Section 112A: Tax on Long-Term Capital Gains (LTCG) on Equity Shares & Mutual Funds (Updated)

Section 112A of the Income Tax Act, 1961, was initially introduced by the Finance Act 2018, effective from April 1, 2018. This provision governs the taxation of Long-Term Capital Gains (LTCG) arising from the transfer of specific capital assets: listed equity shares, units of equity-oriented mutual funds, and units of a business trust, where Securities Transaction Tax (STT) has been paid.

Recent Updates from Union Budget 2024: Significant amendments have been introduced via the Union Budget 2024, applicable for transfers made on or after July 23, 2024. These changes directly impact the tax rate and exemption limit under this section.

What is Long-Term Capital Gain (LTCG)?

A capital gain is the profit realized from the sale of a capital asset. For taxation purposes, capital gains are categorized into short-term and long-term based on the holding period of the asset.

• For listed equity shares, equity-oriented mutual funds, and units of a business trust, an asset is considered a long-term capital asset if held for more than 12 months immediately preceding the date of transfer.
• Any profit made from the sale of such assets after this 12-month period is treated as Long-Term Capital Gain (LTCG).

Applicability of Section 112A

Section 112A applies specifically to LTCG arising from the transfer of the following capital assets:

• Listed Equity Shares: Equity shares of a company listed on a recognized stock exchange in India.
• Units of Equity-Oriented Mutual Funds: Mutual fund schemes that invest at least 65% of their investible funds in equity shares of domestic companies.
• Units of a Business Trust: This includes Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs).

Key Conditions for Applicability:

For the special provisions of Section 112A to apply, the following conditions must be satisfied:

• The transaction of sale of such equity share or unit must be entered into on or after April 1, 2018.
• The transaction must be chargeable to Securities Transaction Tax (STT). This means the sale must typically occur on a recognized stock exchange in India.
• In the case of listed equity shares, STT must have been paid at the time of both acquisition and transfer (sale). For units of equity-oriented mutual funds or business trusts, STT needs to be paid only at the time of transfer (sale).
• The LTCG arising from such transfer must exceed Rs. 1,25,000 (Rupees One Lakh Twenty-Five Thousand) in the financial year for transfers on or after July 23, 2024. For transfers before this date, the limit was Rs. 1 Lakh. Gains up to this exemption limit are exempt from tax under this section.

Tax Rate under Section 112A and the Indexation Point

The LTCG covered under Section 112A is subject to a special concessional tax rate, which has recently been updated:

• For transfers made before July 23, 2024: 10% of the LTCG that exceeds Rs. 1,00,000.
• For transfers made on or after July 23, 2024: 12.5% of the LTCG that exceeds Rs. 1,25,000.

It is crucial to understand that this tax rate is applied without the benefit of indexation. Indexation is a mechanism that adjusts the cost of acquisition of an asset for inflation over the holding period, thereby reducing the taxable capital gain. While indexation benefit is generally available for other long-term capital assets to account for the erosion of purchasing power due to inflation, for LTCG taxable under Section 112A, this benefit is explicitly denied to ensure a simpler and direct taxation of equity gains.

The tax is calculated plus applicable surcharge and health & education cess.

Calculation of Long-Term Capital Gains & Grandfathering Rule

The LTCG is calculated as follows:

Grandfathering Rule for Cost of Acquisition:

For assets acquired before February 1, 2018, a special 'grandfathering' rule applies to determine the cost of acquisition. This rule protects gains accrued up to January 31, 2018, from taxation. The cost of acquisition for such assets is deemed to be the higher of:

1. The actual cost of acquisition of the asset.
2. The Fair Market Value (FMV) of the asset as on January 31, 2018.
   • However, the FMV considered cannot exceed the actual full value of consideration (sale price) received or accruing from the transfer. This ensures that a capital loss is not created artificially by choosing a higher FMV than the selling price.

For assets acquired on or after February 1, 2018, the actual cost of acquisition is used to calculate the gain.

Examples of Calculation under Section 112A

Example 1: Asset acquired BEFORE Feb 1, 2018 (Grandfathering Rule applicable), sold AFTER July 23, 2024 (New Rates)

Mr. Amit purchased 100 shares of XYZ Ltd. on June 15, 2015, for Rs. 500 per share (Total Cost: Rs. 50,000). The Fair Market Value (FMV) of XYZ Ltd. shares on January 31, 2018, was Rs. 700 per share. Mr. Amit sold all 100 shares on August 10, 2025, for Rs. 2,000 per share (Total Sale Price: Rs. 2,00,000). Brokerage paid on sale was Rs. 200.

In this case, despite significant appreciation, the taxable gain is much lower due to the grandfathering rule.

Example 2: Asset acquired AFTER Feb 1, 2018, sold AFTER July 23, 2024 (New Rates)

Ms. Priya purchased 50 units of an Equity-Oriented Mutual Fund on March 1, 2020, for Rs. 1,000 per unit (Total Cost: Rs. 50,000). She sold all units on September 5, 2025, for Rs. 3,500 per unit (Total Sale Price: Rs. 1,75,000). Brokerage/Exit Load was Rs. 150.

Even with substantial gains, Ms. Priya pays no tax on LTCG as her total gain is below the updated exemption limit of Rs. 1.25 Lakh.

Example 3: Total LTCG significantly above Exemption Limit

Mr. Rohan purchased shares worth Rs. 80,000 on March 15, 2019. He sold them on October 20, 2025, for Rs. 5,00,000. No significant expenses were involved.

When Section 112A is NOT Applicable

The provisions of Section 112A do not apply in the following cases:

• Unlisted Equity Shares: Gains from the sale of unlisted equity shares (held for more than 24 months for LTCG) are generally taxed at 20% with indexation under Section 112.
• Debt-Oriented Mutual Funds: For units purchased on or after April 1, 2023, gains from debt mutual funds are taxed as per the investor's income tax slab rates, regardless of the holding period. For those acquired before this date, if held for more than 36 months, they were considered LTCG and taxed with indexation benefit.
• Other Capital Assets: Long-term gains from assets like real estate, gold, bonds, debentures, etc., are not covered by Section 112A and are generally taxed at 20% with indexation under Section 112, or 10% without indexation if specific conditions are met (e.g., certain bonds).
• Off-Market Transactions: If listed equity shares or equity-oriented mutual funds are transferred off-market (i.e., not through a recognized stock exchange) or if the transaction is not subject to STT.
• Non-Resident Individuals (NRIs) and Foreign Institutional Investors (FIIs): Special provisions (e.g., Section 115AD) apply to their capital gains, not Section 112A.
• Securities held as Stock-in-Trade: If the securities are held as stock-in-trade for business purposes rather than as capital assets for investment, the gains are taxed as business income, not capital gains.
• IFSC Transactions: Transactions involving securities listed on a recognized stock exchange located in an International Financial Services Centre (IFSC) are exempt as they are not subject to STT.

Important Points to Remember

• No Deductions under Chapter VI-A: Deductions under Chapter VI-A (e.g., Section 80C, 80D, 80G, etc.) are not allowed from the LTCG taxable under Section 112A. These deductions are only allowed from other sources of income.
• Rebate under Section 87A: For resident individuals whose total income (including LTCG under Section 112A) does not exceed Rs. 5 lakh, a tax rebate of up to Rs. 12,500 is available under Section 87A. This rebate can effectively make LTCG up to a certain limit tax-free, if the total taxable income falls within the eligible bracket.
• Set-off of Losses: Long-term capital losses (LTCL) from assets taxable under Section 112A can only be set off against LTCG from assets taxable under Section 112A or other LTCG. They cannot be set off against short-term capital gains (STCG) or other heads of income. Unabsorbed LTCL can be carried forward for 8 assessment years to be set off against future LTCG.
• Securities Transaction Tax (STT): STT is a tax levied on the value of securities transacted through a recognized stock exchange. While STT payment is a condition for Section 112A applicability, the STT amount itself is not deductible from the capital gain.
• Basic Exemption Limit Adjustment: If your total income (excluding LTCG taxable under Section 112A) is below the basic exemption limit (e.g., Rs. 2.5 lakh for regular individuals), the shortfall can be adjusted against the LTCG taxable under Section 112A. Only the remaining LTCG above the combined exemption will be taxed.

Understanding the intricacies of Section 112A, especially with the recent changes in tax rates and exemption limits, is paramount for investors in equity markets and equity-oriented mutual funds. The specific tax rate, increased exemption limit, and the critical grandfathering rule significantly influence the overall tax liability on long-term gains, making it essential for effective tax planning and compliance.