Long-term capital gains on sale of equity shares taxable @ 10% – New section 112A

Long-term capital gains on sale of equity shares taxable @ 10% – New section 112A applicable from AY 2019-20

Under the existing provisions, long term capital gains arising from equity shares of a company or an unit of equity oriented fund or an unit of business trusts is exempt from income-tax under clause (38) of section 10 of the Income Tax Act, 1961.

However, transactions in such long term capital assets carried out on a recognized stock exchange are liable to securities transaction tax (STT). According to the Government, this regime is inherently biased against manufacturing and has encouraged diversion of investment in financial assets. It has also led to significant erosion in the tax base resulting in revenue loss. The problem has been further compounded by abusive use of tax arbitrage opportunities created by these exemptions.

The Finance Bill 2018 has proposed to withdraw the exemption under section 10(38) and to introduce a new section 112A in the Act to provide taxation of such long term capital gains at 10 per cent where such capital gains exceed one lakh rupees.

However , the concessional rate of 10%  will be applicable if—

(i) in a case where long term capital asset is in the nature of an equity share in a company , securities transaction tax has been paid on both acquisition and transfer of such capital asset; and

(ii) in a case where long term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust, securities transaction tax has been paid on transfer of such capital asset.

Also it has been provided that the long term capital gains from sale of equity shares will be computed without considering  any indexation for indexation u/s 48 in respect of cost of acquisitions and cost of improvement and the benefit of computation of capital gains in foreign currency in the case of a non-resident, will not be allowed.

Also, it has been provided that the cost of acquisitions in respect of the long term capital asset acquired by the assessee before the 1st day of February, 2018 , shall be deemed to be the higher of –

(a) the actual cost of acquisition of such asset; and

(b) the lower of –

(i) the fair market value of such asset; and
(ii) the full value of consideration received or accruing as a result of the transfer of the capital asset