Section 112A: Rs 1.25 Lakh LTCG Exemption on Equity and the New 12.5% Rate After July 2024

Every equity investor who books a profit on listed shares or an equity mutual fund runs into Section 112A of the Income Tax Act, 1961. It is the provision that decides how much of your long-term gain is tax-free and what rate applies to the rest. Two numbers matter more than any other here: the annual exemption of Rs 1,25,000 and the concessional rate of 12.5% that applies to transfers made on or after 23 July 2024. Before that date the exemption was Rs 1,00,000 and the rate was 10%, so anyone reconciling gains that straddle the 2024 Budget must apply the correct rate to the correct period.

This guide walks through the statutory language in plain English, a fully worked computation for a salaried investor, the mistakes that surface most often in Income Tax Department scrutiny, and a set of frequently asked questions. Use it alongside our Capital Gains Calculator to test your own figures before you file.

What the Section Says

Section 112A applies to long-term capital gains arising from the transfer of three categories of assets: listed equity shares, units of an equity-oriented mutual fund, and units of a business trust (REITs and InvITs). For a gain to qualify as long-term, listed equity shares and equity-fund units must be held for more than 12 months before transfer. The defining condition is that Securities Transaction Tax (STT) must have been paid: on the transfer for all three categories, and additionally on acquisition in the case of equity shares, subject to exceptions notified by the Central Government (for instance, shares acquired through an IPO, bonus, or rights issue).

Once those conditions are met, the tax treatment is a two-step calculation. First, aggregate long-term gains under this section up to Rs 1,25,000 in a financial year are not charged to tax. Second, the amount exceeding Rs 1,25,000 is taxed at a flat 12.5%, without the benefit of indexation and without the first proviso to Section 48 (foreign-currency adjustment for non-residents). The 12.5% is the base rate; a surcharge and a 4% health and education cess are then added. A useful relief for smaller investors: a resident individual or HUF whose other income falls below the basic exemption limit may reduce the Section 112A gain by the unexhausted portion of that limit before applying the 12.5% rate.

The rate change is the single most important date-sensitive fact in this section. The table below sets out the two regimes.

A further feature that catches long-term holders is grandfathering. For shares and units acquired before 1 February 2018, the cost of acquisition is taken as the higher of (a) the actual cost, or (b) the lower of the fair market value on 31 January 2018 and the actual sale consideration. This protects gains that had already accrued up to 31 January 2018 from the levy introduced in 2018. The related short-term rate under Section 111A, which applies when the holding period is 12 months or less, rose from 15% to 20% on the same date of 23 July 2024. To see how the LTCG and STCG figures change your overall bill, run both regimes through our Income Tax Calculator.

Worked Example

Consider Priya, a salaried professional in Bengaluru with a taxable salary income of Rs 14,00,000 for FY 2025-26. During the year she sold a portfolio of listed equity shares and an equity mutual fund, all held for more than 12 months, all with STT paid, and all transferred after 23 July 2024. Her long-term capital gains are as follows.

The computation runs in three steps. First, subtract the annual exemption: Rs 4,25,000 minus Rs 1,25,000 leaves Rs 3,00,000 as the taxable long-term gain. Second, apply the 12.5% concessional rate: 12.5% of Rs 3,00,000 is Rs 37,500. Third, add the 4% health and education cess: Rs 37,500 plus Rs 1,500 gives a total tax on the equity gain of Rs 39,000. Because Priya's total income is comfortably above the basic exemption limit, she cannot use the unexhausted-limit relief, and because her income is below Rs 50,00,000, no surcharge applies.

Note what does not happen here. The Rs 1,25,000 exemption is not a deduction against her salary; it applies only to the Section 112A pool. Her salary of Rs 14,00,000 continues to be taxed under the slab rates she has opted for, entirely separately from the flat 12.5% on the equity gain. Had the same shares been transferred on, say, 10 July 2024, the first Rs 1,00,000 would have been exempt and the balance taxed at 10% — a reminder to check the transfer date on every contract note. If Priya were comparing regimes for her salary component, our Old vs New Regime Calculator shows the slab tax; the 112A tax on equity gains stays the same under either regime.

Common Mistakes

The errors below recur in Income Tax Department processing and in scrutiny of returns filed under this head.

Treating the Rs 1,25,000 as a per-transaction figure. The exemption is an annual aggregate across all Section 112A assets, not a fresh Rs 1,25,000 for each scrip or fund. Priya's example pooled Rs 3,00,000 and Rs 1,25,000 into a single Rs 4,25,000 total before applying one exemption.

Applying the old 10% rate to post-23 July 2024 transfers. Software templates and older spreadsheets carried the 10%/Rs 1,00,000 combination well into FY 2024-25. Every transfer dated 23 July 2024 or later must use 12.5% on the excess over Rs 1,25,000. Mixing the two within one year is legitimate only because the transfer dates genuinely differ.

Forgetting the STT condition on acquisition. For listed equity shares, STT must have been paid both on acquisition and on transfer, unless the acquisition falls within a notified exception. Off-market purchases that do not meet an exception can push the gain out of Section 112A and into the ordinary Section 112 route, changing the rate.

Skipping the grandfathering computation. For shares bought before 1 February 2018, using the raw historical cost rather than the higher-of formula overstates the taxable gain and the tax paid. This is the most common source of excess self-assessment tax in old holdings.

Reporting gains in the wrong schedule. Section 112A gains must be reported scrip-wise in Schedule 112A of the ITR, with acquisition date, sale date, and fair market value on 31 January 2018 where relevant. A mismatch between Schedule 112A and the capital-gains summary is a frequent trigger for a proposed adjustment. If a resulting demand is set off against a refund, our explainer on Section 245 refund adjustments sets out the response process.

FAQ

Is the Rs 1,25,000 exemption available separately in the old and new tax regimes?

Yes. Section 112A operates the same way regardless of whether you have opted for the old or new personal-tax regime for your slab income. The Rs 1,25,000 annual exemption and the 12.5% rate apply to the equity long-term gain in both cases, because the special rate under Section 112A overrides the ordinary slab computation for that income.

Does the 12.5% rate attract surcharge and cess on top?

Yes, but with a cap. The 4% health and education cess applies in every case. Surcharge applies only if your total income crosses Rs 50,00,000, and the surcharge on capital gains taxed under Sections 111A, 112 and 112A is capped at 15% even where your other income would otherwise attract a higher rate. For most retail investors below Rs 50,00,000 of total income, no surcharge is due.

Can I set off short-term or long-term capital losses against these gains?

A long-term capital loss can be set off only against long-term capital gains, including Section 112A gains. A short-term capital loss may be set off against either short-term or long-term gains. Unabsorbed capital losses can be carried forward for up to 8 assessment years, provided the return is filed within the due date under Section 139(1).

How does grandfathering change my cost of acquisition?

For listed equity and equity-fund units acquired before 1 February 2018, the cost is the higher of the actual cost or the lower of the 31 January 2018 fair market value and the sale price. This protects gains accrued up to 31 January 2018 from tax while charging only the appreciation after that date.

Do I still get indexation on these equity gains?

No. Section 112A expressly denies the benefit of indexation. Indexation continues to apply to certain other assets under different provisions, but not to listed equity or equity-oriented fund units taxed under this section. You can read more about the mechanism in our indexation glossary entry.

What is the rate for equity sold within 12 months?

That is a short-term capital gain under Section 111A, taxed at a flat 20% for transfers on or after 23 July 2024 (raised from 15%), plus cess and any applicable surcharge, again capped at 15%. The 12.5% Section 112A rate applies only to holdings of more than 12 months.

Which schedule of the ITR reports Section 112A gains?

Section 112A gains are reported scrip-wise in Schedule 112A, capturing each acquisition and sale with the 31 January 2018 fair market value where the asset was bought before that date. The totals then flow into the capital-gains schedule of your return on the income tax e-filing portal.