Under Budget 2018, the Finance Minister, Shri Arun Jaitley, removed the exemption under Section 10(38). He also introduced a new Section 112A with a 10% tax on LTCG in excess of INR 1 lac in the case of a long term capital asset on which STT is paid. The new Section 112A was applicable from FY 2018-19 (AY 2019-20).
Controversy surrounding Section 10(38) & it’s removal
Up to FY 2017-18 (AY 2018-19), Long Term Capital Gain (LTCG) on the sale of a capital asset on which STT (Securities Transaction Tax) is paid was exempt under Section 10(38) of the Income Tax Act. Thus, profit on the sale of listed equity shares, equity-oriented mutual funds, and units of business trust held for more than a year was exempt from income tax.
Since investors already paid STT on listed securities, provisions u/s 10(38) provided relief from double taxation to such investors. However, there was a growing sentiment that the provision encouraged diversion of funds from sectors such as manufacturing & infrastructure into capital markets.
Further, many taxpayers misused the exemption leading to loss of revenue and tax evasion due to abusive practices. Certain taxpayers earned windfall tax-free gains on the sale of penny stocks after inflating its market price by leaking misleading information amongst the investors.
Many other taxpayers earned compensation in the form of less salary and more stock options. Such taxpayers paid tax on salary only while they earned tax-free long term capital gains on the sale of shares. Thus, several taxpayers earned bogus long term capital gains without paying tax.
As a result, CBDT removed the exemption under Section 10(38) and made LTCG in excess of INR 1 lac taxable at 10% under Section 112A.
Confusion Galore: Grandfathering Rule Section 112A
Many investors invest in equity markets with an intention to earn tax-free profits in the form of Long Term Capital Gains. For such investors, 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, 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)
ITD Utility & Reporting woes of Section 112A
The grandfathering rule and Section 112A has increased complexity and confusion for the investors to Compute Capital Gains and file Income Tax Return. In the ITR utility, the IT department added a new Schedule 112A to calculate LTCG on trade wise basis after applying grandfathering rule.
After much uproar, Schedule 112A, the IT deparment made trade wise reporting optional for FY 2018-19 (AY 2019-20). However, the utilities released by the IT department this year has reignited the discussion.
The IT department issued ITR-2 excel utility for FY 2019-20 (AY 2020-21) on the Income Tax Website on 26th June 2020. It is now mandatory for the taxpayer to enter details of each trade under Schedule 112A. The taxpayer should enter details of each trade with ISIN, share name, quantity, sale price, purchase price, fair market value as on 31st Jan 2018, and transfer expenses to calculate LTCG (Long Term Capital Gain) or LTCL (Long Term Capital Loss).
P&L Reports from Brokers (Inadequate)
Investors/traders can download Tax P&L report from their brokers. Brokers like Zerodha provide both FMV as on 31st Jan 2018 and the cost of acquisition as per grandfathering rule in their Tradewise Tax P&L Report. However, the reports of many other brokers do not reflect such details making it extremely challenging for the traders and investors to file their Income Tax Returns.
With such reporting requirements in the ITR and missing information in the broker’s reports, the process of tax filing has become drastically complicated for traders and investors this year. Let us hope that the Income Tax Department comes out with a solution that makes tax filing less tedious for the taxpayers.
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Now, while filing for capital gains with ITR 2 and ITR 3, you have to provide the following details of share sold during FY 2019-20:
1. ISIN (aka International Securities Identification Number)
2. Name of the share/unit
3. Number of shares
4. Sales-price per share/unit
5. Cost of Acquisition
6. FMV as on 31/01/2018
7. Expenditure related to transfer
Out of all the above details, ISIN was most difficult to procure as brokerages and investment platforms wouldn’t provide their customers with the same. Yes, it was such a hassle that traders were pulling their hair out.
Now, there might be a chance that the Income Tax Department heard the cries. It came up with a major relief a few days ago – you no longer need to lookup for ISIN. Instead, the trader can use an ‘INNOTAVAILAB’ as ISIN.
This can be used in place of the older/original ISIN! This will greatly reduce the stress in trade-wise reporting. Taxpayers now have to worry about one less detail in cases where the data is huge and time is less. Update on 4th Nov’20- LTCG realized on shares purchased after 31st Jan’18 can be reported at the aggregate level instead of trade level data.
We are Quicko, a team of accountants, developers, and designers on a mission to simplify taxes for all. For any queries or questions comment below.
Hi @FalconZex
On business income of 2 lakhs INR: 5%
On STCG of 2 lakhs INR: 15%
You can also refer to our Income Tax Calculator
I have income Short Term and Long term Capital gains and “Income from other sources” (Bank interest and Dividend). Also, I have investments in 80C, 80D, 80CCD.
Are the investments in 80C, 80D, 80CCD considered for tax deduction?
For example if income from other source is 1 lac and 80C investment is 1lac, will this 1 lac be exempt?
STCG is 3.5lac, so 15% will be applicable on 1 lac. as 2.5 lacs is exempt.
so i pay tax only 15% of 1 lac which is Rs.15000.
please assist
Hey @Yasmin_Menon
Your are absolutely correct.
Deductions, if any, will be reduced from your Income taxable at slab rates.
The un-exhausted part of the basic exemption limit of 2.5 lakhs will be reduced from you Capital Gains.
So, in the above case you’ll have to pay 15% tax on 1 lakh.
However, if your taxable income after deductions is upto 5 lakhs, you’re eligible for rebate (12.5k) under section 87A.
Hope this helps.
Just to reconfirm,
income from other source (FD Interest and dividend) is 1 lac and 80C investment is 1lac, will this 1 lac be exempt and will not be calculated under taxable income?
Yes, this 1 lac will not be taxable after deductions.