A Guide to Section 112 of Income Tax Act

• Section 112 of Income Tax Act deals with long-term capital gains tax on the sale or transfer of assets.
• Every type of taxpayer is liable to pay capital gains tax on profits earned from long-term assets.
• The tax rate depends on the nature of the asset sold and its holding period.
• Section 112 allows some exemptions on capital gains tax to help reduce your tax liability.

Capital gain refers to the profitsmade by selling assets held for a long time. Based on the tenure of the asset holding, capital gain is further classified under two heads- Long Term Capital Gain (LTCG) and Short Term Capital Gain (STCG).Profit earned from assets held for more than a year is known as LTCG, whereas profit earned from assets held for less than a year is known as STCG.LTCG and STCG are taxed under respective sections of the Income Tax Act. One such section is 112. Let's understand what it is all about.

Sec 112 of Income Tax Act lays down the provisions for taxation on all Long Term Capital Gains, excluding those assets covered under Section 112A of the Income Tax Act. It considers only profit/losses marked from the sale of assets held for more than a year.The applicable tax interest rate to be paid under sec 112 of Income Tax Actis not fixed and depends upon the nature of the asset and the tenure of holding the asset.

All Indian taxpayers are bound by Sec 112 of Income Tax Actand must pay the applicable taxes on capital gains. Eligible taxpayers include the following:

• Individuals
• Hindu Undivided Families (HUFs)
• Partnership firms
• Companies
• Residents
• Non-Residents, and
• Foreign Companies etc.

Also Read: Income Tax in India: Meaning, Terms & Tax Deductions

Gains earned from the sale of the following assets are considered under Section 112 of Income Tax Act :

• All securities (excluding units) listed on a recognised Indian Stock Exchange.
• A unit of the Unit Trust of India
• Zero-coupon bonds
• Securities not listed on recognised Indian Stock Exchange.
• Immovable properties such as land, building or both, and
• Other capital assets

Sec 112 of Income Tax Actdoes not consider the sale of a few long-term assets for taxation purposes as they fall under Sec 112A of the Income Tax Act. These include:

• Listed equity shares where the securities transaction tax (STT) is paid only on the acquisition or transfer of stocks.
• Units of equity-oriented mutual funds are where the securities transaction tax (STT) is paid on transfer.
• Units of business trust where the securities transaction tax (STT) is paid on transfer.

The applicable tax rates for long-term capital gain under Income Tax Act, Sec 112, are given below:

• Listed securities (other than units) held for 12 months are taxable at 10% without indexation.
• Zero-coupon bonds held for 12 months are taxable at 10% without indexation or 20% with indexation, whichever is lower.
• A unit of Unit Trust of India held for 12 months is taxable at 20% without indexation.
• Unlisted securities transferred by non-resident or foreign companies held for 12 months are taxable at 10% without indexation.
• Unlisted securities and immovable properties held for 24 months are taxable at 20% with indexation.
• Other assets held for 36 months are taxable at 20%.

Here are some things to consider when computing tax liability under Section 112 of Income Tax Act:

• Purchase value or the indexed cost of acquisition
• Indexed cost of improvement and
• Expenses incurred on transfer

• Total sale value
• Applicable deductions u/s 48, which includes-

• The sectionallows for adjustments of your long-term capital gain tax against your basic exemption limit. This means that if your annual taxable income is below the basic exemption limit, you may request the IT department to adjust your LTCG against the shortfall in your basic exemption limit and pay taxes only on the remaining income.
• You must report all your earnings from capital gains under an ITR form, including ITR-2 and ITR-3. You must provide the under-mentioned details under schedule CG of the ITR for your LTCG-
• You may also offset any loss incurred by the sale of assets held for a longer period than the specified holding period. Loss incurred from such a sale is known as Long Term Capital Loss or LTCL.

Sec 112 of Income Tax Act allows provisions for you to write off your LTCL against LTCG earned by the sale of other long-term assets owned by you. However, you may write off your LTCL against LTCG only for the current year. You are allowed to carry forward the losses for the next 8 years and set off the same against LTCG earned in future.

The following exemptions are available under Section 112 of Income Tax Act -

Section 54EE

This section provides tax exemption on the profit earned by the sale of long-term assets on investment in units of a pre-specified fund.

Section 54F

This section provides tax exemption on the profit earned by the sale of investments made in residential property, excluding houses.

Section 54, Section 54EC, Section 54EE and Section 54 GB

You get tax exemption on the sale of immovable properties. However, this again depends upon the nature of the asset.Sec 112also allows you to reinvest your sale proceeds in another capital asset and claim exemptions on the earnings on account of investment. By doing so, you can lower your capital gains and save taxes. If you choose to do so, you must hold the new asset for the period specified in the section.

If you own assets and sell them in a financial year, understand the provisions of Section 112 of Income Tax Act. Calculate your tax liability on the profits earned on the sale and file your taxes correctly.