Section 111A vs 112A: Capital Gains Tax on Shares

Every year, around July, the same question lands in my inbox: "Rao sir, I made some money in the market last year. How much tax do I actually owe?"

It's a fair question — and a serious one. Most people are perfectly happy to learn how to make a profit. The taxation part is where eyes glaze over. Section 111A, Section 112A, STT, STCG, LTCG — too many acronyms, too much fine print. So they either skip it, get a notice six months later, or pay their CA to figure it out without ever understanding what's going on.

That's a problem. Because once you understand these two sections, the whole tax picture for an equity investor or trader becomes simple. Almost embarrassingly simple. Let's walk through it.

Two Buckets. That's the Whole System.

Every profit you make from selling a listed share or an equity mutual fund falls into one of two buckets. Which bucket it lands in depends on one thing only — how long you held the asset before selling.

If you held it for 12 months or less, you've made a short-term capital gain. The tax rule for that is Section 111A.

If you held it for more than 12 months, you've made a long-term capital gain. The tax rule for that is Section 112A.

That's the whole logic. Two sections, two buckets, one clock. Everything else is detail.

One thing to flag right up front: at exactly 12 months, you're still in short-term territory. Long-term treatment requires holding for more than 12 months — one extra day, at minimum. We'll come back to this.

The Rates You Used to Know Are Wrong

If you read an article on this topic written before July 2024, the numbers in it are out of date. The Union Budget 2024 made the biggest change to equity taxation since LTCG tax was first reintroduced in 2018.

Here's what shifted, effective for all sales made on or after 23 July 2024:

If you sold shares on, say, 10 July 2024, the old rates apply to that trade. If you sold on 25 July 2024, the new rates apply. The ITR forms now ask you to split your gains accordingly — so save your contract notes carefully.

Section 111A, Decoded

Section 111A covers the short-term side. The clock is exactly 12 months — and the boundary day belongs to the short-term side. Sell a share at the 11-month-and-29-day mark, and you're in 111A territory. Sell at exactly 12 months — same calendar date one year later — and you're still in 111A. Sell one day later, and you finally cross into 112A. That single day can save you a meaningful amount of tax. We'll get to that.

What 111A applies to

Section 111A is narrow. It only covers three specific asset types, and only when STT has been paid:

• Equity shares of a listed company, sold through a recognised stock exchange
• Units of an equity-oriented mutual fund (a fund that has at least 65% of its portfolio in domestic equity)
• Units of a business trust — REITs and InvITs

Everything else — debt mutual funds, gold, bonds, real estate, unlisted shares — is taxed under different sections at different rates. Don't confuse them.

The rate, simply

The rate is a flat 20% on the entire gain. It doesn't matter which tax slab you're in — whether you earn ₹5 lakh a year or ₹50 lakh — the STCG part of your income is taxed at 20%. Add 4% Health & Education Cess to that, and surcharge if applicable (capped at 15% for these gains).

The one trick: basic exemption limit

Here's a small relief that most people miss. If you're a resident individual or HUF and your total other income (salary, interest, business income) is below the basic exemption limit, you can use the unused part of that limit against your 111A gains.

Example: a homemaker with no other income makes ₹5 lakh in short-term equity gains during FY 2025-26. The new-regime basic exemption for FY 2025-26 is ₹4 lakh. Since she has no other income, ₹4 lakh of her STCG is absorbed against the exemption limit, and only the remaining ₹1 lakh is taxed at 20%. Net STCG tax: ₹20,000 instead of ₹1,00,000.

If she had earned ₹4 lakh or less of STCG with no other income, her tax bill would be zero. The exemption slab gets used first, the STCG fills the rest.

If you're working with figures from an earlier year, use that year's basic exemption limit instead — it was ₹3 lakh under the new regime until FY 2024-25, and ₹2.5 lakh under the old regime for most resident individuals.

Non-residents do not get this benefit. They pay 20% on the entire gain.

Section 112A, Decoded

Section 112A is where long-term equity investors live. The asset list is identical to 111A — listed shares, equity mutual funds, business trust units. The only difference is the holding period: more than 12 months.

And the rules are gentler. Two reasons.

The ₹1.25 lakh exemption

The first ₹1.25 lakh of long-term capital gains in a financial year is completely tax-free. This isn't a deduction you claim — it's a built-in carve-out. Only gains above ₹1.25 lakh get taxed.

If your LTCG for the year is ₹1.2 lakh, you owe zero tax. If it's ₹1.5 lakh, only the ₹25,000 above the limit is taxed.

This is the single most powerful planning lever for a long-term investor. Two earning spouses can together shield ₹2.5 lakh of equity gains per year, every year, completely tax-free.

The 12.5% rate

Above the ₹1.25 lakh exemption, the rate is a flat 12.5%. Again, no slab matters. Cess and surcharge apply on top (surcharge is capped at 15%).

And critically: no indexation benefit. Indexation lets you adjust your cost upward for inflation, reducing your taxable gain. For most long-term assets — gold, real estate, debt funds (with different rules) — indexation used to be allowed. For listed equity under Section 112A, it isn't. You pay 12.5% on the nominal gain.

Notice what just happened. Anand's gain of ₹3.5 lakh — if it had been short-term — would have attracted ₹70,000 in tax under Section 111A. As a long-term gain under 112A, the effective tax is ₹29,250.

The difference, ₹40,750, is what patient capital earns simply by being patient. That's the cost of selling one day before completing 12 months.

The Grandfathering Rule (For Pre-2018 Holdings)

Before 1 February 2018, long-term capital gains on listed equity were completely tax-free. Section 10(38), in its original form, made sure of it.

When the government brought LTCG tax back in 2018, the obvious question was: what about the years of gains people had already accumulated? Charging tax on gains earned before the law existed would feel unfair, even retrospective. The fix was the grandfathering rule.

The rule works through a clever cost-of-acquisition formula. For listed shares or equity MF units bought on or before 31 January 2018, your cost of acquisition is treated as the higher of:

• (a) the actual purchase price, and
• (b) the lower of: the Fair Market Value of the asset on 31 January 2018, and the sale price

Read that twice. It's a nested formula. The effect is that any appreciation between your purchase date and 31 January 2018 is shielded from tax — you only pay LTCG on the gain that accrued after 31 January 2018.

Two more things to know about the FMV used in this formula. First, the FMV is the highest price quoted on the NSE or BSE on 31 January 2018. Your broker's tax statement will usually have this figure pre-filled. Second, if the asset wasn't listed on 31 January 2018 — for example, an IPO that came after — the grandfathering benefit isn't available and a different cost-indexing formula applies.

The ITR forms require scrip-wise reporting of all transactions under Schedule 112A when grandfathering applies. That means you have to list every share or unit you sold, individually, with ISIN, purchase price, sale price, and FMV. Boring work, but unavoidable.

The Six Traps Most Investors Miss

The headline rates are simple. The trouble is in the corners. Here are the six edge cases that send retail investors to their CA in a panic.

1. STT is non-negotiable

Both Section 111A and 112A only apply if Securities Transaction Tax has been paid on the transaction. For shares, STT must have been paid on the sale; for 112A, it must have been paid on both purchase and sale (with specific carve-outs for IPOs, ESOPs, etc.).

Sell a share off-market — say, through a private transfer — and the lower 12.5% rate doesn't apply. The gain gets taxed under Section 112 (the generic LTCG section, no special rate), usually at 12.5% but without the ₹1.25 lakh exemption and without the equity-friendly treatment. Worse, for shares of unlisted companies, the rate is 12.5% but at slab in some cases. Always check whether STT was paid.

2. No Chapter VI-A deductions

You cannot reduce your 111A or 112A gain by claiming Section 80C (PPF, ELSS, life insurance), 80D (medical insurance), or any other Chapter VI-A deduction. Those deductions only reduce your other income — salary, interest, business income — not your special-rate capital gains.

3. No Section 87A rebate (with one fine-print note)

For Section 112A LTCG, the position is settled: the 87A rebate is not available against the tax payable on those gains. For Section 111A STCG, the practical position from FY 2025-26 onward is the same — the enhanced new-regime rebate (up to ₹60,000, making income up to ₹12 lakh effectively tax-free) explicitly excludes special-rate capital gains. For earlier assessment years there was litigation and conflicting interpretations between the ITR utility and the law, so taxpayers reopening prior-year returns should check the position of the day or consult a tax professional.

4. Capital loss set-off has its own logic

Capital losses don't go into the same pool as your regular losses. They follow their own rules:

• Short-term capital loss can be set off against both short-term and long-term capital gains in the same year.
• Long-term capital loss can only be set off against long-term capital gains, never against short-term.
• Unabsorbed losses can be carried forward for 8 assessment years, but only if you file your return on time.

This last point is the most expensive miss. If you have a sizeable capital loss in any year and you file your ITR after the due date, you forfeit the right to carry it forward. Eight years of potential set-off, gone.

5. Surcharge is capped, mercifully

For high-income earners, surcharge usually escalates — 10%, 15%, 25%, even 37% in the old regime. For income taxed under 111A, 112, and 112A, the maximum surcharge is capped at 15%. If you're in the ₹2-crore-plus bracket, this cap saves you a meaningful amount on your equity gains. It's an explicit policy choice to keep equity attractive to large investors.

6. Brokerage is deductible. STT is not.

This catches people every single year. When you compute your capital gain, you can deduct the brokerage, exchange transaction charges, and stamp duty paid on purchase — these are expenses incurred wholly and exclusively for the transfer.

What you cannot deduct is the STT itself. Section 40(a)(ib) of the Income Tax Act specifically disallows STT as an expense against capital gains. The logic is that the lower equity tax rates (20% and 12.5%) already factor in the STT paid; allowing it as a deduction on top would amount to a double benefit.

For traders reporting their income as business income (intraday, F&O), the rule flips — STT becomes a deductible business expense. But for anyone in the 111A or 112A bucket, ignore STT in your gain computation. Many investors get this wrong and slightly under-report their gains, which the AIS catches almost immediately these days.

A practical note: which ITR form?

If you have capital gains under Section 111A or 112A, you cannot use ITR-1. Most investors with these gains file ITR-2. If you also have business income — intraday or F&O treated as business — you'll need ITR-3. When the grandfathering rule applies to your 112A gains, you have to fill Schedule 112A with scrip-wise details: ISIN, name, units, sale price, purchase price, FMV on 31 January 2018. Tedious, but unavoidable.

The mistake I see most often is the opposite of tax avoidance — it's tax myopia. People obsess over the 5% or 7% they might save by changing their holding strategy, while ignoring the 30% or 50% returns they're leaving on the table by mistiming their entries and exits. Tax planning is a layer on top of good investing. It is not a substitute for it.

That's why our Ultimate Traders Program covers taxation alongside live investing and trading — because for a serious market participant, knowing the tax code is part of knowing the game.