Section 112A of Income Tax Act

In summary

Section 112A of the Income Tax Act, 1961 governed tax on eligible long-term capital gains from specified equity investments. From 1 April 2026, Section 198 of the Income Tax Act, 2025 provides the corresponding rules.

• The applicable LTCG tax rate for Tax Year 2026–27 is 12.5%.
• The first Rs. 1.25 lakh of eligible aggregate LTCG in a tax year is outside this special-rate taxation.
• The 12-month holding period applies to specified listed securities and eligible equity-oriented fund units.
• Securities Transaction Tax (STT) conditions apply to qualify for this tax treatment.
• Indexation is not available, but the grandfathering provision protects the acquisition-cost calculation for eligible investments acquired before 1 February 2018.
• Eligible long-term capital losses can be adjusted against long-term capital gains.

Budget 2026 did not change the 12.5% rate or Rs. 1.25 lakh threshold. Check the applicable tax year, investment category and STT conditions before calculating your capital gains tax.

The Finance Act, 2026 has not changed this rate or threshold. The provisions introduced through the Finance (No. 2) Act, 2024 continue to apply.

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Here are the key rules applicable for Tax Year 2026–27:

The Rs. 1.25 lakh threshold applies to the aggregate eligible gains from specified securities during the tax year, not separately to each share or mutual fund.

What about Budget 2026?

Budget 2026 did not announce a change to the Section 112A LTCG rate or exemption threshold. It increased STT on futures transactions from 0.02% to 0.05% from 1 April 2026. This change relates to derivative transactions and does not change the Section 198 tax rate on eligible long-term equity gains.

Section 112A remains relevant when dealing with tax years governed by the earlier Act. Section 536 of the Income-tax Act, 2025 provides the relevant repeal and transition rules for earlier tax years and pending proceedings.

The provision was introduced through the Finance Act, 2018 and applied from 1 April 2018.

Before Section 112A, eligible long-term capital gains from specified equity investments were exempt under Section 10(38) of the Income-tax Act, 1961, subject to the applicable conditions.

Section 112A replaced this broad exemption with a tax structure under which eligible gains above the prescribed annual threshold became taxable.

The tax treatment changed again in July 2024:

• Before 23 July 2024, the applicable rate was 10%.
• For transfers on or after 23 July 2024, the applicable rate increased to 12.5%.
• The annual threshold increased from Rs. 1 lakh to Rs. 1.25 lakh.

For the financial year 2024–25, the Rs. 1.25 lakh threshold applied to aggregate eligible gains across transfers made before and after 23 July 2024. The revised rate applied according to the transfer date.

You must hold eligible equity shares, equity-oriented mutual fund units or other specified securities for more than 12 months to qualify as long-term capital assets under the applicable holding-period rules.

The holding period is calculated from the date of acquisition to the date of transfer.

The 24-month holding period applies to most other capital assets transferred on or after 23 July 2024. The 12-month period continues for specified securities.

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For example, suppose you purchase listed equity shares on 1 June 2025 and sell them on 15 August 2026. Since you held them for more than 12 months, the gains can qualify as LTCG, subject to the other conditions.

How are long-term capital gains taxed under Section 198?

Eligible long-term capital gains exceeding the aggregate Rs. 1.25 lakh threshold are taxed at 12.5% under Section 198. This calculation is based on the eligible gains from specified investments during the tax year.

Consider this example:

Suppose you sell eligible listed equity shares and equity-oriented mutual fund units during Tax Year 2026–27.

Your aggregate gains from these investments are Rs. 2 lakh.

Calculation:

Taxable LTCG = Rs. 2,00,000 − Rs. 1,25,000 = Rs. 75,000.

Tax = Rs. 75,000 × 12.5% = Rs. 9,375.

Therefore, the basic capital gains tax is Rs. 9,375, before applicable surcharge and health and education cess. This example assumes no eligible capital losses, transfer expenses or adjustment of the basic exemption limit.

This provision was introduced when long-term capital gains on specified equity investments became taxable from 1 April 2018.

How is the grandfathered cost of acquisition calculated?

For eligible investments acquired before 1 February 2018, the cost of acquisition is generally the higher of:

1. The actual cost of acquisition.
2. The lower of the FMV as on 31 January 2018 and the sale consideration.

This calculation prevents investors from being taxed on the entire appreciation that had already accrued before the grandfathering date. It does not make every gain earned before 31 January 2018 automatically tax-exempt.

Suppose you purchased 500 listed equity shares on 1 June 2016 at Rs. 100 per share. Their FMV on 31 January 2018 was Rs. 150 per share. You sold them on 1 August 2026 at Rs. 200 per share.

Here is how the grandfathering calculation works:

Step 1: Calculate the actual purchase cost.

500 shares × Rs. 100 = Rs. 50,000.

Step 2: Calculate the FMV as on 31 January 2018.

500 shares × Rs. 150 = Rs. 75,000.

Step 3: Compare the FMV with the sale consideration.

• FMV on 31 January 2018: Rs. 75,000.
• Sale consideration: Rs. 1,00,000.
• Lower amount: Rs. 75,000.

Step 4: Determine the grandfathered cost.

The higher of the actual cost of Rs. 50,000 and the lower amount of Rs. 75,000 is Rs. 75,000.

Step 5: Calculate LTCG.

Your LTCG is Rs. 25,000 before eligible transfer expenses. Assuming you have no other eligible LTCG during the tax year, this gain falls within the annual Rs. 1.25 lakh threshold.

The same grandfathering principle applies to eligible equity-oriented fund units and business trust units acquired before 1 February 2018, with the relevant FMV determination based on the nature of the asset.

The reporting format depends on the tax year and the applicable return form.

Under the earlier Income-tax Act, 1961, Schedule 112A was used to report eligible LTCG from specified investments.

The schedule required details such as:

• ISIN (International Securities Identification Number).
• Name of the equity share or security.
• Number of shares or units sold.
• Full sale consideration.
• Cost of acquisition.
• FMV as on 31 January 2018, wherever grandfathering applied.
• Eligible expenses related to the transfer.

These details helped calculate the correct LTCG and apply the grandfathering provision.

What changes under the Income Tax Act, 2025?

For Tax Year 2026–27, you must follow the return forms and reporting requirements prescribed under the Income-tax Rules, 2026.

The Income Tax Department has clarified that the new ITR forms for Tax Year 2026–27 will be made available before their respective filing due dates. Therefore, do not assume that the older Schedule 112A will remain the exact reporting format under the new Act.

For returns relating to earlier assessment years, the relevant old ITR forms and schedules continue to apply.

Here is a timeline of the major changes:

The changes introduced in July 2024 continue to apply to eligible equity transactions during Tax Year 2026–27.

For Tax Year 2026–27, eligible gains exceeding Rs. 1.25 lakh are taxed at 12.5%, subject to the applicable STT and holding-period requirements. The grandfathering provision continues to protect the acquisition-cost calculation for eligible investments purchased before 1 February 2018.

Before selling your investments, calculate your aggregate LTCG, consider eligible capital losses and check the applicable tax conditions. Understanding these provisions can help you estimate your tax liability and plan your investments more effectively.