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If you invest in stocks or mutual funds, you’ve probably heard the term “Long-Term Capital Gains,” or LTCG. But what does it actually mean? And how much tax do you need to pay on it? That’s where Section 112A of the Income Tax Act comes in.
This rule was reinstated in 2018 and altered how gains on listed shares and certain mutual funds are taxed. Earlier, long-term gains from such investments were completely tax-free. However, after the 2018 budget, a 10% tax was introduced, and now, in Budget 2024, it is 12.5% (a new rule under Section 112A)—although only above a certain threshold.
Now, this may sound a bit technical, but don’t worry—we’ll break it down for you in a simple way. In this blog, we’ll explain what Section 112A is all about, who it applies to, how much tax you’ll owe (if any), and how to avoid common mistakes while filing. We’ll also share tips on how you can reduce your tax using smart strategies that many investors miss.
Let’s start with the basics—what is a long-term capital gain, and why does it matter?
Let’s say you bought some shares or mutual fund units and held onto them for over a year. When you sell them and make a profit, that profit is referred to as a Long-Term Capital Gain (or LTCG). This only applies if you’ve kept the investment for more than 12 months in the case of listed equity shares or equity-oriented mutual funds.
Section 112A relates to the taxation of Long-Term Capital Gain (LTCG) on the sale of certain assets, primarily about equity shares, units of equity oriented mutual funds, and units of business trust.
Now, who exactly needs to worry about Section 112A? Not everyone, thankfully—but if you’re investing in the Indian stock market, chances are, it affects you.
You are eligible for section 112A under the following conditions:
So, if you bought 100 shares of a listed company and sold them after a year through a stock exchange (where STT is paid) and made a tidy profit, Section 112A applies to you. In simple terms, if you’re making money from listed stocks or equity mutual funds, and you’re doing it by the book, Section 112A is the tax rule that applies.
But if you sold unlisted shares or traded privately without going through the exchange, STT may not apply—and this section might not cover you.
From Budget 2024, the government states that if your LTCG exceeds the threshold of Rs. 1.25 lakh on listed equity shares, your investment is taxed at 12.5%. This means small investors still receive a decent tax break, while those making bigger profits contribute a fair share.
In simple terms: in case you gain Rs.90,000 as your annual long term capital gain, then you don’t need to pay any tax because the amount is under the limit of Rs 1.25 lakh. But if you you gain ₹1,50,000, you pay 12.5% tax on the ₹25,000 exceeding the ₹1.25 lakh limit.
Before 31st January 2018, long-term capital gains on certain shares and mutual funds were completely tax-free. When the government decided to start taxing them again, they also decided, “Hey, let’s not tax people for gains they already made before this new rule.” Fair enough, right?
To better understand the proposed amendment, given below is the further review of the LTCG implication in certain context:
| Particular | Implication |
| Purchase and sale before 31/1/2018 | Exempt under Section 10(38) |
| Purchase before 31/1/2018 Sale after 31/1/2018 but before 1/4/2018 |
Exempt under Section 10(38) |
| Purchase before 31/1/2018 Sale on or after 1/4/2018 |
LTCG taxable Gains accrued before 31/1/2018 exempt |
| Purchase after 31/1/2018 Sale on or after 1/4/2018 |
LTCG taxable |
Say you bought shares in 2016. Now you want to sell them in 2025.
Instead of calculating your profit from the day you bought them, you get to reset the purchase price using the market value as of January 31, 2018—but only if it benefits you.
Gains exceeding 1.25 lakh are taxed at 12.5%, and this rate applies without indexation. (Indexation is a way to adjust your purchase price for inflation, which usually lowers your tax burden—but Section 112A doesn’t allow that.)
This limit resets every financial year. So smart investors often use strategies to keep their gains just under ₹1.25 lakh annually—and avoid paying any tax.
Next, let’s tackle the grandfathering rule, a term that sounds old-school but is actually quite helpful.
Now don’t let the name throw you off—this isn’t about your grandpa’s old investment tricks. The Grandfathering Rule was introduced to ease the transition to the LTCG tax for investors when Section 112A took effect in 2018.
Here’s a simple version of the formula:
Cost of acquisition = Higher of your actual purchase price
OR
The lower of:
– Market value on January 31, 2018
– The selling price
It may sound complex, but it’s designed to ensure that profits earned before February 1, 2018, are not unfairly taxed.
So basically, the government is saying, “We’ll only tax what you’ve earned after this rule came into effect. Anything before that? You’re good.”
Next up—let’s look at a real-life example to make all this even more straightforward.
Let’s break it down with an example: Sometimes numbers explain things better than words—so let’s see how all this plays out in real life.
Imagine this:
So how do you calculate the capital gains?
Let’s plug it into the formula from the Grandfathering Rule:
According to the rule, your deemed purchase price will be the higher of your actual price (₹200) and the lower of the FMV (₹300) or sale price (₹400).
So, between ₹200 and ₹300 → we pick ₹300.
That means:
Now here’s the best part—since the gain is under ₹1.25 lakh, it’s completely tax-free under Section 112A.
No tax. Zero. Zilch: See? Not as scary as it seemed, right? Let’s now look at what you need to do when it’s time actually to report these gains while filing your return.
LTCL from a transfer made on or after April 1, 2018 will be allowed to be set-off against any other LTCGs and unabsorbed LTCL can be carried forward to subsequent eight years for set-off against LTCG.
Okay, so you’ve figured out your gains, now what? Time to file your taxes. However, don’t worry; this part is more about being cautious than complicated.
If you’ve earned long-term capital gains that fall under Section 112A, you’ll need to show them in your Income Tax Return (ITR). Here’s how to do it right:
1. Use the Correct ITR Form
If you’re an individual with capital gains, you’ll likely be using ITR-2 or ITR-3, depending on your income sources. If you only have a salary and some capital gains, ITR-2 should be suitable for you.
Fill in Schedule 112A
There’s a special section in the form called Schedule 112A—this is where you have to file all the details mentioned below:
Basically, all the information you used in that example we just walked through? This is where it goes.
2. Supporting Documents
While you’re not always asked for these, it’s smart to keep things like:
These may come in handy if the tax department ever asks for clarification.
3. Extra Careful with Numbers
Even small mistakes in gain calculation or mismatched dates can lead to notices or delays. Double-check everything. Or better yet—get a tax expert to review it.
If you take a few extra minutes to enter your details correctly, you’ll be sorted—no last-minute panic, no unwanted letters from the IT department.
Section 112A might seem pretty straightforward once you understand the basics, but trust us—many investors still trip up on the small stuff. These errors can either result in unnecessary tax liability or attract scrutiny from the tax department. Here are some common slip-ups to watch out for:
1. Ignoring the Grandfathering Rule
Some investors forget to apply the grandfathering clause when calculating LTCG. If your equity investment was bought before 1st February 2018, you must use the FMV as of 31st January 2018 in your cost calculation. Ignoring this can lead to overstated gains—and more tax than you actually owe.
2. Incorrect ITR Form Selection
Using the wrong return form is a classic mistake. For example, if you report capital gains in ITR-1 (which doesn’t allow it), your return could be rejected or marked defective. Always choose ITR-2 or ITR-3 if you have capital gains to report.
3. Missing STT Details
Section 112A only applies if the transaction is subject to Securities Transaction Tax (STT). This is common with stock exchange trades but not with off-market transactions. If STT wasn’t paid, claiming benefits under this section might land you in trouble.
4. Incomplete Schedule 112A Entries
Some people simply report the total gain without providing a breakdown. That’s not how it works. You need to mention the ISIN, quantity, acquisition date, FMV, sale price—everything. Leaving out even one field can lead to tax notices.
5. Skipping Proofs and Documents
It’s not mandatory to upload all documents when filing, but having them ready is essential. If your case gets flagged later, you should be able to show contract notes, demat statements, FMV records, and STT payments. No one likes scrambling to find papers after a notice arrives.
6. Mixing Short-Term and Long-Term Gains
This one’s tricky. If you mix up short-term capital gains (STCG) and LTCG in your return, you could end up paying the wrong tax rate or reporting the wrong figures altogether. Keep them separate, and double-check your holding period.
7. Forgetting About Loss Set-Off Rules
Many assume they can set off LTCG under Section 112A against any kind of capital loss. However, the rules are strict: only non-indexed long-term losses can be offset against this gain. Indexed losses or short-term losses won’t work here.
These mistakes are avoidable. All it takes is a bit of attention, and if needed, a brief consultation with a tax consultant. Better safe than sorry, especially when it comes to taxes.
Section 112A brought long-term capital gains on equity investments back into the tax net, but with a relatively friendly framework. The ₹1.25 lakh exemption, a flat 12.5% rate, and the grandfathering clause indicate that the government aimed to strike a balance between investor interests and revenue needs.
If you’re investing in listed shares or equity mutual funds, knowing how this section works isn’t just good tax hygiene—it’s smart investing. From calculating your gains correctly to selecting the correct ITR form, and from utilizing exemptions to maintaining proper records, a little care goes a long way.
At Mercurius, we understand the value of your hard-earned money and the importance of maximizing your gains. That’s why our team of experienced professionals, Chartered Accountants (CAs) and Tax Accountants, handles all your tax filing requirements in accordance with the Income Tax Act. We help you accurately calculate your gains to ensure you file correctly and save on taxes. If you require any further assistance, kindly click here
