If your family holds shares of a listed company or units of an equity mutual fund and sells them after holding on for more than a year, the profit doesn’t slip through tax-free anymore. That profit is a long-term capital gain, and Section 112A of the Income Tax Act decides exactly how much of it the government keeps. For commerce students, this is one of the most practical parts of the capital gains syllabus because it applies to almost every household that invests through the stock market.
Table of Contents
What section 112A actually covers
Section 112A applies to three specific assets: listed equity shares, units of an equity-oriented mutual fund, and units of a business trust. The gain has to come from a transfer that has already gone through the exchange mechanism, not a private, off-market handshake deal.
There’s a gatekeeping condition attached to all of this: Securities Transaction Tax (STT) must have been paid. For equity shares, STT has to be paid both when you bought the shares and when you sold them, though the Income Tax Department lists specific exceptions to the purchase-side requirement, such as shares acquired through an IPO, ESOPs, or corporate restructuring. For mutual fund and business trust units, STT only needs to be paid at the time of sale.
The other condition is holding period. The asset must be held for more than 12 months to count as long-term. Sell a day earlier, and the gain falls under the short-term capital gains rule (Section 111A) instead, which is taxed quite differently.
The tax rate and exemption limit
This is where most students get confused because the rule changed mid-way through 2024. Budget 2024 revised both the tax rate and the exemption threshold, and the new numbers apply to any transfer made on or after 23 July 2024.
| Particulars | Transfers before 23 July 2024 | Transfers on or after 23 July 2024 |
|---|---|---|
| Tax rate on LTCG | 10% | 12.5% |
| Annual exemption | ₹1,00,000 | ₹1,25,000 |
| Indexation benefit | Not available | Not available |
So under the current rule, the first ₹1.25 lakh of long-term gains from listed securities in a financial year is exempt. Anything above that is taxed at a flat 12.5%, with no indexation adjustment for inflation. This is confirmed directly in the text of Section 112A on the Income Tax Department’s site, and the change itself was one of the headline announcements of last year’s budget, which moved toward a uniform 12.5% long-term capital gains rate across most asset classes while dropping the indexation benefit that used to soften the tax bill.
A quick worked example
Suppose Priya sells listed shares she bought two years ago and books a long-term gain of ₹3,00,000 in FY 2025-26. Here’s how the tax works out:
- Total LTCG: ₹3,00,000
- Exemption: ₹1,25,000
- Taxable LTCG: ₹1,75,000
- Tax payable: 12.5% of ₹1,75,000 = ₹21,875 (plus applicable surcharge and cess)
The grandfathering clause for older investments
Section 112A didn’t exist before 1 April 2018. Before that, long-term gains on listed shares were fully exempt under the now-scrapped Section 10(38). To avoid taxing gains that had already built up before the new rule arrived, the law added a grandfathering clause for anything bought on or before 31 January 2018.
Under this rule, the cost of acquisition for such shares isn’t just the original purchase price. It’s the higher of the actual cost, or the fair market value (FMV) of the share on 31 January 2018, capped at the actual sale price. This effectively freezes any tax liability on gains made up to that date.
For example, if shares were bought for ₹1,00,000 in 2015, had an FMV of ₹2,50,000 on 31 January 2018, and were eventually sold for ₹3,00,000, the cost of acquisition is taken as ₹2,50,000 instead of the original ₹1,00,000. The taxable gain becomes just ₹50,000, not ₹2,00,000, protecting the appreciation that happened before the tax regime even existed.
What falls outside section 112A
Not every equity-related gain gets this treatment. A few situations are specifically excluded:
- Unlisted shares: Section 112A only applies to listed securities. Gains on unlisted shares fall under the general capital gains provisions instead.
- Off-market transfers without STT: If STT wasn’t paid on the transaction, the concessional rate doesn’t apply, unless the transaction falls under one of the notified exceptions.
- Securities on IFSC exchanges: Transactions on recognised stock exchanges within an International Financial Services Centre, where the consideration is received in foreign currency, are treated differently since STT itself doesn’t apply there.
- Business stock-in-trade: If the securities were held as trading stock rather than as an investment, the profit is business income, not a capital gain.
- Non-resident Indians: NRIs are governed by a separate provision, Section 115AD, rather than Section 112A.
A few filing details worth knowing
Section 112A comes with some fine print that trips up first-time filers:
- No Chapter VI-A deductions: Popular deductions like those under Section 80C cannot be claimed against the portion of income that is long-term capital gains under this section.
- Limited Section 87A rebate: The rebate that many small taxpayers use to bring their tax liability to zero is computed only on income other than the 112A gains, so it can’t be used to wipe out tax on these gains.
- Scrip-wise reporting: If your total LTCG under this section crosses the exemption limit, your income tax return requires a detailed, transaction-wise breakup in Schedule 112A, listing each sale along with its cost of acquisition and grandfathered value where applicable.
- Loss set-off: Long-term capital losses on listed securities can be set off against long-term gains in the same year, and unused losses can be carried forward for up to eight assessment years.
It’s also worth remembering where this section came from. It was introduced through the Finance Act, 2018, which withdrew the earlier blanket exemption that listed equity gains enjoyed. Since then, the rate has only moved in one direction: from a tax-free regime, to 10%, and now to 12.5%. That trend itself is a useful thing to note if this topic ever shows up in an exam question about the evolution of capital gains taxation in India.
What do you think?
What do you think? If the exemption limit under Section 112A keeps rising over time but indexation stays permanently removed, does that actually work out better or worse for long-term investors compared to the pre-2018 fully exempt regime? And should the grandfathering cut-off of 31 January 2018 ever be revised, or does it risk complicating an already detailed calculation further?
References
- https://www.incometaxindia.gov.in/w/capital-gain
- https://www.incometaxindia.gov.in/w/section-112a-60
- https://www.business-standard.com/amp/finance/personal-finance/budget-2024-all-the-key-changes-to-capital-gains-tax-explained-124072500330_1.html
- https://www.angelone.in/knowledge-center/income-tax/section-112a
- https://www.incometaxindia.gov.in/w/schedule_112_a
- https://www.business-standard.com/article/news-ani/cbdt-notifies-introduction-of-section-112a-in-the-act-118042400840_1.html
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