Section 112A of Income Tax Act: LTCG Tax on Shares & Equity Funds

Long-Term Capital Gains (LTCG) tax on shares and equity funds is a crucial element of India’s taxation system for investors. Since 2018, the tax treatment of LTCG has undergone significant changes, specifically through Section 112A of the Income Tax Act, 1961. This section governs the taxation of gains made from the sale of shares and equity mutual funds, which are held for a long-term period. Understanding the provisions of Section 112A is essential for both retail and institutional investors, especially in the context of the latest tax reforms.

Section 112A of the Income Tax Act was introduced to govern the taxes levied on Long-Term Capital Gains resulting from the sale of equity-oriented mutual funds, listed equity shares, and unit trusts. 

Key Points of Section 112A

• Applies to LTCG on listed shares and equity mutual funds held for more than one year

• 10% tax is levied on LTCG above ₹1 Lakh per financial year (changed in Budget 2024)

• Requires STT payment on acquisition and transfer of shares and on sale of mutual funds

The Budget 2024 introduced important revisions to the LTCG tax under Section 112A. These include: 

1. Increased Tax Rate: 

The LTCG tax rate has risen from 10% to 12.5%. As a result, investors with substantial capital gains from listed securities will now face a higher tax rate than in previous years. 

2. Higher Exemption Limit: 

The exemption limit for LTCG has been increased to ₹1.25 Lakhs from ₹1 Lakh. Investors with capital gains below this limit will continue to enjoy tax exemptions. 

3. Effective Date: 

These changes apply to securities sold on or after 23rd July 2024. Transactions before this date will be governed by the earlier tax rules.

Section 112A brought about significant changes from the previous tax regime. Here’s how taxation works under this section: 

• LTCG of over ₹1.25 Lakhs (raised from ₹1 Lakh in FY 2024-25) is taxable 

• The applicable tax rate on LTCG is 12.5% (hiked from 10% effective 23rd July 2024) 

• The exemption limit of up to ₹1.25 Lakhs is applicable to each individual investor

• No indexation benefit is available for calculating the gains for taxation

Example:

Suppose an investor sells equity shares in FY 2025-26 and earns LTCG of ₹2,00,000.
Since the exemption limit is ₹1,25,000, the LTCG to be taxed will be: 

• ₹2,00,000 - ₹1,25,000 = ₹75,000

• LTCG tax payable = 12.5% of ₹75,000 = ₹9,375

Section 112A was introduced in the Finance Act, 2018 to provide clarity and a structured approach to taxing LTCG on shares and equity mutual funds. Before its introduction, such gains were exempt from tax under the Section 10(38) of the Income Tax Act, provided Securities Transaction Tax (STT) was paid. The introduction of Section 112A aimed to: 

• Tax long-term capital gains, which were previously exempt

• Provide a simple taxation structure for investors, taxing only gains over ₹1.25 Lakhs

• Address concerns about tax avoidance on capital gains in equities
  

The grandfathering rule applies to gains made before 1st February 2018, when Section 112A was introduced. 

Key Points of Grandfathering Rule: 

• For shares and mutual funds held before 1st February 2018, the cost of acquisition is ‘grandfathered’, i.e., considered as the fair market value (FMV) on 31st January 2018

• Only the gains after 1st February 2018 will be taxed under Section 112A, and not the gains prior to 2018

Example: 

• Suppose an investor bought shares of a company in 2017 for ₹50,000 and the FMV on 31st January 2018 was ₹60,000, 

  • This FMV will be considered the purchase price for tax purposes

• If the investor sells the shares later for ₹80,000, the capital gain tax will be as follows: 

  • Sale price: ₹80,000

  • FMV (as on 31st January 2018): ₹60,000

  • LTCG: ₹80,000 - ₹60,000 = ₹20,000

  • LTCG Tax: 10% of ₹20,000 = ₹2,000

This rule ensures only the gains after 2018 are taxed, safeguarding past gains.

The Fair Market Value (FMV) plays a crucial role in calculating LTCG for shares or mutual funds held before 1st February 2018. 

FMV Determination:

• For listed shares: FMV is the closing price of the stock on 31st January 2018 on the recognised stock exchange

• For equity mutual funds: FMV is the NAV of the mutual fund units on 31st January 2018

If a stock was not trading on 31st January, the highest price on the immediately preceding date will be considered as the FMV.

1. Holding Period for LTCG Qualification

• To qualify as long-term capital gains, shares and equity funds must be held for more than one year

• If sold before one year, gains are considered Short-Term Capital Gains (STCG) and taxed differently

2. No Indexation Benefit:

• Unlike other long-term assets (such as property), no indexation is allowed while calculating LTCG under Section 112A

• Gains are calculated on the difference between sale price and cost of acquisition (or FMV for grandfathering)

3. TDS on LTCG:

• Non-resident Indians (NRIs) face 10% TDS on LTCG exceeding ₹1 Lakh

• This is a separate provision and does not affect tax liability under Section 112A

4. No Deductions Under Chapter VI-A:

• Deductions like Section 80C or rebates under Section 87A are not applicable to LTCG taxed under Section 112A

• Taxpayers cannot reduce LTCG tax liability using these deductions

1. Ensure that TDS (if any) and capital gains are reflected in your Form 26AS

2. Declare your LTCG in the ‘Income from Capital Gains’ section in the ITR form

3. Choose the correct ITR Form —usually ITR-2 or ITR-3— to report capital gains

4. Use Schedule 112A for scrip-wise reporting of listed shares and mutual funds sold

5. Report details such as purchase date, sale date, cost of acquisition (adjusted as per grandfathering), sale consideration, and capital gains