Section 112 of ITA, 1961 : Section 112: Tax On Long-Term Capital Gains

Explanation using Example

Let's say Mr. Sharma, a resident individual, sold a piece of land that he had owned for more than 3 years, which qualifies it as a long-term capital asset. The sale resulted in a long-term capital gain of INR 10,00,000. His other income for the year (from salary, interest, etc.) amounts to INR 5,00,000.

According to Section 112 of the Income-tax Act, 1961, Mr. Sharma's tax liability would be calculated as follows:

1. First, calculate the tax on his total income excluding the capital gain, which is INR 5,00,000. Assume the tax on this amount is INR 30,000.
2. Next, calculate the tax on the long-term capital gains at a flat rate of 20%, which would be INR 2,00,000 (20% of INR 10,00,000).
3. Mr. Sharma's total tax liability would be the sum of the above two amounts, i.e., INR 30,000 + INR 2,00,000 = INR 2,30,000.

However, if Mr. Sharma's total income excluding the capital gain was below the taxable limit, he could reduce his long-term capital gains by the shortfall amount before calculating the 20% tax on the remaining capital gains.