Section 112 of the Income Tax Act deals with Long Term Capital Gain Provision. Under Income Tax Section 112, LTCG is calculated where the asset if Listed Securities, Unlisted Securities etc. In this Post, we will cover the Scope of Section 112, How Zero Coupon Bonds are treated under section 112, LTCG Calculation under section 112 of the Income Tax Act etc.Section 112 has been inserted with effect from April 1, 1993 for computation of Income-tax on Long-term Capital gains. Long-term Capital gains are taxable at a flat rate 20%.
LTCG on Securities – Section 112 Income Tax Act
Income-tax as amended by Finance Act, 1999 & subsequently by Finance Act, 2014 provides that – In respect of listed securities (other than unit) or units or zero tax coupon bonds, assessees have the option of :
- paying tax @ 20% on long-term capital gain computed by considering the ‘indexed’ cost of acquisition and improvement; or
- paying tax @ 10% on long-term capital gains computed by considering the actual i.e. the historical cost
This option can be exercised separately in respect of each transaction i.e. exercise of the first option in respect of one transaction does not preclude the assessee from exercising the second option in respect of a subsequent transaction(s) during the same previous year.
Assessee Choice – Section 112 Income Tax Act LTCG
Assessees must exercise this choice judiciously on a comparison of tax liability under the two options. In respect of long-term capital gains from transfer of bonus shares, invariably the second option will be exercised.
The assets covered under this provision are securities defined under Section 2(h) of the Securities Contracts (Regulation) Act, 1956 listed on any recognised stock exchange in India.
Securities – – Section 112 Income Tax Act
As per Section 2(h) “Securities includes shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature of any company, Government Securities and other notified instruments.
VIA Deductions – Section 112 Income Tax Act LTCG
In respect of such long-term capital gain, deductions under Chapter VIA (i.e. under Sections 80C to 80U) are not allowed. Further, income other than long term capital gains will be subject to tax at the rates in force.
CLARIFICATION REGARDING THE DEFINITION OF THE TERM ‘UNLISTED SECURITIES’ FOR THE PURPOSE OF SECTION 112 (1) (C)
Existing provisions of clause (c) of sub-section (1) of section 112 provide tax rate of ten per cent for long-term capital gain arising from transfer of securities, whether listed or unlisted. The expression “securities” for the purpose of the said provision has the same meaning as in clause (h) of section 2 of the Securities Contracts (Regulations) Act, 1956 (32 of 1956)(‘SCRA’). A view has been taken by the courts that shares of a private company are not “securities”.
New Provision – Section 112 Income Tax Act LTCG
With a view to clarify the position so far as taxability is concerned, clause (c) of sub-section (1) of section 112 of the Income- tax Act has been amended to provide that long-term capital gains arising from the transfer of a capital asset being shares of a company not being a company in which the public are substantially interested, shall be chargeable to tax @ 10%.
These amendments effective from the 1st day of April, 2017 and accordingly apply in relation to assessment year 2017-18 and subsequent years.
Zero Coupon Bonds – Section 112 Income Tax Act LTCG
The proviso under Section 112(1) includes zero coupon bonds. Therefore, where the tax payable in respect of any income arising from the transfer of a long-term capital asset being zero coupon bonds exceeds 10% of the amount of capital gain, before giving effect to the provisions of the second proviso to Section 48 (i.e. before giving effect to indexed cost) such excess shall be ignored for the purpose of computing the tax payable by the assessee