Section 112A is the law that governs tax on your stock market and equity mutual fund profits — specifically, Long-Term Capital Gains (LTCG) on listed equity shares, units of equity-oriented funds, and business trust units. Think of Mr. Sharma who bought 500 shares of Infosys two years ago and just sold them through NSE. That profit? Section 112A is what decides his tax bill.
Before Budget 2018, such gains were completely tax-free under Section 10(38). The government brought them back into tax but kept it investor-friendly: only gains exceeding ₹1.25 lakh (amended by Finance Act 2024 — earlier it was ₹1 lakh) are taxed, at a flat 10% without indexation. This section overrides the general LTCG provisions of Section 112. Three conditions must all be satisfied: (1) the asset is a listed equity share, equity-oriented mutual fund unit, or business trust unit; (2) it's held for more than 12 months (making it long-term); and (3) STT (Securities Transaction Tax) has been paid — on both acquisition and transfer for equity shares, but only on transfer for mutual fund units. If STT wasn't paid (e.g., off-market deals), Section 112A won't apply and the gain gets taxed under regular Section 112 at 20% with indexation.
There's a useful relief for resident individuals and HUFs: if your non-LTCG income falls below the basic exemption limit (₹2.5 lakh under old regime), you can use that shortfall to reduce your taxable LTCG — effectively stretching the exemption further. Two important deduction rules that trip up students: Chapter VI-A deductions (80C, 80D, etc.) are NOT allowed against 112A gains — they reduce only the remaining income. And Section 87A rebate is not available against the tax computed on 112A gains. The STT condition is relaxed only for transfers on a recognised stock exchange located in an IFSC where consideration is in foreign currency. This section is asked frequently as a 4–6 mark question in exams — either as a standalone LTCG computation or embedded in a full total income problem.
Example 1 — Basic 112A computation
Mr. Arjun (resident, 35 years) sells 2,000 listed equity shares (held for 20 months). Sale price: ₹400/share, purchase price: ₹225/share. STT paid on both legs. His salary income is ₹9,00,000. Compute his tax liability (old regime, AY 2026-27).
| Step | Amount |
|---|---|
| LTCG = (₹400 − ₹225) × 2,000 | ₹3,50,000 |
| Less: Exemption under 112A | ₹1,25,000 |
| Taxable LTCG | ₹2,25,000 |
| Tax on LTCG @ 10% | ₹22,500 |
Tax on salary income (₹9,00,000) at slab rates:
- Up to ₹2,50,000 → Nil
- ₹2,50,001–₹5,00,000 → 5% × ₹2,50,000 = ₹12,500
- ₹5,00,001–₹9,00,000 → 20% × ₹4,00,000 = ₹80,000
- Tax on salary = ₹92,500
Total income tax = ₹92,500 + ₹22,500 = ₹1,15,000
Add: Health & Education Cess @ 4% = ₹4,600
Total Tax Payable = ₹1,19,600
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Example 2 — Basic exemption limit adjustment (resident individual)
Ms. Rekha (resident individual) has interest income of ₹1,60,000 and LTCG on an equity mutual fund of ₹2,00,000 (STT paid on transfer). Compute tax.
| Step | Amount |
|---|---|
| Shortfall from basic exemption = ₹2,50,000 − ₹1,60,000 | ₹90,000 |
| Adjusted LTCG (₹2,00,000 − ₹90,000 shortfall) | ₹1,10,000 |
| Less: ₹1,25,000 exemption (₹1,25,000 > ₹1,10,000, so full gain exempt) | ₹1,10,000 |
| Taxable LTCG | ₹0 |
| Tax on interest income (₹1,60,000 < ₹2,50,000 slab) | ₹0 |
Total Tax Payable = ₹0
Note: The shortfall mechanism effectively shields Rekha's entire LTCG from tax.
📖 Bare Act text — Section 112A, Income Tax Act 1961
(click to expand)
(1) Notwithstanding anything contained in section 112, the tax payable by an assessee on his total income shall be determined in accordance with the provisions of sub-section (2), if— (i) the total income includes any income chargeable under the head "Capital gains"; (ii) the capital gains arise from the transfer of a long-term capital asset being an equity share in a company or a unit of an equity oriented fund or a unit of a business trust; (iii) securities transaction tax under Chapter VII of the Finance (No.2) Act, 2004 has,— (a) in a case where the long-term capital asset is in the nature of an equity share in a company, been paid on acquisition and transfer of such capital asset; or (b) in a case where the long-term capital asset is in the nature of a unit of an equity oriented fund or a unit of a business trust, been paid on transfer of such capital asset. (2) The tax payable by the assessee on the total income referred to in sub-section (1) shall be the aggregate of— (i) the amount of income-tax calculated on such long-term capital gains exceeding one lakh rupees at the rate of ten per cent.; and (ii) the amount of income-tax payable on the total income as reduced by the amount of long-term capital gains referred to in sub-section (1) as if the total income so reduced were the total income of the assessee: Provided that in the case of an individual or a Hindu undivided family, being a resident, where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, the long-term capital gains, for the purposes of clause (i), shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax. (3) The condition specified in clause (iii) of sub-section (1) shall not apply to a transfer undertaken on a recognised stock exchange located in any International Financial Services Centre and where the consideration for such transfer is received or receivable in foreign currency. (4) The Central Government may, by notification in the Official Gazette, specify the nature of acquisition in respect of which the provisions of sub-clause (a) of clause (iii) of sub-section (1) shall not apply. (5) Where the gross total income of an assessee includes any long-term capital gains referred to in sub-section (1), the deduction under Chapter VI-A shall be allowed from the gross total income as reduced by such capital gains. (6) Where the total income of an assessee includes any long-term capital gains referred to in sub-section (1), the rebate under section 87A shall be allowed from the income-tax on the total income as reduced by tax payable on such capital gains. Explanation.—For the purposes of this section,— (a) "equity oriented fund" means a fund set up under a scheme of a mutual fund specified under clause (23D) of section 10 and,— (i) in a case where the fund invests in the units of another fund which is traded on a recognised stock exchange,— (A) a minimum of ninety per cent. of the total proceeds of such fund is invested in the units of such other fund; and (B) such other fund also invests a minimum of ninety per cent. of its total proceeds in the equity shares of domestic companies listed on a recognised stock exchange; and (ii) in any other case, a minimum of sixty-five per cent. of the total proceeds of such fund is invested in the equity shares of domestic companies listed on a recognised stock exchange: Provided that the percentage of equity shareholding or unit held in respect of the fund, as the case may be, shall be computed with reference to the annual average of the monthly averages of the opening and closing figures; (b) "International Financial Services Centre" shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005; (c) "recognised stock exchange" shall have the meaning assigned to it in clause (ii) of Explanation 1 to clause (5) of section 43.