When you sell listed equity shares or equity mutual fund (MF) units after holding them for more than 12 months, the profit is Long-Term Capital Gains (LTCG). Section 112A is the specific rule that taxes these gains — not the general Section 112. The headline rate is 10%, but only on gains exceeding ₹1 lakh in a financial year. Crucially, no indexation benefit is available here — you take the actual cost, subtract it from the sale price, and whatever crosses ₹1 lakh gets taxed at 10%.
For Section 112A to apply, three conditions must be met simultaneously: (1) the asset is an equity share, a unit of an equity-oriented fund, or a unit of a business trust; (2) it qualifies as a long-term capital asset (held > 12 months); and (3) Securities Transaction Tax (STT) was paid — for equity shares, STT must be paid on both purchase and sale; for equity MF units or business trust units, STT only needs to be paid on sale. This STT condition is dropped if the trade happens on an IFSC recognised stock exchange with foreign currency consideration (think GIFT City).
Here's what trips students most in exams: the basic exemption proviso for resident individuals and HUFs. If your non-LTCG income (salary, interest, etc.) falls below the basic exemption limit (₹3 lakh for those under 60), the shortfall is first deducted from your LTCG — before you apply the ₹1 lakh threshold. This is a classic 4-mark question setup. Two more non-negotiables: Chapter VI-A deductions (80C, 80D, etc.) are computed on total income after removing these LTCG — they don't reduce your 112A gains directly. And the Section 87A rebate cannot be set off against the tax computed under 112A — even if your overall tax liability is under ₹12,500, that 10% on equity LTCG must be paid.
Example 1 — Basic case (Mr. Sharma, age 35, resident individual)
Mr. Sharma earns salary of ₹4,00,000 and makes LTCG of ₹3,50,000 on listed equity shares (STT paid on buy & sell, held 18 months).
| Income head | Amount |
|---|---|
| Salary | ₹4,00,000 |
| LTCG u/s 112A | ₹3,50,000 |
| Gross Total Income | ₹7,50,000 |
Step 1 — Tax on other income (₹4,00,000):
- Up to ₹3,00,000: Nil
- ₹3,00,001 to ₹4,00,000 @ 5%: ₹5,000
Step 2 — Tax on LTCG u/s 112A:
- LTCG: ₹3,50,000
- Less: ₹1,00,000 threshold: ₹1,00,000
- Taxable LTCG: ₹2,50,000 × 10% = ₹25,000
Step 3 — Total tax:
- ₹5,000 + ₹25,000 = ₹30,000
- Add: Health & Education Cess @ 4% = ₹1,200
- Total Tax Payable = ₹31,200
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Example 2 — Basic exemption proviso (Ms. Priya, age 28, resident individual)
Ms. Priya has interest income of ₹1,50,000 and LTCG u/s 112A of ₹3,50,000.
Step 1 — Apply the proviso:
- Basic exemption limit: ₹3,00,000
- Other income: ₹1,50,000
- Shortfall = ₹3,00,000 − ₹1,50,000 = ₹1,50,000
- Adjusted LTCG = ₹3,50,000 − ₹1,50,000 = ₹2,00,000
Step 2 — Tax on adjusted LTCG:
- ₹2,00,000 − ₹1,00,000 (threshold) = ₹1,00,000 × 10% = ₹10,000
Step 3 — Tax on other income:
- ₹1,50,000 < basic exemption → Nil
Step 4 — Total tax:
- ₹10,000 + Cess @ 4% = ₹10,400
Without the proviso, Priya would have paid: (₹3,50,000 − ₹1,00,000) × 10% = ₹25,000 + cess = ₹26,000. The proviso saves her ₹15,600.
📖 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.