Section 112A of Income Tax Act – Long-Term Capital Gains on Shares

Long-term capital gains (LTCG) on shares refer to profits earned from selling equity shares or units of equity-oriented mutual funds held for over 12 months. Section 112A governs LTCG arising from listed equity shares, equity-oriented mutual funds, and units of business trusts. These gains are taxed at 12.5%, along with an annual exemption of ₹1.25 lakh.

What is Section 112A?

Section 112A covers taxation of long-term capital gains generated from the sale of listed equity shares, equity-oriented funds, and business trust units. It imposes a tax rate of 12.5% on such gains and allows an exemption of ₹1.25 lakh each financial year on LTCG from equity investments. It is important to note that the rebate under Section 87A is not available on tax calculated under Section 112A.

Budget 2024 Amendments

Budget 2024 introduced significant changes in LTCG taxation, especially for listed shares. The key points are:

Tax Rate Before 23rd July 2024

LTCG on listed equity shares, equity-oriented funds, and business trust units was taxed at 10% without indexation.
A yearly exemption of ₹1.25 lakh was available on capital gains.

Tax Rate On or After 23rd July 2024

LTCG on listed equity shares, equity-oriented funds, and business trust units is taxed at 12.5% without indexation.
The exemption limit of ₹1.25 lakh continues to apply on total gains in the financial year.

Note:
The ₹1.25 lakh exemption is available only once for the entire year. It cannot be used separately for gains earned before and after the cut-off date.

Applicability of Section 112A

To claim the concessional tax rate and exemption available under Section 112A, the following conditions must be fulfilled:

STT must be paid on both the purchase and sale of equity shares.
For units of equity-oriented mutual funds or business trusts, STT is required at the time of sale.
The securities must qualify as long-term capital assets.
The holding period should exceed 12 months.
No deductions under Chapter VI-A can be applied against such LTCG.

How to Calculate Capital Gains Under Section 112A

Step 1: Compile all your capital gains transactions for the year using broker statements and verify them with the AIS.

Step 2: Separate the gains into two parts — transactions completed before 23rd July 2024 and those executed on or after 23rd July 2024.

Step 3: For each category, compute the total sale value and subtract the respective purchase cost.

Step 4: This will give you the capital gains for both periods. Combine them and deduct ₹1.25 lakh from the total to arrive at the taxable LTCG.

What is the Grandfathering Clause in Section 112A?

The grandfathering provision under Section 112A safeguards gains earned before 31 January 2018 from taxation. It ensures that only appreciation occurring after this date is taxed. For listed equity shares, equity mutual funds, and business trust units, the cost of acquisition is determined as the higher of the actual purchase price or the fair market value on 31 January 2018, but capped at the sale price. This prevents taxation of gains accrued before the LTCG tax came into effect.

Grandfathering of Shares

The cost of acquisition as per the grandfathering mechanism is calculated using the following method:

Value I: Lower of the fair market value as on 31 January 2018 or the actual selling price.
Value II: Higher of Value I or the actual purchase price.

Value II becomes the cost of acquisition under the grandfathering rule.

Long-Term Capital Gain (LTCG) = Sale Value – Cost of Acquisition (as per grandfathering rule) – Transfer Expenses

Tax Payable = 12.5% × (LTCG – ₹1.25 lakh)

Illustration for LTCG on Shares Using the Grandfathering Rule

Let’s break it down with an example:

Mr. Udit invested ₹20 lakh in shares of a listed company in June 2005.
The fair market value (FMV) on 31 January 2018 was ₹40 lakh.
He sold the entire investment in May 2019 for ₹43 lakh, earning a profit of ₹23 lakh.
However, because of the grandfathering provision, only ₹3 lakh becomes taxable.

In another case, Udit invested ₹15 lakh in a different listed company in February 2016.
The FMV on 31 January 2018 stood at ₹4 lakh, and he sold these shares in June 2019 for ₹10 lakh.
As per the grandfathering formula, this resulted in a long-term capital loss of ₹5 lakh.

Udit’s Investment Portfolio	Sale Price (A)	Cost (B)	FMV on 31 Jan (C)	Value I: Lower of A & C (D)	Value II: Higher of B & D (E)	Capital Gain (A – E) (F)
1	43 lakh	20 lakh	40 lakh	40 lakh	40 lakh	3 lakh
2	10 lakh	15 lakh	4 lakh	4 lakh	15 lakh	(5 lakh)

Exemption on LTCG from Listed Shares

Under Section 112A, LTCG on equity shares sold on or after 23 July 2024 is taxed at 12.5%.
For sales before 23 July 2024, the tax rate remains 10%.
In both situations, taxpayers can claim an exemption of ₹1.25 lakh, meaning only gains above this threshold are taxed.

Example:
Mr. A reports LTCG of ₹3,00,000 on listed shares. Tax calculation is as follows:

Sold on 1 March 2024:
(₹3,00,000 – ₹1,00,000) × 10% = ₹20,000
Sold on 1 July 2024:
(₹3,00,000 – ₹1,25,000) × 10% = ₹17,500
Sold on 1 August 2024:
(₹3,00,000 – ₹1,25,000) × 12.5% = ₹21,875

LTCG on Transfer of Bonus and Rights Shares Acquired on or Before 31 January 2018

For bonus or rights shares received on or before 31 January 2018, LTCG is computed by adopting the FMV as on 31 January 2018 as the cost of acquisition. This ensures that gains earned up to that date remain tax-free.

Example:
If you purchased Reliance shares on 1 April 2016 and received bonus shares on 1 April 2017, then for any sale made after 31 January 2018, the FMV on that date becomes the cost of acquisition for the bonus shares.

Set-Off of Long-Term Capital Loss Against Long-Term Capital Gain

Losses from the sale of long-term listed equity shares or equity-related instruments are treated as long-term capital losses.

These losses can be set off only against long-term capital gains.
If an investor reports losses on some securities and gains on others, the long-term losses can be adjusted against long-term gains before calculating the final taxable amount.

Carry Forward of Long-Term Capital Losses on Sale of Shares

Long-term capital losses arising from the sale of shares can be set off only against long-term capital gains. Unlike short-term capital losses, which may be adjusted against both short-term and long-term gains, long-term losses cannot be used to offset short-term capital gains.

If these losses cannot be fully adjusted in the same financial year, they may be carried forward for up to eight assessment years, but must be utilized only against long-term capital gains in those future years.

Fair Market Value (FMV)

The FMV of a listed security is the highest traded price on a recognized stock exchange.
If the security was not traded on 31 January 2018, then the FMV is the highest traded price on the most recent date before 31 January 2018 when it was traded.
For unlisted units as on 31 January 2018, FMV refers to the net asset value (NAV) on that date.
For equity shares listed after 31 January 2018, or received through mergers or transfers covered under Section 47, FMV is computed as:
Purchase price × Cost Inflation Index for FY 2017–18 ÷ CII for the year of purchase or FY 2001–02, whichever applies.

Reconciliation of Capital Gain Statement vs AIS

The Income Tax Department now receives trading and sale details directly from depositories such as CDSL and NSDL. These details appear in your Annual Information Statement (AIS).

Therefore, it is essential to match your personal capital gains records with the information shown in AIS before filing your tax return. Any difference between your ITR and AIS may trigger a notice from the department.

Rebate Under Section 87A

The rebate available under Section 87A does not apply to long-term capital gains taxed under Section 112A.

How to Reduce Your LTCG Tax Liability

Once your long-term capital gains exceed the annual exemption limit, the remaining amount becomes taxable at 12.5%. However, a strategic approach known as tax harvesting can help lower your tax outgo. There are two methods:

Tax Gain Harvesting
This approach involves selling investments that have appreciated to the extent of the available exemption limit. The investor then reinvests the proceeds, maintaining market exposure while ensuring that the gains booked remain tax-free.
Tax Loss Harvesting
This method helps reduce taxable gains by selling investments that are currently at a loss and using those losses to offset gains from other securities.

Important Points Before Applying Tax Harvesting

Avoid intraday trading.
Conduct proper technical analysis before selling securities for harvesting.
Keep track of corporate actions like dividend payouts before executing sales.
It is advisable to consult a financial advisor, as improper execution may result in unintended losses.

FAQs on Long-Term Capital Gains (LTCG) on Shares & Equity-Oriented Funds

1. How is the Fair Market Value (FMV) of shares determined for grandfathering?

FMV is calculated based on the price on the recognised stock exchange as on 31st January 2018:

If the share was traded on 31st Jan 2018 → Highest quoted price on that day is the FMV.
If there was no trading on 31st Jan 2018 → FMV will be the highest quoted price on the last trading day prior to 31st Jan 2018.
For unlisted units, FMV = Net Asset Value (NAV) as on 31st January 2018.

2. Is TDS applicable on LTCG earned by resident taxpayers?

No. There is no TDS requirement on long-term capital gains from equity shares or equity-oriented mutual funds for resident taxpayers.

3. Is indexation benefit available for computing LTCG on equity?

No. As clarified by the Income Tax Department, indexation of cost is NOT allowed for LTCG on equity shares or equity-oriented funds.

4. Is TDS applicable on LTCG payable to non-resident investors?

Yes. For non-residents:

10% or 12.5% TDS applies (depending on the applicable rate).
Tax is charged only on gains exceeding ₹1.25 lakh.
An additional 4% health & education cess applies.

5. Has LTCG tax on shares changed in Budget 2024?

Yes, Budget 2024 introduced the following key changes:

Exemption limit increased from ₹1 lakh to ₹1.25 lakh per financial year.
Tax rate increased from 10% to 12.5% for transfers made on or after 23 July 2024.

6. What is the surcharge rate on LTCG under Section 112A?

Surcharge on LTCG under sections 111A, 112A & 112 is capped at 15%.

7. How is the cost of acquisition (COA) determined for shares bought before 31st January 2018?

For grandfathered investments:

Start with actual purchase cost.
If actual cost < FMV (31 Jan 2018) → FMV becomes the COA.
If sale value < FMV → COA will be higher of actual cost or sale value.
This ensures taxpayers do not pay tax on gains before 31 Jan 2018.

8. What is the holding period for equity to qualify as LTCG?

Equity shares or equity-oriented funds qualify as long-term if they are held for more than 12 months.

9. Are LTCG benefits available on listed shares only?

LTCG benefits apply to:

Listed equity shares
Equity-oriented mutual funds
Units of a business trust

10. Is STT (Securities Transaction Tax) required to claim LTCG benefits under Section 112A?

Yes. To avail the concessional LTCG tax rate, STT must be paid both:

At the time of purchase (in certain cases), and
At the time of sale.

11. Can LTCG on equity be set off against losses?

Long-term capital losses can be set off only against LTCG.
They cannot be adjusted against short-term capital gains.

12. For how many years can long-term capital losses be carried forward?

LTC losses can be carried forward for 8 assessment years, provided the ITR is filed within the due date.

13. Is exemption available under Section 54F for LTCG on shares?

No. Section 54F exemption is not available for LTCG arising from equity shares or equity-oriented funds.

14. Do NRIs get benefit of the ₹1.25 lakh LTCG exemption?

Yes. The updated ₹1.25 lakh annual exemption is available to both resident and non-resident taxpayers, subject to applicable tax treaties.