The ₹1.25 lakh limit on long-term equity gains: how section 112A works

You hold listed shares or equity mutual fund units that have gained in value. You have heard that the first ₹1.25 lakh of long-term gain each year is not taxed, and you want to know what the law actually says. This article explains the statute so that you can read your own numbers. It is general information, not advice on whether to sell or buy anything.

The short answer

Under section 112A of the Income-tax Act, 1961, tax on long-term capital gains from listed equity shares, equity oriented fund units and business trust units is calculated only on the gains "exceeding one lakh twenty-five thousand rupees" (section 112A(2)(i), Income-tax Act, 1961). For a transfer on or after 23 July 2024 the rate on that excess is "twelve and one-half per cent" (section 112A(2)(i)(b), Income-tax Act, 1961).

The Income-tax Act, 2025 carries the same rule into section 198: tax is "income-tax calculated on such long-term capital gains exceeding ₹ 125000 at the rate of 12.5%" (section 198(2)(a), Income-tax Act, 2025). The Act of 2025 applies from 1 April 2026, so sales in tax year 2026-27 onwards fall under it; earlier years stay under the 1961 Act. The two sections are linked in the official 1961-to-2025 mapping (section 112A maps to section 198).

So the first ₹1.25 lakh of eligible long-term gain is not taxed, and only the part above it is taxed at 12.5%. That is not a deduction from your income or a separate exemption section. It is built into how the tax is calculated.

Which gains count

Section 112A does not cover every gain on every asset. All of these must be true (section 112A(1), Income-tax Act, 1961; section 198(1), Income-tax Act, 2025):

• The income is chargeable under the head "Capital gains".
• The gain comes from transferring a long-term capital asset that is an equity share in a company, a unit of an equity oriented fund, or a unit of a business trust.
• Securities transaction tax (STT) has been paid. For an equity share, STT must have been paid "on acquisition and transfer". For a unit of an equity oriented fund or business trust, STT must have been paid on transfer.

A few points follow from the words:

• Long-term. The Income-tax Act, 2025 says a short-term capital asset is one held for not more than twenty-four months, but for a security listed on a recognised stock exchange in India, a unit of the Unit Trust of India, a unit of an equity-oriented fund or a zero-coupon bond, "twelve months" is substituted (section 2(101), Income-tax Act, 2025). So a listed share or equity-oriented fund unit held longer than twelve months is long-term. A holding that is not long-term is short-term, and different rules apply (see below).
• STT on purchase. For shares, the STT condition covers the purchase as well as the sale. Section 112A(4) of the 1961 Act (section 198(5) of the 2025 Act) lets the Central Government notify types of acquisition where the purchase-side STT condition does not apply. Whether your shares fall in such a category is a question for a notification, not for this article.
• International Financial Services Centre. The STT condition does not apply to a transfer on a recognised stock exchange in an IFSC where payment is in foreign currency (section 112A(3), Income-tax Act, 1961; section 198(4), Income-tax Act, 2025).
• Equity oriented fund. The section defines it: a minimum of 65% of the fund's proceeds in equity shares of domestic companies listed on a recognised stock exchange, or 90% in units of another such fund that itself invests 90% that way (Explanation to section 112A, Income-tax Act, 1961; section 198(8), Income-tax Act, 2025). Whether a particular scheme meets that test is a matter for its documents.

The limit is per year and in aggregate

The proviso to section 112A(2)(i) in the 1961 Act says the limit of ₹1.25 lakh "shall apply on aggregate of the long-term capital gains" for transfers before and after 23 July 2024. In practice, in the 2024-25 year, which had sales on both sides of that date, one ₹1.25 lakh limit covered all the eligible gains. It was not ₹1.25 lakh for each period.

The figure applies to the gains of the year in which the transfers take place. The text of section 112A contains no provision carrying an unused part of the limit into a later year, and none letting you add an earlier year's unused part to this year's. If you want to know what happened to an unused limit, the answer on the text is that nothing carries over.

The limit is therefore part of how each year's tax is computed. Nothing in the text links one year's limit to another's.

A worked example

Take a resident individual with other income that already exceeds the basic exemption limit. In one year she sells listed shares, with STT paid on purchase and sale, held more than twelve months, for a long-term gain of ₹2,00,000 and no other capital gain.

• Gain: ₹2,00,000.
• Excess over the limit: ₹2,00,000 minus ₹1,25,000 = ₹75,000.
• Tax at 12.5% on ₹75,000: ₹9,375 (section 112A(2)(i)(b), Income-tax Act, 1961; section 198(2)(a), Income-tax Act, 2025). This is before any surcharge and cess, which this article does not cover.

If the gain were ₹1,25,000 or less, no tax would arise under this section on it. The limit is applied to the total of such gains for the year, not per share or per scheme.

When your other income is low

The law adjusts for a resident individual or Hindu undivided family whose other income does not reach the basic exemption limit. In that case, the long-term capital gains are reduced by the amount of the shortfall, and the remainder goes through the ₹1.25 lakh limit and the 12.5% rate (proviso to section 112A(2)(ii), Income-tax Act, 1961; section 198(3), Income-tax Act, 2025).

Deductions and rebate

Deductions under Chapter VI-A (1961 Act) or Chapter VIII (2025 Act) are allowed only from the gross total income reduced by these capital gains (section 112A(5), Income-tax Act, 1961; section 198(6), Income-tax Act, 2025). The section 87A rebate (section 156 in the 2025 Act) is computed on the tax on total income as reduced by the tax payable on these gains (section 112A(6), Income-tax Act, 1961; section 198(7), Income-tax Act, 2025). The rebate cannot be used against this tax.

The 31 January 2018 cost rule

Shares and fund units bought before 1 February 2018 have a special way to work out the cost. This is called grandfathering. In the Income-tax Act, 2025, section 90(7) says that for a long-term equity share or unit referred to in section 198, "acquired before the 1st February, 2018", the cost of acquisition is the higher of:

• the actual cost of acquisition, and
• the lower of the fair market value and the full value of consideration received on transfer.

Fair market value for a share listed on 31 January 2018 is "the highest price of the capital asset quoted on such exchange on that date" (section 90(8)(b)(i), Income-tax Act, 2025). If there was no trading that day, the highest price on the nearest earlier traded day is used. For an unlisted unit, it is the net asset value on that date. The statute adds other rules for shares not listed on that date.

The effect: gains that built up up to 31 January 2018 are generally left out of the computation, and a loss cannot be created by this rule, because the cost is capped at the sale price. Take a share bought in 2015 for ₹100 that traded at a high of ₹180 on 31 January 2018 and is sold for ₹250. Cost is the higher of ₹100 and the lower of ₹180 and ₹250, which is ₹180. The gain is ₹70, not ₹150. If it were sold for ₹150, the cost would be the higher of ₹100 and the lower of ₹180 and ₹150, which is ₹150, and the gain is nil.

For the 1961 Act, this rule sits in section 55(2)(ac). The official mapping links section 55 of the 1961 Act to section 90 of the 2025 Act. The Finance (No. 2) Act, 2024 amended clause (ac) only in its Explanation, adding an item (AA) for equity shares not listed on a recognised stock exchange on 31 January 2018, with effect from 1 April 2018 (section 22, Finance (No. 2) Act, 2024). The full wording of clause (ac) is not reproduced here; for a sale in a year governed by the 1961 Act, read the clause itself for your type of holding.

Short-term equity gains are different

Short-term gains on listed equity with STT paid are not in section 112A. They are in section 111A of the 1961 Act, where the Finance (No. 2) Act, 2024 (section 29) set the rate at fifteen per cent for a transfer before 23 July 2024 and twenty per cent for a transfer on or after that date. The Income-tax Act, 2025 equivalent is section 196, which taxes such short-term gains at 20% (section 196(1)(i), Income-tax Act, 2025). The ₹1.25 lakh limit applies only to long-term gains under section 198. It does not apply to short-term gains under section 196.

What not to assume

• Not every long-term gain qualifies. Gains on unlisted shares, on property or on gold are outside section 112A and have their own rules.
• Missing STT can take a sale out. If STT was not paid on purchase of a share, the gain is not under section 112A unless a notified category applies.
• Losses interact. How a long-term loss on equity is set off against these gains, and what can be carried forward, is governed by other provisions that this article has not covered. Check them before you count a loss against the limit.
• This is not advice. The article shows how the statute works. It does not say what any person should buy or sell.

What to do now

• Next step: to read your own position, list the sales that meet the conditions above (listed shares and equity-oriented fund units, held more than twelve months, STT paid) and total the gain after the cost rule.
• Which Act: for sales in tax year 2026-27 onwards, the Income-tax Act, 2025 governs, under section 198. For earlier years, section 112A of the 1961 Act governs.
• Consequence: tax is charged on the part above ₹1.25 lakh at 12.5% (section 112A(2)(i)(b), Income-tax Act, 1961; section 198(2)(a), Income-tax Act, 2025).

Have a CA review your facts before you act or file.

Frequently asked questions

Is the ₹1.25 lakh limit per share or per year?
It is an aggregate across all your eligible long-term gains for the year, not per share (section 112A(2), Income-tax Act, 1961; section 198(2), Income-tax Act, 2025).

Can I carry forward an unused part?
The text of section 112A and section 198 provides no carry-forward of an unused limit.

Does the limit apply to equity mutual funds?
Yes, for units of an equity oriented fund, with STT paid on transfer (section 112A(1)(iii)(b), Income-tax Act, 1961; section 198(1)(c)(ii), Income-tax Act, 2025).

Does the limit apply to short-term gains?
No. Short-term gains on listed equity fall in section 111A of the 1961 Act, or section 196 of the 2025 Act.

What rate applies above the limit?
12.5% for transfers on or after 23 July 2024 under the 1961 Act, and 12.5% under the 2025 Act (section 112A(2)(i)(b); section 198(2)(a)).

Which Act applies to my sale?
Sales on or after 1 April 2026 fall under the Income-tax Act, 2025. Earlier sales fall under the 1961 Act.

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