Section 112A of Income Tax Act: LTCG Exemption 2025

In simple terms, capital gains refer to the profits you earn when you sell a capital asset at a price higher than its purchase cost. Examples of capital assets include stocks, bonds, mutual funds, gold, and real estate. These gains are further classified as Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG), depending on how long you hold the asset before selling it.

For listed equity shares and equity-oriented mutual funds, if the period of holding is more than 12 months, the resulting profit is categorised as LTCG. The threshold is different for different types of assets. For example, profits from immovable properties such as real estate and gold qualify as LTCG if they are held for more than 24 months.

The table below depicts the holding periods for different capital assets for the classification of LTCG:

Taxation of long-term capital gains is governed by Sections 112 and 112A of Income Tax Act.
Section 112A applies to LTCG from the following assets:

• Listed equity shares
• Equity-oriented mutual funds
• Business trust units

For all other types of long-term capital gains not falling under Section 112A, the provisions of Section 112 shall apply.

Tax Rate for Long-Term Capital Gains

Prior to the Assessment year 2018-19, long-term capital gains from equity shares, mutual funds, and business trust units were exempted from income tax under section 10(38) of the Income Tax Act. But in 2018, the government discontinued the tax relief and introduced Section 112A to govern the taxation of these assets.

Following the amendments in 2018, long-term capital gains from equity-based instruments (stocks, mutual funds, and business trust units) were taxed at a flat rate of 10% without indexation benefits u/s 112A. Whereas, LTCG from real estate and other assets u/s 112A were taxed at a flat rate of 20% with indexation benefits.

However, the government again amended the LTCG tax rates in the Union Budget of 2024. With effect from 23rd July 2024, LTCG from all types of capital gains are taxed at a flat rate of 12.5% without indexation. The step was taken to encourage long-term investments.

The table below depicts LTCG tax rates for various capital assets before and after the 2024 amendments:

Section 112A of the Income Tax Act offers tax relief to investors. As per Section 112A, long-term capital gains of up to ₹1.25 lakhs from listed equity shares, equity-oriented mutual funds, and business trust units are exempted from income tax.

Earlier, this tax exemption limit was ₹1 lakh per financial year. However, the limit was raised to
₹1.25 lakh in the Union Budget 2025. The updated limit is applicable for assets sold on or after 23rd July 2024.

Conditions for Applicability of Section 112A Exemption

Tax exemption under section 112A of Income Tax Act is applicable only under the following conditions:

• The sale must involve equity-based capital assets. They can be listed equity shares, equity-oriented mutual funds, or business trust units.
• The assets must have been held for more than 12 months so that the capital gains from them qualify as LTCG.
• Securities Transaction Tax (STT) must have been paid at the time of purchase and sale of equity shares. In the case of mutual funds and business trust units, STT must have been at the time of sale or redemption.
• Long-term capital gains up to ₹1.25 lakhs are exempted from tax. LTCG above this threshold will continue to attract tax at a revised rate of 12.5% (provided that the assets were sold on or after 23rd July 2025). If sold before 23rd July 2024, the exemption limit would be ₹ 1 lakh, and the applicable tax rate would be 10%
• A taxpayer cannot claim any deduction under Chapter VI-A of the Income Tax Act.
• Rebates under Section 87A cannot be claimed against the tax payable on long-term capital gains under Section 112A.

The Concept of Grandfathering U/S 112A

Taxation on long-term capital gains was introduced only in 2018. Before that, LTCG used to be tax-free. The concept of “Grandfathering” under Section 112A ensures that long-term capital gains made up to 31st January 2018 are protected from taxation. In other words, it ensures that only the appreciation in the asset’s value after 31st January 2018 is subject to LTCG tax.

For listed equity shares, equity-oriented mutual funds, and units of business trusts, the cost of acquisition is considered as the higher of the actual purchase price or the fair market value as on 31st January 2018, but not exceeding the sale price. This mechanism safeguards investors from being taxed on gains that had already accrued before the introduction of the LTCG tax under Section 112A in 2018.

Tax liability under the “Grandfathering Clause” of Section 112A can be calculated as follows:

• Step 1 - Identify the ‘Actual Purchase Price’ of the equity share, equity mutual fund, or a unit of a business trust.
• Step 2 - Find the Fair Market Value (FMV) as on 31st January 2018. For listed shares, FMV is the highest traded price on 31st January 2018 (or nearest trading day). For an equity mutual fund or a business trust unit, FMV is the NAV on 31st January 2018.
• Step 3 - Note the ‘Actual Sale Price’, i.e., the price at which the asset is sold.
• Step 4 - Note down the lower of the Fair Market Value or Actual Sale Price. Let’s assume it is the “Value I”.
• Step 5 - Determine the cost of acquisition. It’s the higher of the Value I or the Actual Purchase Price.
• Step 6 - Determine LTCG by subtracting the cost of acquisition and transfer expenses from the Sale Value.
• Step 7 - If the LTCG exceeds ₹1.25 lakhs, calculate the taxable value by subtracting ₹1.25 lakhs from the LTCG. If the LTCG is below ₹1.25 lakhs, no tax would be applicable.
• Step 8 - The payable tax would be 12.5% of the taxable value.

Let’s understand the calculation of the LTCG tax under Section 112A with the help of an illustration.

Case 1 - An investor purchased 2000 shares of a company for ₹100 each in February 2024. He sold these shares for ₹130 each in June 2025. Since the holding period is more than 12 months, the profit will qualify as LTCG and will be taxed at a 12.5% rate.

LTCG = [(2000 x 130) - (2000 x 100)] = ₹60,000.

Since the LTCG is below the exemption limit of ₹1.25 lakh, no tax would be payable.

Case 2 - An investor invested ₹5 lakhs in equity mutual funds in 2021 and redeemed ₹7.5 lakhs in 2025. Since the period of holding exceeds 12 months, the profit will qualify as LTCG and will attract a tax at a 12.5% rate.

LTCG = (7,50,000 - 5,00,000) = ₹2.5 lakhs

Taxable amount = (2,50,000 - 1,25,000) = ₹1,25,000

Payable tax u/s 112A = 12.5% of ₹1,25,000, i.e., ₹15,625

Case 3 - An investor bought 2000 shares of a company for ₹1000 each in 2016 and sold them for ₹2500 each in 2025. Since the period of holding exceeds 12 months, the profit will qualify as LTCG and will attract a tax at a 12.5% rate. However, returns accumulated before 31st January 2018 will be protected from tax under the “Grandfathering” clause.

Actual Purchase Price = (2000 x 1000) = 20 lakhs

FMV on 31st January 2018 = 1500. This will be the cost of acquisition

Total gains = [2000 x (2500 - 1000)] = ₹30 lakhs

Taxable amount (after factoring in the Grandfathering Clause) = [2000 x (2000 - 1500)] = ₹20 lakhs.

Payable tax u/s 112A = 12.5% of ₹20 lakhs, i.e., ₹2.5 lakhs.

As you can see, the tax is levied on Rs. 20 lakhs and not on the entire capital gain of ₹30 lakhs.

While you cannot avoid LTCG taxation altogether, you can reduce or defer your liability by following these tips:

• LTCG up to ₹1.25 lakh is exempted from tax u/s 112A. You can strategically sell or redeem your investments to book tax-free capital gains up to this limit, and then reinvest the redeemed amount.
• You can set off your capital losses in other investments against the LTCG to reduce your net taxable gains. This process is known as tax-loss harvesting.
• If you total income is below the tax exemption limit, you can adjust the shortfall against LTCG.
• Invest in tax-efficient instruments such as ULIPs, ELSS, etc.
• Transfer high-performing assets to your family members in lower tax brackets.

The introduction of Section 112A of Income Tax Act in 2018 marked a turning point in the taxation of equity investments in India. It aims to strike a balance between encouraging long-term investment and ensuring fairness in taxation. With the exemption limit raised to ₹1.25 lakh in 2024, investors can now plan their investments efficiently without worrying about the LTCG tax burden.

Following the tips mentioned above can help you significantly reduce your tax liability. Furthermore, you can buy health insurance to avail of a tax deduction under Section 80D of the Income Tax Act. A health insurance policy protects you from hefty medical costs, should you fall ill or need hospitalisation. You can also attach riders, such as critical illness cover, accidental injury cover, etc., to enjoy complete peace of mind.

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