertaken on a recognised stock exchange located in an International Financial Services Centre where the consideration is received or receivable in foreign currency.

Chapter VI-A deductions

Where gross total income includes qualifying long-term capital gains under Section 112A, deductions under Chapter VI-A are allowed from the gross total income after reducing it by those gains. In practical terms, Chapter VI-A deductions cannot be used to reduce the qualifying Section 112A gains themselves.

Rebate under Section 87A

Section 112A contains a specific rule for computing the Section 87A rebate where total income includes gains covered by Section 112A. The rebate is determined with reference to income-tax on total income after excluding the tax payable on those qualifying gains. The applicable assessment year and the current text of Section 87A should therefore be checked while computing the final tax liability.

Definitions used in Section 112A

Equity-oriented fund

The expression covers a fund set up under a scheme of a mutual fund specified under Section 10(23D) that satisfies the equity investment tests stated in Section 112A. Broadly, the section prescribes a 90% test for certain fund-of-fund structures and a 65% domestic listed-equity test in other cases, calculated by reference to the annual average of monthly averages. The current provision also contains a specific rule for certain unit-linked insurance policy schemes.

International Financial Services Centre

"International Financial Services Centre" has the meaning assigned in Section 2(q) of the Special Economic Zones Act, 2005.

Recognised stock exchange

"Recognised stock exchange" has the meaning assigned by the cross-reference in Section 112A to Section 43 of the Income-tax Act.

Related capital gains provisions

Section 112A should be read with the general capital-gains charging and computation provisions, the rules determining whether an asset is long-term, Section 111A for specified short-term capital gains, Section 112 for other long-term capital gains, and the special cost-of-acquisition rules applicable to assets covered by the 31 January 2018 grandfathering framework.