Section 112A Decoded: LTCG Tax on Equity Gains

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

• Assets Covered: Listed equity shares, equity mutual funds, and business trust units

• Holding Period: More than 12 months (long-term)

• Tax Rate: 12.5% on LTCG exceeding ₹1.25 lakh/year (effective 23rd July 2024)

• No Indexation: Not allowed for calculating gains

• Grandfathering Rule: FMV on 31st Jan 2018 used as cost for assets bought before Feb 2018

• STT Requirement: Must be paid on acquisition and/or sale

• No Deductions: Chapter VI-A and 87A not applicable on such LTCG

• TDS for NRIs: 12.5% on LTCG above ₹1.25 Lakh

• Mandatory Reporting: Use Schedule 112A in ITR for scrip-wise disclosures

• FPIs Included: Same 12.5% LTCG tax applies from FY 2025–26

The Budget 2025 introduced important revisions to the LTCG tax under Section 112A. These include: 

1. Increased LTCG Tax Rate
   

   • Raised from 10% to 12.5% on gains exceeding the exemption limit.

   • Applies to listed equity shares, equity-oriented mutual funds, and business trusts.
     

2. Revised Exemption Limit
   

   • Increased from ₹1 Lakh to ₹1.25 Lakh per financial year.

   • Only LTCG above ₹1.25 Lakh is now taxable.
     

3. Effective Date
   Applicable to transactions made on or after 23rd July 2024.
   

4. Applicability to FPIs
   Foreign Portfolio Investors (FPIs) now taxed at 12.5% on LTCG exceeding ₹1.25 Lakh.
   

5. Updated TDS for NRIs
   TDS of 12.5% now applies to NRIs (earlier 10%), matching the new LTCG rate.
   

Example:

If an investor earns LTCG of ₹2,00,000 in FY 2025–26:

• Exempt amount = ₹1,25,000

• Taxable LTCG = ₹75,000

• Tax Payable = 12.5% of ₹75,000 = ₹9,375
  
  

Note: Gains accrued before 1st Feb 2018 may be eligible for grandfathering benefits (see FMV rules).

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: 12.5% of ₹20,000 = ₹2,500

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

• As per Section 195, NRIs are subject to 10% TDS on LTCG exceeding the exemption limit, which is adjustable against final tax liability

• 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

6. Ensure scrip-wise reporting in Schedule 112A remains mandatory as per the updated ITR filing rules for AY 2026–27.