Section 112A of the Income Tax Act

Section 112A of the Income Tax Act, 1961, is the operative tax provision that governs long-term capital gains (LTCG) on transfers of listed equity shares, units of equity-oriented mutual funds , and units of business trusts (REITs and InvITs), subject to the condition that Securities Transaction Tax (STT) has been paid on both acquisition and sale (with prescribed exceptions). The section was inserted by the Finance Act, 2018, effective from 1 April 2018, replacing the long-standing Section 10(38) exemption that had operated since the introduction of STT in 2004. As of the post-23 July 2024 regime introduced by the Finance (No. 2) Act, 2024, LTCG under Section 112A is taxed at 12.5 per cent on gains above an annual exemption threshold of Rs 1.25 lakh, with no indexation benefit. The section operates alongside Section 111A (short-term capital gains on the same asset class at 20 per cent) and the broader capital gains tax in India framework.

The reintroduction of LTCG on listed equity through Section 112A in 2018 was politically and economically contentious. For 14 years (2004 to 2018), long-term equity gains had been exempt under Section 10(38), with the implicit policy bargain that the broad-based STT (introduced in 2004) substituted for the LTCG tax. Investors had structured long-horizon equity portfolios on the assumption of permanent exemption. To avoid retrospective taxation of accrued pre-2018 gains, Section 112A was accompanied by a grandfathering rule under Section 55(2)(ac) , which substitutes the higher of the actual cost and the 31 January 2018 fair market value (FMV) as the deemed cost of acquisition for assets acquired on or before that date. The grandfathering rule has the effect of treating all pre-1 February 2018 appreciation as outside the taxable base while preserving prospective taxation of post-31 January 2018 gains.

The Finance (No. 2) Act, 2024, effective 23 July 2024, made two consequential amendments to Section 112A: the LTCG rate was raised from 10 per cent to 12.5 per cent, and the annual exemption threshold was raised from Rs 1 lakh to Rs 1.25 lakh. The grandfathering mechanism under Section 55(2)(ac) was not amended; the post-2024 rates apply to the residual taxable gain after the FMV substitution. Section 112A is the principal LTCG provision affecting Indian retail equity investors and equity-MF unit-holders; its annual revenue contribution to the central government exceeds Rs 1 lakh crore as of FY 2024-25.

Statutory framework

Insertion and amendments

Section 112A was inserted into the Income Tax Act, 1961 by the Finance Act, 2018, with effect from assessment year 2019-20 (financial year 2018-19). The text was substantially amended by the Finance (No. 2) Act, 2024 to update the rate and threshold. The principal statutory anchors are:

Section 112A operates alongside related sections including Section 111A (STCG on listed equity and equity-oriented MF), Section 112 (LTCG on other capital assets), Section 50AA (specified mutual fund regime under Finance Act 2023), and Section 115BBH (virtual digital asset gains under Finance Act 2022).

Text and structure

Section 112A is structured into seven sub-sections:

The reference to “equity-oriented fund” is the gateway condition for equity-MF gains to fall under Section 112A; the definition aligns with the SEBI categorisation framework (more than 65 per cent of investible assets in domestic equity shares of listed companies).

Charging provision

Scope of applicability

Section 112A applies to long-term capital gains arising from the transfer of:

1. Equity shares listed on a recognised stock exchange in India, on which STT has been paid on both acquisition and transfer.
2. Units of equity-oriented funds (defined as funds investing at least 65 per cent of investible assets in equity shares of domestic listed companies). The category covers SEBI Large Cap, Mid Cap, Small Cap, Multi Cap, Flexi Cap , Focused, Value or Contra, ELSS , Sectoral or Thematic, Dividend Yield, and Large and Mid Cap funds, plus Aggressive Hybrid and Arbitrage funds where the equity threshold is met.
3. Units of business trusts (Real Estate Investment Trusts and Infrastructure Investment Trusts), under specified conditions, as added by Finance Act 2018 read with subsequent amendments.

Long-term holding requirement

The asset must be held for more than 12 months to qualify as a long-term capital asset under Section 2(42A) read with Section 112A. The 12-month threshold is consistent with the broader holding-period framework under the post-2024 regime. For assets acquired through inheritance or gift, the previous owner’s holding period is included in the computation under Section 49(1).

STT condition

A key condition for Section 112A applicability is that Securities Transaction Tax (STT) must have been paid on:

• Both acquisition and sale, in the case of equity shares.
• The sale alone, in the case of equity-oriented MF units (since STT is not levied on MF subscription; only on redemption).

The STT condition is the gateway test that distinguishes Section 112A treatment from the residual Section 112 treatment (which applies at the same 12.5 per cent rate post-2024 but without the Rs 1.25 lakh exemption threshold).

Exceptions to the STT-on-acquisition requirement

Under Section 112A(4), the Central Government has notified specific exceptions to the STT-on-acquisition requirement, primarily through CBDT Notification No. 60 of 2018 dated 1 October 2018 and subsequent updates. The exceptions cover acquisitions where STT could not have been paid by design:

• IPO allotment: Shares acquired through an initial public offering allotment.
• FPO allotment: Shares acquired through a follow-on public offer.
• Rights issue, bonus issue: Shares received pursuant to corporate actions on existing holdings.
• ESOP exercise: Shares received through employee stock option scheme exercise (the perquisite tax under Section 17 having been paid).
• Scheme of amalgamation, demerger, reconstruction: Shares received under court- or NCLT-approved schemes.
• Inheritance and gift from specified relatives: Shares received through transmission or gift under Section 47 transactions not regarded as transfer.
• Mutual fund switch: Units acquired through an intra-AMC switch (no separate STT paid on the new units).

These exceptions ensure that Section 112A applies to legitimately acquired listed equity even where STT was not technically paid at acquisition.

Tax rate and exemption threshold

Post-23 July 2024 regime

Under the Finance (No. 2) Act, 2024, effective for sales on or after 23 July 2024:

• LTCG rate: 12.5 per cent on gains exceeding the exemption threshold.
• Annual exemption threshold: Rs 1.25 lakh per financial year, aggregated across all Section 112A LTCG.
• No indexation: Section 112A does not allow indexation of cost of acquisition.
• No basic exemption limit: Section 112A LTCG is taxed at the flat 12.5 per cent rate; it is not added to the taxpayer’s regular income and does not benefit from the basic exemption limit available for other income.

Pre-23 July 2024 regime

For sales before 23 July 2024 (during financial year 2024-25 up to 22 July 2024 and earlier years from financial year 2018-19):

• LTCG rate: 10 per cent.
• Annual exemption threshold: Rs 1 lakh per financial year.
• All other terms (STT condition, grandfathering, no indexation) unchanged.

Surcharge and cess

The Section 112A LTCG is subject to applicable surcharge (based on the taxpayer’s total taxable income) and Health and Education Cess at 4 per cent. The effective tax rate for the highest surcharge bracket is approximately:

• Pre-23 July 2024: 10 per cent base + 15 per cent surcharge + 4 per cent cess = approximately 11.96 per cent.
• Post-23 July 2024: 12.5 per cent base + 15 per cent surcharge + 4 per cent cess = approximately 14.95 per cent.

The surcharge structure under the post-2024 regime preserved the differential rates for high-income taxpayers.

Computation

Step-by-step computation

The Section 112A LTCG computation proceeds as follows:

1. Determine the holding period: Confirm the asset was held for more than 12 months from acquisition to transfer.
2. Confirm STT condition: Verify that STT was paid on both acquisition (with exceptions) and sale.
3. Compute full value of consideration: The sale price received, excluding STT and brokerage.
4. Determine cost of acquisition:
   • For assets acquired after 31 January 2018: the actual purchase price.
   • For assets acquired on or before 31 January 2018: the higher of the actual purchase price and the 31 January 2018 fair market value , subject to the cap that the deemed cost cannot exceed the sale consideration.
5. Compute the gain: Sale consideration minus deemed cost of acquisition.
6. Aggregate across all Section 112A transactions in the financial year.
7. Apply the exemption threshold: Subtract the Rs 1.25 lakh annual exemption.
8. Apply the rate: 12.5 per cent on the residual gain.
9. Add surcharge and cess: As applicable to the taxpayer’s income level.

Worked examples

Example 1: Post-2024 equity sale with grandfathering

An investor purchased 1,000 shares of a listed company in 2015 at Rs 200 per share (total cost Rs 2,00,000). The 31 January 2018 FMV was Rs 350 per share. The investor sold 1,000 shares in August 2024 at Rs 800 per share (sale consideration Rs 8,00,000).

Example 2: Equity-MF redemption, post-2024

An investor invested Rs 5,00,000 in an equity-oriented mutual fund in March 2022 at a NAV of Rs 100 per unit (5,000 units). The investor redeemed all 5,000 units in October 2024 at a NAV of Rs 175 per unit.

No grandfathering applies because the units were acquired after 31 January 2018.

Example 3: SIP redemption with FIFO

An investor ran a monthly SIP of Rs 10,000 in an equity-MF for 30 months from January 2022 to June 2024. In August 2024 the investor redeemed 50 per cent of the units. Under the FIFO (first-in-first-out ) rule, the first 15 months’ units are deemed redeemed first.

The first 15 months’ units were acquired during January 2022 to March 2023. The earliest 9 months’ units were held for more than 12 months at the time of redemption (long-term, Section 112A applies); the next 6 months’ units were held for less than 12 months (short-term, Section 111A applies). Each month’s units are treated as a separate acquisition for holding-period computation. The detailed FIFO computation is treated at the SIP taxation FIFO reference.

Reporting in the income tax return

Schedule 112A

Section 112A transactions are reported in Schedule 112A of ITR-2 or ITR-3 where the taxpayer has business income. Schedule 112A requires scrip-wise disclosure for each transaction:

The e-filing portal’s pre-filled return data populates Schedule 112A automatically using:

• Stock-exchange-sourced reporting through broker capital gains statements (Zerodha ITR capital gains statement , how to download capital gains statement on Zerodha ).
• RTA-sourced reporting for mutual fund redemptions through the CAMS-KFin capital gains statement and the mutual fund ITR capital gains statement .
• AIS reconciliation data via the Annual Information Statement .

The taxpayer must validate the pre-filled data, particularly the 31 January 2018 FMV for grandfathered holdings, before submission.

Aggregation rule

The Rs 1.25 lakh exemption applies on an aggregate basis across all Section 112A LTCG in the financial year. A taxpayer with LTCG from multiple equity-MF redemptions and direct-equity sales must aggregate all Section 112A gains across the year and apply the single annual exemption to the total.

Loss set-off

Long-term capital losses under Section 112A may be set off against:

• Other long-term capital gains in the same year (under Section 70).
• Future long-term capital gains, with carry-forward for up to 8 years (under Section 74).

LTCG losses cannot be set off against short-term capital gains or against any other head of income.

Anti-abuse provisions

Bonus stripping

Section 112A(6) contains an anti-abuse provision against bonus stripping (the practice of buying shares before a bonus issue, claiming a capital loss on the resulting low-cost-basis original holding after the ex-bonus date, while continuing to hold the bonus shares with a zero cost basis). The anti-abuse provision integrates with the Income Tax Act’s broader Section 94(7) and Section 94(8) anti-abuse rules.

Dividend stripping

A parallel anti-abuse mechanism under Section 94(7) addresses dividend stripping (buying shares to capture an upcoming dividend and selling at a loss after the ex-dividend date). The two anti-abuse provisions together close the principal route for converting taxable dividend income into capital losses.

GAAR overlap

The General Anti-Avoidance Rule (GAAR), introduced from 1 April 2017, provides a broader anti-abuse mechanism that can re-characterise structured transactions designed primarily to obtain Section 112A benefits in artificial ways. GAAR application has been limited in practice but remains a regulatory backstop.

Specified persons and special cases

Foreign portfolio investors

Foreign portfolio investors (FPIs) registered with SEBI under the SEBI (Foreign Portfolio Investors) Regulations, 2019, are treated as Specified Persons under Section 112A(5) for certain operational purposes. The general rate and threshold apply, but the TDS framework under Section 195 may apply on the gain payment.

Non-resident Indians

NRIs subscribing to and redeeming equity-MF units are subject to Section 112A on the gain, with TDS deducted under Section 195 at the time of redemption. The post-2024 TDS rate is 12.5 per cent on the LTCG portion (subject to the Rs 1.25 lakh exemption being applied at the time of return filing rather than at TDS). DTAA relief may be available where applicable.

Listed bonds and debentures

Listed bonds and debentures are not eligible for Section 112A treatment, even where STT may be paid (note that STT does not generally apply to debt instruments). LTCG on listed bonds and debentures is taxed under Section 112 at 12.5 per cent without indexation, without any equivalent of the Rs 1.25 lakh exemption.

REIT and InvIT units

Units of business trusts (REITs and InvITs) listed on a recognised stock exchange with STT paid on transfer are eligible for Section 112A treatment for the LTCG on transfer. The holding-period threshold for REIT and InvIT units was harmonised at 12 months under the Finance (No. 2) Act, 2024.

Legislative history

2018 reintroduction

The Finance Act, 2018 reintroduced LTCG on listed equity through Section 112A at the rate of 10 per cent above an annual exemption of Rs 1 lakh, effective 1 April 2018. The reintroduction was politically and economically contentious:

• The 2004 Section 10(38) exemption had been in place for 14 years, with investors having structured long-horizon portfolios on the assumption of permanent exemption.
• The simultaneously-introduced grandfathering rule under Section 55(2)(ac) was the policy mechanism for avoiding retrospective taxation.
• The reintroduction was justified on revenue grounds (estimated Rs 3,67,000 crore in cumulative LTCG over 2004 to 2017) and on parity grounds (LTCG treatment for equity was structurally different from other asset classes).

2024 rate and threshold update

The Finance (No. 2) Act, 2024, effective 23 July 2024, made two consequential amendments:

• Rate raised from 10 per cent to 12.5 per cent: Consistent with the broader 2024 capital gains harmonisation that brought the LTCG rate to 12.5 per cent across asset classes (with limited transition exception for land and building under Section 112).
• Threshold raised from Rs 1 lakh to Rs 1.25 lakh: A partial offset to the rate increase, indexed in a one-off manner rather than indexed annually.

The grandfathering mechanism under Section 55(2)(ac) was not amended in 2024; the post-2024 rates apply to the residual taxable gain after the FMV substitution.

Comparison with Section 111A

The companion provision Section 111A governs short-term capital gains on the same asset class (listed equity and equity-oriented MF with STT paid on both legs):

Comparison with Section 112

Section 112 (LTCG on other capital assets) applies to LTCG arising from transfers not covered by Section 112A:

The structural distinction is the Rs 1.25 lakh annual exemption under Section 112A, which is not available under Section 112.

Recent developments

Post-2024 reform implementation

The Finance (No. 2) Act, 2024 amendments to Section 112A came into effect on 23 July 2024. The mid-year effective date produced operational issues for sales straddling the transition:

• Sales on or before 22 July 2024: Old rate (10 per cent) and threshold (Rs 1 lakh).
• Sales on or after 23 July 2024: New rate (12.5 per cent) and threshold (Rs 1.25 lakh).

The transition rule is consistent with the standard Income Tax Act approach to amendment effective dates; CBDT issued clarificatory circulars in late 2024 addressing the principal interpretive questions.

AIS integration

The Annual Information Statement (AIS) framework now captures Section 112A LTCG at the per-transaction level for both broker-sourced equity transactions and RTA-sourced MF redemptions. The pre-filled Schedule 112A in the income tax return draws from the AIS dataset, substantially reducing manual reporting burden for investors.

Pre-filled return improvements

The 2024 to 2025 enhancements to the e-filing portal’s pre-filled return have substantially expanded the auto-populated Schedule 112A. For most investors holding equity and equity-MF through SEBI-regulated intermediaries, the pre-filled Schedule 112A arrives nearly complete, with the investor required only to validate the 31 January 2018 FMV for grandfathered holdings and to confirm the FIFO computation for SIP redemptions.

Tax-loss harvesting platforms

The post-2024 rate increase has produced increased investor interest in tax-loss harvesting strategies. Platforms including Kuvera and ET Money offer automated tax-loss-harvesting features that compute the optimal redemption to offset LTCG under Section 112A.

REIT and InvIT inclusion clarification

The Finance (No. 2) Act, 2024 included clarificatory amendments confirming that listed REIT and InvIT units fall within Section 112A treatment under prescribed conditions. The amendments closed an interpretive gap that had existed since the original Section 112A insertion in 2018.

Criticism and debates

Rate increase impact

The 25 per cent relative increase in the LTCG rate (from 10 per cent to 12.5 per cent) under the Finance Act 2024 has been argued by industry to discourage long-term equity holding. The counter-argument is that the rate remains modest in international comparison and is offset by the increase in the exemption threshold.

Grandfathering FMV cap

The cap that the deemed cost cannot exceed the sale consideration has been criticised on policy grounds. In situations where the post-2018 sale price falls below the 31 January 2018 FMV, the cap converts the deemed cost into the sale price, producing zero capital gain rather than a deemed loss. Industry commentary has periodically suggested removing the cap, but no such amendment has been notified.

Section 112A versus Section 112 anomaly

The structural anomaly that Section 112 (LTCG on other capital assets) imposes the same 12.5 per cent rate without the Rs 1.25 lakh exemption has been argued to be inequitable. The counter-argument is that the STT condition under Section 112A represents an additional implicit tax, justifying the exemption.

Anti-abuse rule complexity

The interaction of Section 112A with the bonus-stripping and dividend-stripping anti-abuse rules (Sections 94(7) and 94(8)) and with GAAR produces operational complexity for genuine multi-step transactions. The CBDT has issued clarificatory circulars but residual interpretive ambiguity persists.

See also

• Capital gains tax in India
• Section 111A
• Grandfathering rule for LTCG
• LTCG equity mutual fund Section 112A
• STCG equity mutual fund Section 111A
• Equity MF grandfathering of January 2018
• How to compute LTCG with grandfathering on Zerodha
• Annual Information Statement (AIS)
• Mutual fund
• Mutual fund industry in India
• SEBI scheme rationalisation circular 2017
• Securities Transaction Tax
• Mutual fund stamp duty
• STT mutual fund equity
• SEBI debt mutual fund tax 2023
• Debt MF indexation removal 2023
• Arbitrage fund taxation
• Flexi Cap mutual fund in India
• ELSS mutual fund in India
• Aggressive Hybrid mutual fund
• Arbitrage mutual fund in India
• ITR-2
• ITR-3
• CAMS-KFin capital gains statement
• Mutual fund ITR capital gains statement
• Zerodha ITR capital gains statement
• How to download capital gains statement on Zerodha
• SIP taxation FIFO
• NRI MF TDS Section 195
• SEBI Investment Management Department
• Kuvera
• ET Money

References

1. Income Tax Act, 1961, Section 112A, as inserted by Finance Act, 2018 and amended by Finance (No. 2) Act, 2024.
2. Income Tax Act, 1961, Section 55(2)(ac), grandfathering provision under Section 112A.
3. Income Tax Act, 1961, Section 10(38) (since repealed), exemption of LTCG on equity (2004 to 2018).
4. Income Tax Act, 1961, Sections 45, 48, 49, 70, 74, 94(7), 94(8), 111A, 112, related provisions.
5. Finance Act, 2018, Sections 27 and 28, insertion of Section 112A and Section 55(2)(ac).
6. Finance (No. 2) Act, 2024, Sections 51 and 52, amendment of Section 112A rate and threshold.
7. CBDT Notification No. 60/2018 dated 1 October 2018, exceptions to STT-on-acquisition requirement.
8. CBDT Circular No. 2/2018 and subsequent circulars on Section 112A operation.
9. CBDT FAQ on Section 112A, Central Board of Direct Taxes, February 2018 and post-2024 updates.
10. AMFI NAV history data for 31 January 2018, Association of Mutual Funds in India.
11. National Stock Exchange of India, historical data portal for 31 January 2018 highest prices.