Long-term capital gains on listed equity shares and equity mutual funds are taxed under Section 112A at 12.5% on gains exceeding Rs.1.25 lakh in a year, provided securities transaction tax (STT) has been paid. Gains up to 31 January 2018 are grandfathered. Shares held for more than 12 months are long-term.
The Section 112A regime
Section 112A taxes LTCG on listed equity shares, equity-oriented mutual funds and units of a business trust where STT is paid on acquisition and/or transfer. After Budget 2024, the rate is 12.5% (up from 10%) and the annual exemption is Rs.1.25 lakh (up from Rs.1 lakh), for transfers on or after 23 July 2024.
Holding period and STT
| Condition | Requirement |
|---|---|
| Holding period (long-term) | More than 12 months |
| STT | Paid on transfer (and acquisition, with exceptions) |
| Rate | 12.5% on gains above Rs.1.25 lakh |
| Indexation | Not available under 112A |
Grandfathering: 31 January 2018
For shares acquired before 1 February 2018, the cost is taken as the higher of actual cost or the lower of (fair market value on 31 January 2018) and (the sale consideration). This 'grandfathers' gains accrued up to 31 January 2018, so only the appreciation after that date is taxed.
Example. Shares bought in 2015 at Rs.100, FMV on 31 Jan 2018 Rs.250, sold at Rs.400. Cost for LTCG = higher of Rs.100 or min(Rs.250, Rs.400) = Rs.250. Taxable gain = Rs.150 per share.
Computation and points
- The Rs.1.25 lakh exemption applies once per year across all 112A gains.
- STCG on the same securities is taxed under Section 111A at 20% (post Budget 2024).
- No indexation and no Chapter VI-A deductions against these gains.
- Reconcile broker statements with AIS before filing. figures.
Worked example: FY 2026-27 equity sale
An investor sells listed shares (STT paid, held 3 years) with a gain of Rs.3,50,000. Section 112A: exempt up to Rs.1,25,000, balance Rs.2,25,000 taxed at 12.5% (rate per Finance (No. 2) Act 2024 for transfers on or after 23 July 2024) = Rs.28,125 plus cess. No indexation, no 87A rebate against this tax in the new regime, and the exemption threshold applies to the aggregate of all 112A gains in the year, not per scrip.
| Parameter | Rule (FY 2026-27) |
|---|---|
| Assets covered | Listed equity shares, equity MF units, units of business trusts — STT-paid on acquisition/transfer (as applicable) |
| Holding period for LTCG | > 12 months |
| Rate / exemption | 12.5% above Rs.1,25,000 per year |
| Grandfathering | Cost stepped up to 31 January 2018 FMV for pre-2018 holdings |
| STCG (≤ 12 months) | 20% under Section 111A |
Grandfathering, still doing quiet work
For shares bought before 1 February 2018, cost of acquisition is the higher of actual cost or the 31 January 2018 FMV (capped at sale price). Long-held portfolios still get most of their pre-2018 appreciation tax-free through this step-up — but only if the FMV data is applied scrip-wise. Broker capital-gains statements handle this automatically; manual DEMAT-transfer cases (gifts, inheritance, off-market transfers) are where the step-up gets missed and tax gets overpaid.
Loss harvesting and set-off mechanics
- Long-term capital losses on equity set off against any LTCG (including property) and carry forward 8 years — an on-time return in the loss year is the price of admission.
- Harvesting the exemption: selling and repurchasing to book Rs.1,25,000 of tax-free gain each year resets the cost base upward — legitimate, widely used, but watch the 12-month clock restart and transaction costs.
- Short-term losses set off against both STCG and LTCG — sequence the set-offs to protect the 12.5%-taxed gains before the 20%-taxed ones.
- Buyback proceeds are now taxed as deemed dividend in shareholders' hands (from 1 October 2024) — the capital-gains machinery no longer shelters buybacks; the cost becomes a capital loss available for set-off.
- Report scrip-wise in Schedule 112A of the ITR; the utility computes the exemption and grandfathering once ISIN-level data is entered — broker CSVs import directly.
Verify current rates and the Finance Act status at incometax.gov.in.
Non-residents, NRIs and the treaty overlay
Section 112A applies to non-residents too — but a treaty can override it. NRI investors from jurisdictions whose DTAA still allocates share gains to the residence state (a shrinking list after the Mauritius/Singapore/Cyprus renegotiations) should run the treaty analysis with a TRC before paying 12.5%. Practical NRI mechanics: brokers and mutual funds apply TDS on capital gains for NRIs (Section 195 / 196A framework) — often at rates above the final liability — so the refund cycle matters; gains are computed in INR (the rupee-depreciation effect is taxable for listed securities, unlike the Section 48 first-proviso relief available on unlisted shares bought in forex); and repatriation needs the usual 15CA/CB pipeline. For returning NRIs, the RNOR window does not shelter Indian-listed gains — these are Indian-source regardless of residency, so 112A planning (harvesting the Rs.1,25,000 exemption annually) applies from day one.
Key takeaways
- 112A: listed equity/equity MF LTCG at 12.5% above Rs.1.25 lakh.
- Holding period over 12 months; STT must be paid.
- Grandfathering protects gains up to 31 January 2018.
- No indexation; STCG on the same is 20% under Section 111A.