Quick Overview
- Allows exemption on long-term capital gains on listed equity shares, equity-oriented mutual funds and units of business trusts.
- Any LTCG above 1 lakh within a financial year is subject to tax.
- Tax rate is 10% (plus surcharge and cess) without indexation benefit.
- Securities Transaction Tax (STT) must be paid on acquisition and transfer (subject to conditions).
- Introduced from FY 2018–19 (AY 2019–20 onwards).
- The grandfathering clause is applicable to gains until 31 January 2018.
- LTCG under section 112A should be shown separately in ITR Schedule 112A.
- The capital losses incurred over long periods may be set off and carried forward in accordance with the rules.
When investing in listed shares or equity mutual funds, it is important to understand Section 112A of the Income Tax Act 1961 in tax planning. This section regulates taxation of long-term capital gains (LTCG) that occur because of the sale of some equity-oriented investments.
Section 112A of the Finance Act, 2018, which was introduced by the Finance Act, 2018, reintroduced the LTCG tax on the listed equity shares and equity mutual funds which exceed a given limit. Here we have discussed Section 112a of the Income Tax Act, its applicability, amendments, exemptions, and examples.
What Is Section 112A of the Income Tax Act?
Under section 112A of the Income Tax Act 1961, there is taxation of long-term capital gains in the transfer of:
- Listed equity shares
- Units of equity-oriented mutual funds
- Units of a business trust (like REITs and InvITs)
In the pre-introduction period, LTCG on listed equity shares was exempted under section 10(38). But since 1 April 2018, any gains in excess of 1 lakh are subject to tax under Section 112A with 10% tax without indexation.
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Key Points for FY25-26 Under Budget 2025-26
For FY 2025-26 (as per the current framework, unless amended in Budget 2025-26):
- LTCG above ₹1 lakh remains taxable at 10%.
- No indexation benefit allowed.
- STT payment condition continues.
- The grandfathering rule remains applicable for shares acquired before 31 January 2018.
- Gains must be reported in Schedule 112A in ITR forms.
Taxpayers should review annual updates announced in the Union Budget for any threshold or rate revisions.
Tax Rate and Provisions Before the Amendment of Section 112A
Before Finance Act 2018:
- LTCG on listed equity shares and equity mutual funds was fully exempt under Section 10(38).
- No tax was payable if STT was paid.
- Investors enjoyed complete tax-free long-term gains.
This exemption was withdrawn to widen the tax base.
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Tax Rate and Provisions After the Amendment of Section 112A
After the introduction of Section 112A:
- LTCG exceeding ₹1 lakh per financial year is taxed at 10%.
- No benefit of indexation.
- No deduction under Chapter VI-A (like Section 80C) from such LTCG.
- Surcharge and 4% health and education cess are applicable.
This brought parity and ensured partial taxation of equity gains.
Exceptions to Section 112A of the Income Tax Act
Section 112A does not apply in the following cases:
- Short-term capital gains (taxed under Section 111A).
- Unlisted shares (taxed under Section 112).
- Debt mutual funds.
- Transactions where STT conditions are not satisfied (subject to notified exceptions).
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Understanding Section 112A with Examples
Let us understand section 112a of the Income Tax Act, example scenarios:
Situation 1: Non-Applicability of Section 112A
Mr A sells unlisted shares after holding them for 3 years. Since the shares are unlisted, Section 112A does not apply. LTCG will be taxed under Section 112 at 20% with indexation.
Situation 2
Ms B sells listed shares held for 14 months. LTCG is ₹90,000. Since gains are below ₹1 lakh, no tax is payable under Section 112A.
Situation 3
Mr C sells equity mutual fund units after 2 years. LTCG is ₹2,50,000. Taxable LTCG = ₹2,50,000 – ₹1,00,000 = ₹1,50,000.
Tax payable = 10% of ₹1,50,000 = ₹15,000 + cess and surcharge (if applicable).
Scope of Section 112A of the Income Tax Act
Section 112A applies to:
- Resident individuals
- HUFs
- Firms
- Companies
- NRIs (subject to applicable rules)
It covers only specified equity investments held for more than 12 months.
Applicability of Section 112A
The section applies when:
- An asset is a listed equity share, equity mutual fund, or business trust unit.
- The asset is long-term (held for more than 12 months).
- STT paid on transfer.
- In case of equity shares, STT is paid on acquisition (with notified exceptions).
Long-Term Capital Gains (LTCG) Under Section 112A
LTCG arises when listed equity shares or eligible units are sold after 12 months from acquisition.
Holding period rules:
- Listed equity shares – More than 12 months
- Equity mutual funds – More than 12 months
If sold before 12 months, gains are taxed as short-term capital gains under Section 111A.
Computation of Long-Term Capital Gains u/s 112A
Step 1: Identify the Full Value of Consideration
This refers to the sale price received or receivable upon transfer of shares or units.
Step 2: Deduct the Following from the Full Value
- Cost of acquisition (as per grandfathering rule if applicable)
- Expenditure incurred exclusively for transfer (e.g., brokerage)
The resulting figure is LTCG. Tax is applied only on gains exceeding ₹1 lakh.
What Is the Grandfathering Clause in Section 112A?
The grandfathering clause protects gains accrued up to 31 January 2018 from taxation.
For shares acquired before 31 January 2018, the cost of acquisition is the higher of:
- Actual purchase price
- Lower of:
- Fair Market Value (FMV) as on 31 January 2018
- Sale price
This ensures gains up to that date remain tax-free.
Illustration of LTCG on Shares as per the Grandfathering Rule
Mr D bought shares in 2015 for ₹1,00,000. FMV on 31 Jan 2018 = ₹2,50,000. Sold in 2025 for ₹3,00,000.
Cost of acquisition = Higher of actual cost (₹1,00,000) or lower of FMV (₹2,50,000) and sale price (₹3,00,000).
So cost = ₹2,50,000.
Taxable LTCG = ₹3,00,000 – ₹2,50,000 = ₹50,000.
Below ₹1 lakh, no tax payable.
Exemption on LTCG on Listed Shares
LTCG up to ₹1 lakh per financial year is exempt under Section 112A. This exemption applies after computing total LTCG across all eligible equity transactions.
LTCG on Transfer of Bonus and Rights Shares Acquired on or Before 31 January 2018
For bonus shares acquired before 31 January 2018:
- Cost of acquisition is considered as per the grandfathering formula.
For rights shares:
- Actual cost paid for rights is considered.
- Grandfathering may apply depending on the acquisition date.
Set-Off Long-Term Capital Loss Against Long-Term Capital Gain
Long-term capital losses (LTCL) can be set off only against LTCG.
Example:
LTCG = ₹2,00,000
LTCL = ₹80,000
Net LTCG = ₹1,20,000
Taxable amount = ₹1,20,000 – ₹1,00,000 = ₹20,000.
Carry Forward of Long-Term Capital Losses on Sale of Shares
Unabsorbed LTCL can be carried forward for 8 assessment years, provided the return is filed within the due date. It can be set off only against future LTCG.
Fair Market Value Considerations Under Section 112A
FMV as of 31 January 2018 is:
- The highest quoted price on that date on a recognised stock exchange.
- If there is no trading on that date, the highest price on the immediately preceding trading day is used.
Correct FMV is essential for accurate tax computation.
Reconciliation of Capital Gain Statement vs Annual Information Statement (AIS)
Taxpayers must reconcile:
- Broker capital gain statements
- Annual Information Statement (AIS)
- Form 26AS
Any mismatch may trigger notices. Always verify transaction-wise details before filing ITR.
Reporting Section 112A in Income Tax Return (ITR)
LTCG under Section 112A must be reported in:
- Schedule 112A of ITR-2 or ITR-3 (as applicable).
Details required:
- ISIN
- Sale value
- Purchase cost
- FMV (if applicable)
- Date of acquisition and sale
Accurate reporting avoids scrutiny.
Rebate Under Section 87A
Resident individuals with total income within the prescribed limit under the applicable tax regime may claim a rebate under Section 87A. However, rebate availability on LTCG under Section 112A depends on total income and prevailing rules for the assessment year.
How to Minimise Your LTCG Tax
Tax Gain Harvesting
Investors can sell shares with gains up to ₹1 lakh before the financial year-end and reinvest, thereby utilising the exemption annually.
Tax Loss Harvesting
Selling loss-making investments to offset LTCG reduces tax liability.
Points to Consider Before Applying Tax Harvesting
- Brokerage and transaction costs
- Market volatility
- Wash sale implications
- Overall investment strategy
Tax decisions should align with financial goals.
Conclusion: Understanding Section 112A for Tax Planning on Shares
Understanding what Section 112a of the Income Tax Act is essential for equity investors. The provision ensures that long-term capital gains on listed shares and equity mutual funds exceeding ₹1 lakh are taxed at 10% without indexation.
With features like grandfathering, loss set-off, and structured reporting requirements, proper planning can significantly optimize tax liability. Being aware of compliance requirements under Section 112A of the Income Tax Act 1961 helps avoid errors and penalties while maximising post-tax returns.
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Frequently Asked Questions
Who is liable to pay tax under Section 112A?
Any taxpayer earning long-term capital gains exceeding ₹1 lakh from listed equity shares, equity mutual funds, or business trust units is liable to pay tax under Section 112A.
Are all listed shares subject to Section 112A?
Yes, provided they are held for more than 12 months, and STT conditions are satisfied.
How is the grandfathering clause applied to existing shares?
Cost of acquisition is determined using the higher of actual cost and the lower of FMV as on 31 January 2018, and the sale price.
Can LTCG losses be carried forward for future set-off?
Yes, long-term capital losses can be carried forward for 8 years and set off against future LTCG.
How to report LTCG under Section 112A in ITR?
Report details in Schedule 112A of ITR forms, including ISIN-wise transaction details, sale consideration, cost, and FMV where applicable.
