Capital Gains arise when a capital asset is transferred and profit is earned. Under the Income Tax Act, capital gains are classified into Short Term Capital Gains (STCG) and Long Term Capital Gains (LTCG) based on the period of holding of the asset. Normally, capital gains are taxed at slab rates, but for certain assets and situations, the Act provides special tax rates. These special rates are mainly covered under Sections 111A, 112A, and 112, while STCG other than 111A is taxed at normal rates. These provisions are very important from exam and practical point of view.
Short Term Capital Gain under Section 111A:
Section 111A deals with short term capital gains on equity oriented assets. This section applies when the following conditions are satisfied. The capital asset transferred should be equity shares of a company, units of an equity oriented mutual fund, or units of a business trust. The transaction should be subject to Securities Transaction Tax (STT). The asset should be transferred within the short term holding period.
If these conditions are fulfilled, the short term capital gain is taxable at a special rate of 15 percent. This rate is applicable irrespective of the income slab of the assessee. Even if the assessee falls in the highest tax slab, STCG under Section 111A will be taxed at 15 percent only.
However, health and education cess at 4 percent is added to this tax. Surcharge is also applicable if total income exceeds specified limits. No basic exemption limit adjustment is allowed except in case of resident individuals and HUFs, where unused basic exemption limit can be adjusted against STCG under Section 111A.
This provision was introduced to encourage participation in capital markets and to provide certainty in taxation of equity based transactions.
Short Term Capital Gain other than Section 111A
Short term capital gains other than those covered under Section 111A are not taxed at special rates. These gains are taxed at normal slab rates applicable to the assessee. This category includes short term gains from sale of land, building, gold, debt mutual funds, and other capital assets where STT is not paid or asset is not equity oriented.
For example, if a person sells a plot of land within a short period and earns profit, such gain is treated as STCG other than 111A. Similarly, sale of debt mutual fund units within short term period also falls under this category.
Such gains are added to total income and taxed according to the slab rate of the assessee. All deductions under Chapter VI A such as Section 80C, 80D, etc., are allowed against this income. Basic exemption limit can be fully adjusted.
Thus, STCG other than Section 111A does not enjoy any concessional tax rate and is treated like normal income.
Long Term Capital Gain under Section 112A
Section 112A deals with long term capital gains on equity shares and equity oriented mutual funds. This section applies when the following conditions are satisfied. The asset transferred should be equity shares, equity oriented mutual fund units, or business trust units. STT should be paid at the time of acquisition and transfer in case of equity shares. The asset should qualify as a long term capital asset.
Under Section 112A, long term capital gains are taxable at 10 percent, but only on gains exceeding Rs 1,00,000 in a financial year. Gains up to Rs 1,00,000 are fully exempt.
Indexation benefit is not allowed under this section. Cost of acquisition is determined based on special grandfathering provisions introduced from 31 January 2018. This was done to protect gains accrued till that date from taxation.
Health and education cess at 4 percent is added to tax. Surcharge is applicable if total income crosses prescribed limits. Resident individuals and HUFs can adjust unused basic exemption limit against LTCG under Section 112A.
Section 112A replaced the earlier exemption under Section 10(38) and brought long term equity gains into the tax net while providing relief through lower tax rate and exemption limit.
Long Term Capital Gain under Section 112
Section 112 applies to long term capital gains other than those covered under Section 112A. This includes gains from sale of land, building, gold, bonds, debentures, and non equity mutual funds held for long term.
Under this section, long term capital gains are generally taxable at 20 percent with indexation benefit. Indexation allows adjustment of cost of acquisition for inflation, thereby reducing taxable gain.
In certain cases, long term capital gains may be taxed at 10 percent without indexation, such as transfer of listed securities or zero coupon bonds, if the assessee opts for it. However, this option is subject to conditions and usually applies where indexation benefit is not claimed.
Health and education cess at 4 percent and surcharge are applicable. Deductions under Chapter VI A are not allowed from LTCG under Section 112. However, resident individuals and HUFs can adjust unused basic exemption limit against such gains.
This section ensures fair taxation of long term gains from non equity assets while providing inflation protection through indexation.
Comparison of Special Tax Rates:
Short term capital gains under Section 111A enjoy a concessional rate of 15 percent to promote equity investments. In contrast, short term gains other than 111A are taxed at normal slab rates, making them costlier for high income earners.
Long term gains under Section 112A are taxed at 10 percent beyond Rs 1,00,000 without indexation, making equity investments tax efficient in the long run. Long term gains under Section 112 are taxed at 20 percent with indexation, providing relief against inflation but at a higher nominal rate.
Important Points for Examination:
Special tax rates apply only when specific conditions are fulfilled. STT payment is a key condition for Sections 111A and 112A. Indexation is allowed only under Section 112 and not under Section 112A. Basic exemption limit adjustment is available only to resident individuals and HUFs. Chapter VI A deductions are not allowed from capital gains taxed at special rates.