Decoding Section 112 of the Income Tax Act: A Guide to Calculating Taxes on Long-Term Capital Gains
The taxation of capital gains is contingent on the duration of investment holding, typically classified as long-term capital gains (LTCG) or short-term capital gains (STCG). In this article, we explore the specifics of taxing long-term capital gains, focusing on Section 112 and Section 112A of the Income Tax Act.
Latest Development:
The Finance Bill 2023 amendment has eliminated the indexation benefit for gains from debt mutual funds. From 1st April 2023, debt mutual fund gains with approximately 35% equity exposure will be taxed at the investor's slab rates, categorized as short-term capital gains.
Understanding Section 112 Applicability:
Section 112 is applicable to all types of taxpayers, including individuals, Hindu Undivided Families (HUFs), companies, firms, residents, non-residents (not companies), and foreign companies.
Types of Long-Term Assets Covered by Section 112:
Section 112 outlines income tax rates for various long-term capital assets, including:
- Listed securities
- Long-term capital gains on zero-coupon bonds
- Unlisted securities
- Immovable property
- Other long-term capital assets
However, Section 112 does not apply to capital assets covered under Section 112A, namely:
- Listed equity shares with Security Transaction Tax (STT) paid on acquisition or transfer
- Units of equity-oriented mutual funds with STT paid on transfer
- Units of business trust with STT paid on transfer
Classification of Capital Assets into Long-Term and Short-Term:
To determine the classification of capital assets, refer to the following table:
Tax Rate on Long-Term Capital Gains under Section 112:
The tax rates for various types of long-term capital gains are as follows:
Calculating Tax Liability on Total Income with Long-Term Capital Gain:
When the taxpayer's total income includes long-term capital gains from the transfer of assets, the tax liability can be determined as follows:
- Subtract the long-term capital gains (LTCG) from the total taxable income and calculate tax based on the applicable rates for individuals or HUFs.
- Calculate the tax on long-term capital gains using the specified rates mentioned above.
- Add both amounts (1 + 2) to arrive at the total tax liability.
Key Points to Remember:
- In the case of individuals and HUFs, if the normal income (excluding LTCG) is less than the basic exemption limit, set off the unadjusted amount against LTCG and calculate tax on LTCG at the specified rates.
- The basic exemption limit benefit mentioned above does not apply to non-residents.
- Chapter VI-A deduction is not applicable to long-term capital gains.
Reporting LTCG in ITR Form
Taxpayers must report income from capital gains in ITR-2 and ITR-3 forms. The following details must be reported for LTCG under Schedule CG of the ITR:
- Full consideration value (sale value)
- Deductions under Section 48
- Indexed cost of acquisition (purchase value)
- Indexed cost of improvement, if applicable
- Expenditure exclusively and wholly related to transfer (trans
fer expenses)
The LTCG will be automatically computed.
Set Off and Carry Forward of Long-Term Capital Loss (LTCG) under Section 112:
Loss on the sale of a capital asset held for more than the holding period is termed as Long Term Capital Loss (LTCL) as per Section 112. A taxpayer can set off the LTCL from one capital asset against the LTCG from another capital asset. As per income tax rules, a taxpayer can set off the LTCL against the LTCG only in the current year. However, the remaining loss can be carried forward for eight years and set off only against future LTCG.
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