Section 112A, The Grandfathering Rule, Long Term Capital Gains, and tons of Scrip-Wise reporting. There has been a lot of confusion around this. It’s chaos for the Traders. Investors are facing hardships to gather and provide data. On 26th September, Income Tax India released a notification regarding Scrip-Wise reporting of capital gains. Yes, there is ‘some’ relief. But the question remains - is it enough?
The Press Release for Scrip-Wise Reporting
The IT Department released a notification saying that the Scrip-Wise reporting is NOT required in the ITR Forms for A.Y. 2020-21 for shares/units which are NOT eligible for Grandfathering (under Long Term Capital Gains) i.e. Short Term Capital Gains, Intraday, and F&O.
CBDT issues clarification that there is no requirement of scrip wise reporting for day trading and short-term sale or purchase of listed shares. Details in press release: pic.twitter.com/M9K7cjUosN— Income Tax India (@IncomeTaxIndia) September 26, 2020
What is the Grandfathering Rule in Long Term Capital Gains?
Do your grandfathers need to be involved? No!
What is Section 112A?
Before diving into this rule, we need to talk about Section 112A.
Under Budget 2018, the exemption under Section 10(38) was removed. And a new Section 112A (applicable from AY 2019-20) was introduced with a 10% tax on LTCG in excess of INR 1 lakh in the case of equity shares and equity mutual funds on which STT is paid.
- You invest INR 3 lakh in stocks or equity funds in March 2018
- You sell the investment for INR 3.50 lakh in March 2019
- LTCG= INR 50k
- Since LTCG up to INR 1 lakh is exempt, your INR 50k will not be taxed.
Section 10(38)'s removal?
Under Section 10(38) profit on the sale of listed equity shares, equity-oriented mutual funds & units of business trust held for more than a year was exempt from income tax.
This Section was introduced in the Finance Act of 2004 based on the Kelkar Committee report. The motto was to attract investments from Foreign Institutional Investors. Also, since investors paid STT, it provided relief from double taxation to such investors.
But many taxpayers misused the exemption leading to loss of revenue and tax evasion due to abusive practices.
The Grandfathering Rule
Many investors invest in equity markets with an intention to earn tax-free profits in the form of Long Term Capital Gains. Under Section 112A, CBDT introduced the grandfathering rule to ensure that gains up to 31st January 2018 are not taxed. For equity shares and equity mutual funds purchased on or before 31st January 2018 and sold after a year, the Cost of Acquisition would be:
- Fair Market Value as on 31st Jan 2018 or the Actual Selling Price whichever is lower
- Step 1 or Actual Purchase Price whichever is higher
Long Term Capital Gain = Sales Value – Cost of Acquisition (as per grandfathering rule) – Transfer Expenses
Tax Liability = 10% (LTCG – INR 1 lac)
A Simple Example:
|Case I||Case II|
|Purchase Date||January 1st, 2018||February 10th, 2018|
|Sell Date||January 10th, 2020||January 10th, 2020|
|Grandfathering Rule Applicable?||Yes||No|
|LTCG=Sale Value-Actual Cost||1,10,000||1,50,000|
|Exempt||Up to INR 1 lakh||Up to INR 1 lakh|
|Tax Liability||1,10,000-1,00,000=10,000 * 10% = 1,000||1,50,000-1,00,000=50,000 * 10% = 5,000|
*Note: Actual Cost is the Cost of Acquisition to calculate capital gains
**Calculation of Actual Cost using FMV (Case I)
|Condition||Amount (INR)||Qualifying Amount|
|Step 1:||Higher of:
Value in Step 1
|Lower of: 3,50,000 or 2,40,000||2,40,000|
|Step 2:||Higher of:
Value in Step 1
|Higher of: 2,40,000 or 2,00,000||2,40,000|
Note: indexation benefit is not available to stock and equity fund investors.
Reasons for Scrip-Wise Reporting
The grandfathering is allowed by comparing different values such as cost, sale price, and market price for each share/unit (as on January 31st, 2018). In this process, there is a need to capture the scrip-wise details for computing capital gains of these shares/units.
- Lack of understanding of the provisions - The taxpayer may not claim or wrongly claim the benefit of grandfathering.
- The correctness of the claim - If the calculation is not entered scrip-wise and is taken as an aggregate, the IT department will not be able to cross verify the details.
- Avoid further audits and scrutiny - The IT Department can electronically verify the scrip-wise details provided by the taxpayers. The details are matched with the data available from reports filed by stock exchanges, brokerages, etc.
- The intent - Providing scrip-wise details will help the taxpayer compute the Long Term Capital Gains on share and units accurately.
Challenges Faced by Traders and Taxpayers.
While filing capital gains with ITR 2 and ITR 3, individuals have to provide the following details of share sales as on January 31st, 2018:
- ISIN (aka International Securities Identification Number)
- Name of the share/unit
- Number of shares
- Sales-price per share/Unit
- Cost of Acquisition
- FMV as on 31/01/2018
- Expenditure related to transfer
Also, most brokers don’t provide with FMV of the shares. Moreover, taxpayers need to fill up these details for each item individually. They have to mechanically and accurately file the data. Boy, this can be a hassle in cases where the data is large and the time and data involved are exceptionally huge.
@IncomeTaxIndia make scrpwise reporting optional for 112A. We see hardship investors face everyday on our platform. Barring few, most brokers do not provide fmv. Isin and utilities are hassle. There has to be a better way. https://t.co/5baqvpMYM5— Vishvajit Sonagara (@iamvishvajit) September 26, 2020
Can’t there be a better way?