LTCG on equity mutual funds (Section 112A)

Long-term capital gains (LTCG) on equity-oriented mutual funds are taxed under Section 112A of the Income Tax Act 1961 at a flat rate of 12.5% on gains exceeding Rs 1,25,000 per financial year, as revised by the Finance Act 2024 effective 23 July 2024. Section 112A was introduced by the Finance Act 2018 to reimpose LTCG tax on listed equity after a 14-year exemption and is the primary charging section for long-term redemptions of equity mutual fund units, ELSS, balanced hybrid funds, and arbitrage funds that qualify as equity-oriented. Indexation is not available under Section 112A. The grandfathering provision in Section 55(2)(ac) ensures that gains accrued before 1 February 2018 are excluded from the taxable base.

Tax advice disclaimer. This article is for educational reference only and does not constitute professional tax or financial advice. Tax law changes frequently and individual circumstances vary widely. Readers should consult a qualified Chartered Accountant or tax adviser before making any investment or tax-filing decision.

Charging conditions

Section 112A applies to LTCG arising from the transfer of units of an equity-oriented mutual fund where:

1. The fund is registered under the SEBI (Mutual Funds) Regulations 1996.
2. STT was paid on both the acquisition (purchase) and the transfer (redemption).
3. The units have been held for more than 12 months (i.e., are long-term capital assets under Section 2(29A)).

Where STT was not paid on acquisition (e.g., units received through off-market transfer, inheritance, gift, or bonus) but STT is paid on redemption, the provision under the second proviso to Section 112A may still allow the 12.5% rate. Tax practitioners should verify the precise conditions in such edge cases.

Rate history

The Finance Act 2018 reintroduced LTCG tax on equity at 10% after Section 10(38) (the previous exemption) was removed. The Finance Act 2024 revised the rate to 12.5% and simultaneously raised the threshold to Rs 1,25,000.

Computation of LTCG under Section 112A

Taxable LTCG = (Total LTCG from all Section 112A transactions in the FY) -- Rs 1,25,000

For each individual transaction:

Gain = Sale consideration -- Deemed cost of acquisition -- Transfer expenses

• Sale consideration: Redemption NAV x units redeemed.
• Deemed cost of acquisition: The higher of actual purchase NAV and the 31 January 2018 FMV, where units were acquired before 1 February 2018 (grandfathering). For units acquired after 31 January 2018, the cost of acquisition is the actual purchase NAV.
• Transfer expenses: Brokerage, if any (nil for most direct-plan redemptions).
• Indexation: Explicitly excluded by the second proviso to Section 48, as referred to in Section 112A.

The Rs 1,25,000 threshold is aggregated across all transactions in the financial year – not per transaction. If the total LTCG from equity shares and equity-oriented mutual fund redemptions in a financial year is Rs 2,00,000, the taxable LTCG is Rs 75,000.

Grandfathering and Section 55(2)(ac)

For units acquired before 1 February 2018, the cost of acquisition is deemed as per Section 55(2)(ac):

Deemed cost = Maximum of:

• Actual cost of acquisition; and
• Minimum of:
  • Fair Market Value (FMV) as on 31 January 2018; and
  • Sale consideration.

The FMV for mutual fund units is the closing NAV of the scheme on 31 January 2018. AMC websites and the AMFI data repository publish this historical NAV.

This deemed cost ensures that gains arising up to 31 January 2018 are not taxable. Full computational examples are in equity MF grandfathering (31 January 2018) and grandfathering rule for LTCG.

No indexation

The second proviso to Section 48 (which provides indexation via the Cost Inflation Index) is explicitly excluded from Section 112A gains. Investors cannot inflate the cost of acquisition of equity-oriented mutual fund units by the CII, unlike debt mutual fund units held before 1 April 2023 or immovable property. The grandfathering mechanism substitutes the 31 January 2018 FMV (which was the market-level price) in place of indexation for pre-2018 units.

Surcharge

For LTCG under Section 112A, the Finance Act 2023 capped the surcharge at 15%. The effective maximum LTCG tax rate is:

• 12.5% tax + 15% surcharge on tax = 14.375% + 4% cess = approximately 14.95%.

This is considerably below the marginal slab rate of 42.74% that would apply to slab-rate capital gains for the highest-income investors.

Basic exemption offset

Similar to Section 111A, resident individuals and HUFs with total income (excluding Section 112A LTCG) below the basic exemption limit may apply the shortfall against Section 112A gains, reducing the taxable LTCG base before applying the Rs 1,25,000 threshold.

Set-off and carry-forward

• LTCG under Section 112A can be set off against LTCG from any capital asset in the same year (Section 70).
• LTCG losses under Section 112A can only be set off against LTCG; not against STCG or other income heads.
• Unabsorbed LTCG losses are carried forward for eight assessment years under Section 74.
• LTCG losses can be carried forward only if the return is filed by the due date under Section 139(1).

ELSS and Section 112A

ELSS fund redemptions are always LTCG under Section 112A (since the three-year lock-in far exceeds the 12-month LTCG threshold). The 12.5% rate and Rs 1,25,000 threshold apply equally to ELSS redemption gains.

IDCW reinvestment and gain computation

Under the growth option, Section 112A applies to the entire appreciation from purchase NAV to redemption NAV. Under the IDCW (dividend) option, each IDCW distribution reduces the NAV on the ex-date. The cost of acquisition of the units is unchanged by IDCW payments; the gain on redemption is smaller because the NAV has been reduced by prior IDCW distributions.

Reporting

Section 112A LTCG is reported in Schedule CG of ITR-2 or ITR-3. There is a dedicated row for “Long-term capital gains on transfer of listed equity shares and units of equity-oriented mutual funds on which STT is paid.” The return requires grandfathering calculations to be entered for pre-February 2018 units. Reconciliation against the Annual Information Statement (AIS) and fund-house capital gains statements is essential.

See also

• Section 112A
• STCG on equity MFs (Section 111A)
• Equity mutual fund taxation in India
• Equity MF grandfathering (31 January 2018)
• Grandfathering rule for LTCG
• ELSS and Section 80C deduction
• Securities Transaction Tax
• SIP taxation and FIFO method
• Capital gains tax in India
• ITR-2
• Annual Information Statement
• AIS/TIS mapping for MF transactions

References

1. Income Tax Act 1961, Section 112A (as amended by Finance Act 2024).
2. Income Tax Act 1961, Section 55(2)(ac) – grandfathering deemed cost.
3. Finance Act 2018 – introduction of Section 112A.
4. Finance Act 2024, clause revising Section 112A rate from 10% to 12.5%.
5. Income Tax Act 1961, Section 2(29A) – long-term capital asset.
6. Income Tax Act 1961, Section 48 – computation of capital gains.
7. Income Tax Act 1961, Section 70 and 74 – set-off and carry-forward.
8. Finance Act 2023, surcharge cap on Section 112A at 15%.