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TMI BlogRecalibrating Long-Term Capital Gains Taxation : Clause 198 of the Income Tax Bill, 2025 Vs. Section 112A of the Income Tax Act, 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... is essential to understand the legislative intent, operative mechanics, practical implications, and the direction of tax policy reform in India. 2. Objective and Purpose The legislative intent behind Clause 198 is multifaceted: * Revenue Augmentation: By increasing the tax rate on eligible LTCG and redefining thresholds, the provision aims to enhance government revenues while maintaining market competitiveness. * Market Integrity: The continued linkage of concessional LTCG tax rates to the payment of Securities Transaction Tax (STT) seeks to incentivize transactions through recognized and regulated market mechanisms, thereby curbing tax evasion. * Simplification and Modernization: The provision consolidates and clarifies the eligibility criteria, computational mechanics, and definitions, aiming for greater clarity and ease of enforcement. * Alignment with International Standards: By refining the definition of equity-oriented funds and providing exemptions for transactions in International Financial Services Centres (IFSCs), the provision seeks to integrate Indian capital markets with global best practices. Section 112A was originally enacted to reintroduce taxation of LT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal capital flows and bolster India's position as a global financial hub, mirroring Section 112A(3). 3.5. Central Government Notification Power (Sub-section 5) Clause 198(5) empowers the Central Government to notify, by Gazette notification, specific types of acquisitions for which the STT-on-acquisition requirement may be waived. This is an enabling provision, paralleling Section 112A(4), and grants flexibility to address market anomalies or policy needs. 3.6. Interaction with Deductions and Rebates (Sub-sections 6 and 7) * Clause 198(6): Deductions under Chapter VIII (analogous to Chapter VI-A in the 1961 Act) are allowed only from gross total income as reduced by the eligible LTCG. This prevents double benefit and maintains the integrity of the concessional rate regime. * Clause 198(7): Rebate u/s 156 (corresponding to section 87A) is allowed from tax on total income as reduced by tax on such LTCG, again mirroring the mechanics of Section 112A(6). 3.7. Definition of Equity-Oriented Fund (Sub-section 8) Clause 198(8) provides a detailed definition of "equity oriented fund", specifying: * Minimum investment thresholds (90% or 65%) in equity shares of domestic compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... * Policy Flexibility: The notification power allows the government to respond dynamically to market developments, but also introduces an element of administrative discretion. 6. Comparative Analysis: Clause 198 vs. Section 112A A detailed comparison reveals both substantial similarities and key differences. The analysis below is structured by major themes: 6.1. Scope and Structure Both provisions apply to LTCG arising from equity shares, units of equity-oriented funds, and business trusts, provided STT has been paid. Both carve out exceptions for IFSC transactions and empower the government to notify exceptions to the STT requirement. 6.2. Tax Rate and Threshold * Section 112A: Originally provided for a 10% tax rate on LTCG exceeding Rs. 1 lakh. Amended (w.e.f. 23 July 2024) to 12.5% on gains exceeding Rs. 1,25,000 for transfers on or after that date. * Clause 198: Directly provides for a 12.5% rate on LTCG exceeding Rs. 1,25,000, reflecting the updated policy and aligning with the most recent amendment to Section 112A. The increase in both the rate and threshold reflects an attempt to balance revenue needs with investor protection. 6.3. STT Payment Requirement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess trusts; subject to STT payment Same scope and conditions No substantive change in asset coverage or STT linkage Tax Rate 10% (pre-July 2024), 12.5% (post-July 2024) 12.5% (for all transfers) Aligns with amended 112A; signals permanence of higher rate Exemption Threshold INR 1,25,000 (recently increased from INR 1,00,000) INR 1,25,000 Threshold harmonized; ensures relief for smaller investors Marginal Relief Available for resident individuals and HUFs Available Unchanged; continuity of taxpayer protection IFSC Exemption STT not required for IFSC trades in foreign currency Same Continues policy of incentivizing IFSCs Deduction/ Rebate Treatment Deductions under Chapter VI-A and rebate u/s 87A allowed only after excluding LTCG Deductions under Chapter VIII and rebate u/s 156 allowed similarly Terminology updated; substance unchanged Definition of Equity Oriented Fund 90%/65% threshold; includes ULIPs; annual average computation Same, with references to new schedules Technical alignment; no major substantive change Government Notification Power Present Present Continued flexibility 6.1. Unique Features or Potential Confli ..... X X X X Extracts X X X X X X X X Extracts X X X X
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