Stock markets are exciting when you’re making profits. But once you sell your shares or mutual funds after holding them for a long time, how much of that profit do you actually get to keep after tax? That’s where section 112A of the income-tax act, comes in.
What is Section 112A?
This section decides how long-term capital gains (LTCG) from equity-oriented investments are taxed.
It applies when:
- You held the investment for more than 12 months.
- STT (Securities Transaction Tax) has been paid:
- For shares → at both the time of purchase and the time of sale.
- For equity mutual funds and business trust units → only at the time of sale.
If the sale happens on a recognized stock exchange in an International Financial Services Centre (IFSC) and payment is received in foreign currency, the STT condition does not apply.
Section 112A is for equity-linked LTCG, whereas section 112 covers other long-term assets like property, gold, debt funds and unlisted shares.
What are the tax rates?
The tax rate on long-term capital gains (LTCG) from listed stocks and equity funds was revised in the Budget 2024. Earlier, gains were taxed at 10%, but from 23 July 2024 onwards, the rate has gone up to 12.5%.
| Tax on long-term gains u/s 112A | |
|---|---|
| Before 23 July 2024 | 10% |
| On/after 23 July 2024 | 12.5% |
Now, unlike assets such as property or gold, equity investments don’t get any indexation benefit. This means your gains are taxed at their actual value, without any adjustment for inflation.
The good news, however, is that Section 112A provides a cushion, the first ₹1.25 lakh of LTCG in a financial year is completely exempt from tax.
Under section 112A, the first ₹1.25 lakh of long-term gains in a financial year is completely tax-free.
Let’s see how this works.
Suppose you make ₹2,00,000 in long-term gains from equity mutual funds in FY 2025–26. Here’s how your tax will be calculated:
→ The first ₹1,25,000 is exempt.
→ The remaining ₹75,000 is taxable.
→ At 12.5%, the tax payable works out to ₹9,375.
So, while the higher rate increases your liability, the exemption ensures that smaller gains continue to remain tax-friendly.
What if you invested before 1st Feb 2018?
For older investments, the grandfathering rule comes into play. In simple terms, it lets you reset your purchase cost to the market price as on 1 February 2018, so that your taxable gains are smaller. This provision helps long-term investors avoid paying tax on appreciation that happened before the LTCG tax was first introduced.
There’s another layer of relief available. For resident individuals and HUFs, if your total income including LTCG falls below the basic exemption limit (BEL), you don’t pay tax. And you can use both benefits together: the ₹1.25 lakh exemption under 112A plus the BEL.
Here’s how the BEL looks under the new regime.
| BEL under new regime | |
|---|---|
| Financial year | Basic exemption limit |
| FY 2024-25 | ₹3 lakh |
| FY 2025-26 | ₹4 lakh |
So, imagine you earn ₹5.25 lakh as LTCG from stocks in FY 2025-26. After reducing the ₹1.25 lakh exemption, the balance ₹4 lakh fits within the BEL, and hence your tax liability is zero. So even with sizeable gains, you can walk away without paying a single rupee in tax if your overall income is modest.
| Particulars | Amount |
|---|---|
| Long-term capital gain | ₹5.25 lakh |
| Less: Exemption u/s 112A | ₹1.25 lakh |
| Effective gain | ₹4 lakh |
That’s all you need to know about LTCG tax on stocks & equity instruments under Section 112A. Feel free to ask if you’ve got any questions.