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Description

Section 112 of the Income Tax Act, 1961 deals with the taxation of long-term capital gains (LTCG) arising from the transfer of long-term capital assets. This section outlines the tax treatment for long-term capital gains on the sale of securities, property, bonds, debentures, and other assets, after they have been held for a period of more than 36 months (or 24 months in certain cases).

Key Features of Section 112 - Tax on Long-Term Capital Gains:

1. Definition of Long-Term Capital Gain (LTCG):

   • Long-term capital gain arises when a capital asset is held for a period longer than the defined holding period.
     • For listed securities, equity shares, and mutual funds, the asset must be held for more than 12 months to qualify as long-term.
     • For immovable property (land/building), the holding period must be more than 24 months to qualify as long-term.
     • For other capital assets such as bonds, the holding period is generally more than 36 months.

2. Tax Rate:

   • Under Section 112, long-term capital gains on the sale of assets, such as listed equity shares, equity-oriented mutual funds, and listed bonds, are taxed at a concessional rate of 20%.
   • If STT (Securities Transaction Tax) has been paid on equity shares or mutual funds, the tax is further reduced, and long-term capital gains on listed equity shares and mutual funds are taxed at 10% without the benefit of indexation.
   • If STT has not been paid or the asset is not listed, the gains are subject to the 20% tax rate after applying the indexation benefit.
   • Indexed cost of acquisition and improvement are used to calculate the long-term capital gain on assets not subject to STT. This can reduce the taxable gain considerably.

3. Indexed Cost of Acquisition:

   • When an asset is held for a long period (more than 36/24 months), you can apply indexation to the cost of acquisition of the asset. This means adjusting the original purchase price by inflation (using the Cost Inflation Index or CII) to arrive at the inflated cost.
   • The indexed cost of acquisition helps to reduce the taxable capital gain by increasing the cost basis of the asset, thus reducing the amount of gain on which tax is payable.

4. Exemption Under Section 54 and 54F:

   • Section 112 allows for exemptions under Section 54 and Section 54F for capital gains arising from the sale of a residential property. These exemptions can reduce or completely eliminate tax liability on long-term capital gains if the capital gain is reinvested in certain assets, such as another residential house.
   • Section 54 provides an exemption for long-term capital gains on the sale of residential property, provided the gain is reinvested in the purchase or construction of another residential property.
   • Section 54F allows an exemption for the sale of a long-term capital asset other than a residential house if the proceeds are used to purchase a new residential property.

5. Tax Treatment for Different Types of Assets:

   • Listed Securities (Equity Shares and Mutual Funds): Long-term capital gains on the transfer of listed equity shares and mutual funds are taxed at 10% without indexation if STT has been paid.
   • Other Assets (like Property, Gold, Bonds): Long-term capital gains on these assets are taxed at 20% after applying indexation. The tax is calculated on the net capital gain after adjusting the indexed cost of acquisition and cost of improvement.

6. Securities Transaction Tax (STT):

   • STT plays a vital role in determining the tax treatment of capital gains on listed equity shares and mutual funds.
     • If STT has been paid on the sale of listed equity shares or equity mutual funds, the long-term capital gain is taxed at 10% without indexation.
     • If STT has not been paid (for example, in the case of unlisted shares), the gain is taxed at 20% after applying indexation.

7. Minimum Tax Payable:

   • Long-Term Capital Gains above ?1 lakh in a financial year are subject to tax at 10% (for listed equity shares and mutual funds, where STT has been paid).
   • For assets that do not have STT, the tax rate is 20% after the application of indexation.

8. Special Case for Inherited Assets:

   • If an individual inherits a capital asset, the holding period of the previous owner is added to the holding period for determining long-term capital gains under Section 112. Thus, an asset may qualify for long-term capital gain treatment even if the individual has held it for less than the required period.
   • Inherited property also benefits from indexation from the year the original owner acquired the asset.

Punishment

Failure to Pay Tax:

• If the taxpayer fails to pay the tax on long-term capital gains under Section 112, penalties and interest can be levied under various sections of the Income Tax Act.
• Penalties under Section 271(1)(c) for concealing income may apply if the taxpayer is found to have misreported their long-term capital gains.
• Interest under Sections 234A, 234B, or 234C may be charged for delayed payment of taxes.

Reassessment and Penalty:

• If the income is underreported or not disclosed properly, the tax authorities can initiate a reassessment under Section 147, and penalties may be imposed for underreporting of capital gains.
• The penalty for willful concealment or false reporting can be significant.