The Income Tax Act of 1961 contains several important provisions dealing with the taxation of capital gains, one of which is Section 112(1) of the Income Tax Act. This section specifically applies to all long-term capital assets & governs how long-term capital gains (LTCG) are taxed in India. Understanding this section is crucial for taxpayers who deal with capital assets such as real estate, mutual funds, stocks, or other investments.
What is Section 112(1) of the Income Tax Act?
Section 112(1) provides for the taxation of long-term capital gains arising from the transfer of capital assets. It specifies that an assessee is required to pay a tax at the rate of 20% or 10% on the gains, depending on whether indexation benefits are claimed.
This section applies to all long-term capital assets, except where the gains are exempt under other provisions, such as Section 10(38) (which previously exempted listed equity shares but has now been withdrawn for gains exceeding ₹1 lakh).
Tax Rates under Section 112(1)
The long-term capital gains under this section are taxed at two possible rates:
- 20% with indexation: When the cost of acquisition & improvement is adjusted for inflation using the Cost Inflation Index (CII), the gains are taxed at 20%.
- 10% without indexation: For certain assets, especially listed securities (excluding shares covered under Section 112A), the taxpayer can opt to pay 10% tax on LTCG without claiming indexation. "
Proviso under Section 112(1)
There’s an important proviso under Section 112(1), which states that if the total income of the taxpayer includes LTCG, then the basic exemption limit can be first adjusted against other income. If any portion of the basic exemption remains unused, it can be adjusted against LTCG, thereby reducing the taxable portion of LTCG.
For example, if a resident individual below 60 years has other income of ₹1,80,000 & LTCG of ₹1,50,000, the basic exemption of ₹2,50,000 leaves ₹70,000 unutilized. This ₹70,000 can be set off against the LTCG, leaving only ₹80,000 taxable.
Key Features of Section 112(1)
- Applies to long-term capital assets held for more than 36 months (in most cases).
- Provides for taxation of long-term capital gains, whether or not the gains are indexed.
- Tax rate is 20% (with indexation) or 10% (without indexation).
- The taxpayer has the option to choose the lower tax rate wherever applicable.
- The section applies to both resident & non-resident assesses."
Assets Covered under Section 112(1)
Some of the major capital assets to which Section 112(1) of the Income Tax Act applies include:
- Immovable property, such as land or buildings
- Unlisted shares
- Bonds, debentures (except certain specified ones)
- Jewellery, art, antiques, etc.
It is important to note that gains from listed equity shares & equity-oriented mutual funds are now taxed separately under Section 112A (introduced after the removal of the exemption under Section 10(38)).
Practical Example of Section 112(1)
Let’s say you bought a plot of land in 2010 for ₹10,00,000 & sold it in 2023 for ₹30,00,000. The indexed cost of acquisition using the applicable CII would be ₹21,82,000 (hypothetical value for illustration). Your long-term capital gain would be ₹8,18,000 (₹30,00,000 – ₹21,82,000). Tax @20% would be ₹1,63,600.
Alternatively, if the taxpayer chooses not to apply indexation, the gain would be ₹20,00,000 (₹30,00,000 – ₹10,00,000), & tax @10% would be ₹2,00,000. In this case, opting for indexation gives a better result.
Proviso to Section 112(1) and Its Importance
The proviso to Section 112(1) ensures that senior citizens, small taxpayers, or those with minimal income can benefit from the basic exemption limit even when they have long-term capital gains. This is especially useful for retirees or individuals with no significant salary income.
Common Questions on Section 112(1) of Income Tax Act
Q1. What is the long-term capital gain tax rate under Section 112(1)?
A: The LTCG is taxed at 20% with indexation or 10% without indexation, whichever is more beneficial.
Q2. Does Section 112(1) apply to mutual funds?
A: It applies to certain mutual funds like debt-oriented funds, not to equity-oriented funds, which fall under Section 112A.
Q3. Can I adjust my basic exemption limit against LTCG?
A: Yes, as per the proviso under Section 112(1), any unutilized basic exemption can be adjusted against long-term capital gains.
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