What is the difference between sections 111A and 112A?

If you have invested in securities, whether in shares, bonds or mutual funds, you will have to pay a tax on the capital gains, or the profit, that you earn from your investment. In India, the law breaks down the capital gains into two time-based categories.

One category is based on the transfer of short-term capital assets, and the other is the transfer of long-term capital assets. A short-term capital asset is described as a capital asset that has been held for not more than 12 months, while a long-term capital asset is a capital asset with a holding period of more than 12 months.

The short-term capital assets and the long-term capital assets invoke a different rate of tax, and the guiding rules for the two categories are also different. Section 111A of the Income Tax Act, 1961, deals with the short-term capital gains tax, while Section 112A deals with the long-term capital gains tax.

What are Short-Term Capital Assets and Long-Term Capital Assets? 

A short term capital asset refers to a capital asset – whether it be security listed in a recognised stock exchange in India or a unit of the Unit Trust of India established under the Unit Trust of India Act, or a unit of an equity oriented fund, or a zero coupon bond – which is held by an investor for a duration of less than 24 months.

However, in the case of a share of a company that is not listed in a recognised stock exchange, or a unit of a debt mutual fund, the holding period is not more than 36 months for it to be classified as a short-term capital asset. When the holding period exceeds the standard limit of 24 months, and 36 months in specific cases, the capital asset is classified as a long-term capital asset.

What is Section 111A of the Income Tax Act?

Section 111A of the Income Tax Act deals with the tax imposed on gains made from short-term capital assets, where the assets are: equity shares in a company, a unit of an equity-oriented fund, or a unit of a business trust. The section states that the capital gains from the transfer of these short-term capital assets will be chargeable to securities transaction tax.

The tax payable by the assessee on the total income shall be the aggregate of the amount of income tax calculated on such short-term capital gains:

• at the rate of 15% for any transfer which takes place before July 23, 2024; and
• at the rate of 20% for any transfer which takes place on or after July 23, 2024.

Section 111A of the Income Tax Act also provides an exemption to an individual or a Hindu Undivided Family (HUF) if their total income, as reduced by such short-term capital gains, is below the maximum amount that is not chargeable to income tax. The section also provides an exemption to a transaction undertaken on a recognised stock exchange located in any International Financial Services Centre, and where the consideration for such transaction is paid or payable in foreign currency.

What is Section 112A of the Income Tax Act?

Section 112A of Income Tax Act deals with the tax imposed on the gains made from long-term capital assets, where the assets are: equity shares in a company, a unit of an equity-oriented fund, or a unit of a business trust. The section states that the capital gains from the transfer of these long-term capital assets will be chargeable to securities transaction tax.

The section imposes tax on long-term capital gains when the income tax calculated exceeds ₹1.25 lakh. The tax rate on long-term capital gains exceeding this exemption limit is as follows:

• 20% for any transfer which takes place before July 23, 2024;
• 12.5% for any transfer which takes place on or after July 23, 2024

This section also provides exemption to an individual or a Hindu Undivided Family (HUF) if their total income, as reduced by long-term capital gains, is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall

be reduced by the amount by which the total income, as so reduced, falls short of the maximum amount which is not chargeable to income tax, and the tax on the balance of such long-term capital gains shall be computed at the rate as applicable

Difference between Section 111A and 112A of the Income Tax Act

Though both these sections deal with tax rates and exemptions on capital gains, there are differences between Sections 111A and 112A of the Income Tax Act, which are elaborated in the table below:

Conclusion

If you are an investor in any type of securities, you must stay updated about the tax rates and exemptions that are applicable to the gains or profit that you make from your investment in capital assets. Sections 111A and 112A of the Income Tax Act deal with the tax rates and exemptions applicable to short-term capital gains and long-term capital gains, respectively. By remaining aware of the tax laws, you can make proper calculations about your earnings and also avoid being on the wrong side of the law.

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