Section 112A: Long-Term Capital Gains Tax on Equity Shares and Equity Funds

Section 112A provides a special method of taxing long-term capital gains (LTCG) from qualifying equity shares, equity-oriented mutual fund units and business trust units. The original page reproduced the law as introduced in 2018, when the rate was 10% above Rs 1 lakh. That historic text remains relevant for earlier transactions, but the Finance (No. 2) Act, 2024 changed the rate and threshold.

Current key rule: For qualifying transfers on or after 23 July 2024, Section 112A generally charges 12.5% on aggregate eligible long-term capital gains exceeding Rs 1,25,000, plus applicable surcharge and health and education cess. Transfers before that date generally attract 10%, subject to the relevant threshold and transitional rules.

1. What Section 112A covers

Section 112A is a special provision in Chapter XII of the Income-tax Act, 1961, overriding the general long-term capital gains rate under Section 112 for qualifying assets. It applies to eligible long-term gains from:

Equity shares in a company;
Units of an equity-oriented mutual fund; and
Units of a business trust, subject to the statutory conditions.

Whether a gain is long-term depends on the type of asset and the holding-period rules applicable to its transfer. Not every gain on shares or mutual funds qualifies for Section 112A.

2. Tax rates and exemption threshold

Transfer date	Section 112A rate	Relevant annual threshold
Before 23 July 2024	10%	Historically Rs 1,00,000; the amended aggregate Rs 1,25,000 limit applies to FY 2024-25 as prescribed
On or after 23 July 2024	12.5%	Rs 1,25,000 on aggregate qualifying gains

The Rs 1,25,000 threshold is an aggregate annual limit, not a separate exemption for each security, transaction or demat account. For FY 2024-25, gains from transfers on both sides of 23 July 2024 are considered together for the aggregate threshold, while the respective rates apply to the relevant gains. The limit is not an automatic Rs 1,25,000 deduction from each category.

3. Securities Transaction Tax (STT) conditions

Under Section 112A(1), STT is generally required on the transfer. For equity shares, STT is ordinarily required on both acquisition and transfer, subject to notified exceptions. For qualifying equity-oriented fund units and business trust units, the statutory STT condition ordinarily concerns transfer.

Section 112A(3) provides a specific exception for transfers on a recognised stock exchange in an International Financial Services Centre (IFSC) where consideration is received or receivable in foreign currency. Section 112A(4) authorises the Central Government to notify classes of equity-share acquisitions for which the acquisition-side STT requirement does not apply. An off-market sale does not automatically qualify merely because the asset is listed.

4. Important statutory definitions

Equity-oriented fund: A qualifying mutual fund meeting the investment conditions in the Explanation to Section 112A, including the applicable 65% domestic listed equity test, or specified fund-of-funds 90% tests, measured using the statutory averaging method.
Business trust: A qualifying trust within the definition under Section 2(13A), including eligible REITs and InvITs.
Recognised stock exchange: Has the meaning referred to in Section 43(5), Explanation 1, as cross-referenced by Section 112A.
International Financial Services Centre: Has the meaning assigned under Section 2(q) of the Special Economic Zones Act, 2005.

5. Grandfathering of investments held on 31 January 2018

For qualifying equity assets acquired before 1 February 2018, Section 55(2)(ac) generally protects appreciation accrued up to 31 January 2018 through a special cost-of-acquisition formula:

Deemed cost = Higher of (actual cost) and (lower of FMV on 31 January 2018 and sale consideration).

The definition and method for fair market value depend on whether the asset was listed and the statutory circumstances. This rule is different from the 2024 land-and-building grandfathering relief under Section 112 and does not create a fresh 2024 market-value reset for Section 112A assets.

6. Calculation example

Assume a taxpayer sells eligible listed equity shares after 23 July 2024 and has Rs 3,25,000 of net qualifying LTCG for the relevant year, with no other Section 112A gains and no adjustment for the basic exemption limit.

Eligible LTCG	Rs 3,25,000
Aggregate annual threshold	Rs 1,25,000
Taxable LTCG under Section 112A	Rs 2,00,000
Income-tax at 12.5%	Rs 25,000
4% health and education cess (assuming no surcharge)	Rs 1,000
Illustrative total	Rs 26,000

This simplified example assumes no eligible capital losses, no applicable exemption, no surcharge, and no other special-rate interactions. Actual liability depends on the full return.

7. Basic exemption, deductions and rebate

Resident individuals and resident HUFs: the first proviso to Section 112A(2) permits eligible adjustment where income excluding Section 112A gains is below the applicable basic exemption limit. This adjustment is not generally available to non-residents.

Chapter VI-A deductions: Section 112A(5) excludes the qualifying long-term gains from the base against which Chapter VI-A deductions are allowed.

Section 87A rebate: Section 112A(6) prevents the rebate from being applied against tax payable on Section 112A gains. Any rebate eligibility on other income must be determined under the applicable law and tax regime.

8. Other computation considerations

For covered listed equity and equity-oriented units, the long-term capital gains computation generally does not allow indexation.
Eligible capital losses may be set off subject to the applicable capital-loss rules; carried-forward losses require compliance with filing requirements.
Eligible reinvestment exemptions, where specifically available, must be considered under their own conditions; Section 112A does not itself grant them.
Sale proceeds, purchase records, broker statements, STT evidence and 31 January 2018 valuation data should be retained.
Tax rates must be applied using the actual date of transfer, not simply the date of return filing.

9. Original statutory structure and historical provision

The original page reflected Section 112A as introduced by the Finance Act, 2018, effective 1 April 2019. Its substantive structure remains important:

Sub-section (1): eligible capital assets and STT conditions;
Sub-section (2): computation of tax on qualifying long-term gains and the resident individual/HUF basic exemption proviso;
Sub-section (3): qualifying IFSC transactions;
Sub-section (4): power to notify acquisitions exempt from acquisition-side STT condition;
Sub-section (5): restriction on Chapter VI-A deductions;
Sub-section (6): restriction on Section 87A rebate; and
Explanation: definitions of equity-oriented fund, IFSC and recognised stock exchange.

Historical wording: as originally inserted, sub-section (2)(i) taxed long-term gains exceeding one lakh rupees at ten per cent. That wording is superseded for transfers governed by the Finance (No. 2) Act, 2024 amendments. The original insertion was by Finance Act, 2018 (Act 13 of 2018), section 33, effective 1 April 2019. Earlier unrelated provisions bearing the same section number had been omitted in 1989.

10. Income-tax Act, 2025 and transitional application

The Income-tax Act, 2025 came into force on 1 April 2026. The applicable statute depends on the tax year, transaction date and saving/transitional provisions. Section 112A remains relevant to assessment of periods governed by the 1961 Act. For tax years governed by the 2025 Act, refer to its corresponding capital-gains special-rate provisions and current schedules rather than assuming old section numbering remains unchanged.

11. Frequently asked questions

Is the first Rs 1,25,000 of eligible LTCG taxable?

Generally, Section 112A taxes only qualifying annual gains exceeding the aggregate Rs 1,25,000 threshold, subject to applicable rules and adjustments.

Is the tax rate 10% or 12.5%?

For transfers before 23 July 2024, 10% generally applies; for transfers on or after that date, 12.5% generally applies. The threshold for FY 2024-25 must be applied on an aggregate basis.

Does Section 112A apply to every mutual fund?

No. The fund must meet the statutory equity-oriented fund definition and other applicable requirements.

Can Section 87A rebate eliminate Section 112A tax?

No. Section 112A(6) specifically restricts the rebate against tax on gains covered by the section.

Is STT necessary when buying shares?

Generally yes for eligible equity shares, but notified exceptions can dispense with acquisition-side STT in specified circumstances.

12. Official law and guidance

Updated: 26 October 2026. This is a general explanatory article. Apply the law and notifications relevant to the transaction and tax year; consult the statutory text for individual cases.