Long-Term Capital Gains On Shares

• Section 112A governs taxation of long-term capital gains on listed equity shares and equity-orientated mutual funds.

• LTCG above ₹1.25 lakh is taxed at 12.5% without indexation from 23 July 2024 onwards.

• The grandfathering clause protects gains accrued up to 31 January 2018 from taxation.

• Rebate under Section 87A is not available on tax payable under Section 112A.

Long-term capital gains on shares arise when listed equity shares or equity-orientated mutual funds are sold after being held for more than 12 months. These gains are taxed under Section 112A of the Income Tax Act. The rule applies only when Securities Transaction Tax (STT) has been paid on both purchase and sale.

This section was introduced to bring equity investments under the tax net while still offering a generous exemption and a relatively low tax rate compared to other income heads. It currently allows an annual exemption on gains up to ₹1 lakh, making long-term investing more tax-efficient for retail investors.

Section 112A deals with the taxation of long-term capital gains arising from the sale of listed equity shares, units of equity-oriented mutual funds, and units of business trusts. It applies only when Securities Transaction Tax (STT) has been paid on the acquisition and transfer of these assets.

Under this section, long-term capital gains exceeding ₹1.25 lakh in a financial year are taxed at a concessional rate, making it an important provision for equity investors. This structure encourages long-term participation in equity markets while keeping the tax impact relatively moderate.

Also Read: LTCG Tax: How to Save Long-Term Capital Gain Tax?

Long-term capital gain u/s 112A refers to profits earned from eligible equity investments held for more than 12 months and sold on a recognised stock exchange. It covers listed equity shares, equity-orientated mutual funds, and units of business trusts where STT is applicable.

These gains are taxed separately from regular income and do not allow indexation benefits or deductions under Chapter VI-A. However, a basic exemption threshold is available, making long-term equity taxation simpler and more predictable for investors.

Budget 2024 introduced a key change in the taxation rate of LTCG on shares.

1. Tax Rate Before 23 July 2024

LTCG on listed equity shares was taxed at 10% without indexation.

An exemption of ₹1.25 lakh was available for total annual LTCG.

2. Tax Rate On Or After 23 July 2024

LTCG on listed equity shares is taxed at 12.5% without indexation.

The ₹1.25 lakh exemption continues to apply annually.

Important Note: The ₹1.25 lakh exemption applies once per financial year and cannot be claimed separately for different periods. No changes to Section 112A LTCG taxation occurred in Budget 2025.

To qualify for taxation under Section 112A, certain conditions must be fulfilled.

1. Securities Transaction Tax (STT)

STT must be paid on both the purchase and sale of equity shares.

2. Mutual Funds And Business Trusts

For equity-orientated mutual funds and business trusts, STT must be paid at the time of sale.

3. Long-Term Holding Period

The asset must be held for more than 12 months.

4. No Chapter VI-A Deductions

Deductions like 80C, 80D, or 80G cannot be claimed against LTCG taxed under Section 112A.

Calculating LTCG under Section 112A involves a step-by-step approach.

1. Step 1: Gather Transaction Details

Compile all equity sale transactions from broker statements and cross-check with AIS.

2. Step 2: Classify Transactions

Separate gains into those made before 23 July 2024 and those made on or after that date.

3. Step 3: Compute Capital Gains

Deduct the purchase cost from the sale value for each category.

4. Step 4: Apply Exemption

Add total gains and reduce ₹1.25 lakh to arrive at taxable LTCG.

The grandfathering clause under Section 112A was introduced to protect long-term equity investors from being taxed on gains earned before the law came into effect. It ensures that only value created after the cut-off date is brought under the tax net.

This provision brings fairness and clarity to long-term capital gains taxation, especially for investors who had built portfolios before 2018.

1. What the grandfathering clause means

The clause shields investors from retrospective taxation on equity investments. Gains accrued up to 31 January 2018 are fully exempt, and only appreciation after this date is taxed at 12.5 per cent as per post-Budget 2024 rules.

2. Cost of acquisition rule

For shares bought before 31 January 2018, the cost of acquisition is taken as the higher of the actual purchase price or the Fair Market Value (FMV) as of 31 January 2018, subject to a cap at the selling price.

3. Example to understand taxation

If shares were bought for ₹100 in 2016, had an FMV of ₹150 on 31 January 2018, and were sold at ₹200 in 2026, the taxable gain is ₹50. The gain of ₹100 from 2016 to 2018 remains fully exempt.

4. Investments covered under this clause

The grandfathering benefit applies to listed equity shares, equity-orientated mutual funds, and units of business trusts that are held for more than 12 months.

5. Applicability in current financial years

The grandfathering clause continues to apply for FY 2025–26. There were no changes to this provision in Budget 2025, ensuring continuity and certainty for long-term investors.

An annual exemption of ₹1.25 lakh is available under Section 112A.

Example

If LTCG is ₹3,00,000:

Sold before 23 July 2024 → Tax = ₹17,500

Sold after 23 July 2024 → Tax = ₹21,875

Only gains exceeding ₹1.25 lakh are taxable.

Apart from the basic taxation framework, Section 112A also lays down specific rules for bonus and rights shares, as well as the treatment of long-term capital losses. Understanding these provisions helps investors plan taxes more efficiently and avoid surprises later.

1. LTCG on bonus and rights shares

For bonus or rights shares acquired before 31 January 2018, the fair market value on that date is considered the cost of acquisition. This ensures that gains earned before the introduction of long-term capital gains tax remain exempt and are not taxed retrospectively.

2. Set-off of long-term capital loss

Long-term capital losses can be set off only against long-term capital gains. They cannot be adjusted against short-term capital gains or regular income, making proper classification of gains and losses important.

3. Carry forward of long-term capital loss

If long-term capital losses are not fully utilised in the same year, they can be carried forward for up to eight assessment years. These carried-forward losses can be adjusted only against future long-term capital gains, allowing investors to manage tax liability over time.

FMV is determined as follows:

1. Listed Shares Traded On 31 Jan 2018

Highest price quoted on that day.

2. Listed Shares Not Traded On That Date

Highest price quoted on the nearest prior trading day.

3. Unlisted Units

Net asset value as of 31 January 2018.

Apart from calculating gains and losses, investors must also pay attention to reporting and rebate rules under Section 112A. Proper compliance helps avoid mismatches and unnecessary tax notices.

1. Reconciliation with AIS

The Income Tax Department receives transaction details directly from depositories and reporting entities. Always reconcile your capital gains figures with the Annual Information Statement (AIS) before filing your return to ensure accuracy and avoid compliance issues.

2. Rebate under Section 87A

The rebate available under Section 87A does not apply to long-term capital gains taxed under Section 112A. This means such gains are taxed separately, even if your overall income falls within the rebate threshold.

Smart planning can help reduce LTCG tax legally.

1. Tax Gain Harvesting

Book gains up to the exemption limit and reinvest to maintain market exposure.

2. Tax Loss Harvesting

Offset gains by selling loss-making investments.

Always consult a financial advisor before implementing tax harvesting strategies.

Understanding Section 112A helps investors plan exits, manage available exemptions, and reduce tax outgo in a legal manner. It brings clarity to how long-term equity gains are taxed. With the right timing, investors can make tax-efficient decisions without disrupting their investment strategy.

A clear understanding of LTCG rules also helps avoid reporting errors and unexpected tax demands. Staying updated with provisions like grandfathering, set-off rules, and AIS reconciliation ensures smoother compliance. This ultimately leads to stronger and more predictable post-tax returns.

To support informed investing and tax planning, solutions from Aditya Birla Capital offer access to investment products, wealth advisory, and financial planning tools. These offerings help investors align equity investments with tax efficiency and long-term financial goals in a structured way.