Overview: The Two Key Sections for Equity Taxation
Section 111A and Section 112A of the Income Tax Act are the two provisions that specifically govern the taxation of capital gains on listed equity shares and equity-oriented securities in India. Understanding these sections is essential because they provide concessional tax rates compared to the regular capital gains tax regime.
Section 111A deals with Short-Term Capital Gains on equity shares, units of equity-oriented mutual funds, and units of business trusts, where Securities Transaction Tax (STT) has been paid. The tax rate under this section is 20% (flat rate).
Section 112A deals with Long-Term Capital Gains on the same categories of assets, also with the STT condition. The tax rate is 12.5% on gains exceeding Rs 1.25 lakh per financial year.
Both sections were introduced to provide a simplified, lower-rate tax framework for equity market participants. Without these sections, short-term gains on stocks would be taxed at the individual's slab rate (potentially up to 30%), and long-term gains would be taxed under Section 112 at 20% with indexation or 10% without indexation.
The Finance Act 2024 revised both rates — Section 111A from 15% to 20%, and Section 112A from 10% to 12.5% — with effect from FY 2024-25. The LTCG exemption threshold was simultaneously raised from Rs 1 lakh to Rs 1.25 lakh.
Section 111A: Conditions for Applicability
Section 111A applies only when all of the following conditions are simultaneously met. If any condition is not satisfied, the gains fall outside Section 111A and are taxed under the regular provisions.
Condition 1: The asset must be an equity share in a company, or a unit of an equity-oriented mutual fund, or a unit of a business trust (REIT or InvIT).
Condition 2: The asset must be a short-term capital asset, meaning the holding period is 12 months or less for listed equity shares, equity-oriented mutual fund units, and business trust units.
Condition 3: The transaction of sale must be subject to Securities Transaction Tax (STT). For equity shares, STT must be paid on both purchase and sale (with some exceptions for IPO allotments and bonus shares where STT on purchase is not applicable). For mutual fund units, STT must be paid at the time of redemption.
Condition 4: The transaction must be carried out on a recognized stock exchange in India. Off-market transactions do not qualify.
When does Section 111A NOT apply: - Sale of unlisted shares (even if short-term) - Sale of shares where STT is not paid (off-market transfers) - Sale of debt mutual fund units - Sale of foreign stocks listed on overseas exchanges - Sale of gold ETFs or commodity ETFs
In these cases, the STCG is added to your regular income and taxed at your applicable slab rate, which could be higher than 20%.
Section 111A: Tax Calculation Mechanics
Under Section 111A, the STCG is taxed at a flat rate of 20%. Here is the precise calculation methodology.
Step 1: Compute the total income of the assessee excluding the STCG under Section 111A. This includes salary, business income, house property income, and other sources.
Step 2: Compute the income tax on this non-111A income as per applicable slab rates.
Step 3: Add the STCG under Section 111A to the total income.
Step 4: Compute tax on the STCG at 20%. However, if the non-111A income is below the basic exemption limit, the shortfall can be adjusted against the STCG before applying 20%.
Example: Kavita has no salary or other income. Her only income is STCG of Rs 5,00,000 under Section 111A.
Under the new tax regime, basic exemption limit is Rs 3,00,000. STCG eligible for exemption: Rs 3,00,000 Taxable STCG: Rs 5,00,000 - Rs 3,00,000 = Rs 2,00,000 Tax: Rs 2,00,000 x 20% = Rs 40,000 Cess: Rs 1,600 Total tax: Rs 41,600
For a salaried person with salary income above Rs 3 lakh, the basic exemption limit is already exhausted by salary, so the entire STCG is taxed at 20%.
Note: Deductions under Chapter VI-A (Section 80C, 80D, etc.) under the old tax regime cannot be claimed against STCG taxed under Section 111A. These deductions only reduce income taxed at slab rates.
Section 112A: Conditions for Applicability
Section 112A applies to Long-Term Capital Gains on listed equity instruments. The conditions mirror Section 111A but with the holding period threshold being more than 12 months instead of 12 months or less.
Condition 1: The asset must be an equity share listed on a recognized stock exchange, or a unit of an equity-oriented mutual fund, or a unit of a business trust.
Condition 2: The asset must be a long-term capital asset, meaning the holding period exceeds 12 months.
Condition 3: STT must be paid on the transaction of sale. For equity shares acquired on or after 1st October 2004, STT should have been paid on acquisition as well, with certain exceptions notified by the government (like shares acquired through IPO, bonus, rights issue, FPO, or off-market acquisitions that were later listed).
Condition 4: The gains must exceed Rs 1.25 lakh in the financial year for the taxable portion. The first Rs 1.25 lakh is exempt.
Key exclusion: Section 112A specifically provides that no indexation benefit is available. Unlike Section 112 (which deals with LTCG on non-equity assets and allows indexation), Section 112A uses the actual cost of acquisition or the fair market value as on 31st January 2018, whichever is higher, without any inflation adjustment.
This means Section 112A provides a lower rate (12.5% vs 20% under Section 112) but no indexation. For equity shares that appreciate faster than inflation, this trade-off is typically favorable.
Section 112A: The Grandfathering Provision
One of the most important features of Section 112A is the grandfathering provision for shares acquired before 1st February 2018. This provision ensures that gains accumulated before the introduction of LTCG tax on equities in Budget 2018 are not taxed.
For shares acquired before 1st February 2018, the cost of acquisition is deemed to be the higher of: - The actual cost of acquisition, OR - The fair market value (FMV) as on 31st January 2018
The FMV on 31st January 2018 is defined as the highest price of the share on a recognized stock exchange on that date. If the share was not traded on 31st January 2018, the closing price on the immediately preceding trading day is used.
However, there is a cap: If the FMV exceeds the actual sale price, the cost of acquisition is the sale price (to avoid creating an artificial loss).
Example: Shares bought in 2015 at Rs 200. FMV on 31st Jan 2018: Rs 500. Sold in 2025 at Rs 800.
Cost of acquisition = Higher of Rs 200 (actual) and Rs 500 (FMV) = Rs 500. LTCG = Rs 800 - Rs 500 = Rs 300 per share.
Without grandfathering, LTCG would be Rs 800 - Rs 200 = Rs 600. The grandfathering provision saves tax on Rs 300 of pre-2018 gains.
Another scenario: Shares bought at Rs 200. FMV on 31st Jan 2018: Rs 500. Sold in 2025 at Rs 400. Sale price (Rs 400) is less than FMV (Rs 500). Cost of acquisition = Rs 400 (capped at sale price). LTCG = Rs 400 - Rs 400 = Rs 0. No gain, no loss.
This prevents creating an artificial loss from the grandfathering adjustment.
111A vs 112A: Complete Comparison
| Feature | Section 111A | Section 112A |
|---|---|---|
| Type of Gain | Short-Term Capital Gains | Long-Term Capital Gains |
| Holding Period | 12 months or less | More than 12 months |
| Tax Rate | 20% | 12.5% |
| Exemption | None (basic exemption limit applies if other income is below threshold) | Rs 1.25 lakh per financial year |
| Indexation | Not applicable | Not available |
| Grandfathering | Not applicable | Yes, FMV as on 31st Jan 2018 |
| STT Requirement | Yes, on sale | Yes, on sale (and purchase with exceptions) |
| Applicable Assets | Listed equity shares, equity MF units, business trust units | Listed equity shares, equity MF units, business trust units |
| Chapter VI-A Deductions | Not applicable against this income | Not applicable against this income |
| Max Surcharge | 15% | 15% |
When Gains Fall Outside Both Sections
It is important to understand when your equity gains do NOT qualify under Sections 111A or 112A, because the tax treatment is significantly different.
Unlisted shares: Gains from selling unlisted shares are taxed under the regular STCG or LTCG provisions, not Sections 111A or 112A. STCG on unlisted shares is taxed at your slab rate. LTCG on unlisted shares (holding period exceeding 24 months) is taxed at 12.5% under Section 112 without indexation after the Finance Act 2024 changes.
Off-market transactions: If you transfer shares off-market (not through a stock exchange) and STT is not paid, Sections 111A and 112A do not apply. The gains are taxed at slab rate for STCG and 12.5% under Section 112 for LTCG.
Foreign stocks: Gains from selling stocks listed only on foreign exchanges (like US stocks bought through international investing platforms) do not qualify under Sections 111A or 112A. STCG is taxed at slab rate, and LTCG (holding period exceeding 24 months for unlisted, 12 months for listed on recognized foreign exchange) at 12.5% under Section 112.
Debt mutual funds: Since April 2023, gains from debt mutual funds purchased after 1st April 2023 are taxed at slab rate regardless of holding period. They do not qualify under Sections 111A or 112A.
Gold ETFs and commodity ETFs: These are not equity-oriented and fall outside Sections 111A and 112A.
Always verify the classification of your asset before assuming the concessional rates apply. Applying the wrong section can lead to underpayment of tax and potential penalties.
Practical Implications for Tax Planning
Understanding Sections 111A and 112A in depth enables smarter tax planning decisions.
Leverage the rate differential: At 20% vs 12.5%, the rate difference between STCG and LTCG is 7.5 percentage points. On large gains, this translates to significant savings. Add the Rs 1.25 lakh exemption under Section 112A, and the effective rate difference is even larger.
Plan around the STT requirement: If you are considering an off-market share transfer (say, between family members), be aware that this takes you out of Sections 111A and 112A. The gains would be taxed at slab rate for STCG, which could be 30% for high-income individuals — much higher than the 20% under Section 111A. Consider executing the transfer through a stock exchange to maintain STT eligibility.
Use the basic exemption limit: If you are a person with no other income (like a homemaker or a retired person), the basic exemption limit can be used against Section 111A gains. This means the first Rs 3 lakh (new regime) of your STCG is effectively tax-free. Combined with the Rs 1.25 lakh LTCG exemption, you could earn Rs 4.25 lakh in capital gains with minimal or zero tax.
Report correctly: Use Schedule CG in your ITR to separately report gains under Section 111A and Section 112A. Mixing them up or reporting equity gains under the wrong section is a common filing error that triggers notices. Your broker's capital gains statement will typically classify gains correctly, so use it as your primary reference.
See how this applies to your portfolio
Upload your Zerodha or Groww reports and get personalized recommendations in under 2 minutes.
Analyze My Portfolio FreeFrequently Asked Questions
What happens if STT is not paid on the transaction?
If STT is not paid (for example, in an off-market transfer), Sections 111A and 112A do not apply. Short-term gains would be taxed at your income tax slab rate (up to 30%), and long-term gains would be taxed at 12.5% under Section 112. The concessional rates under Sections 111A and 112A are specifically linked to STT-paid transactions on recognized stock exchanges.
Does Section 112A apply to equity mutual fund SIP redemptions?
Yes. Each SIP installment is treated as a separate purchase. When you redeem units, FIFO applies — the oldest units are redeemed first. If those units were held for more than 12 months, the gain is LTCG under Section 112A at 12.5% above Rs 1.25 lakh. If held for 12 months or less, the gain is STCG under Section 111A at 20%.
Is the grandfathering provision under Section 112A still applicable?
Yes. The grandfathering provision remains applicable for all shares and equity mutual fund units acquired before 1st February 2018. The cost of acquisition is deemed to be the higher of actual purchase price or the fair market value as on 31st January 2018. This provision permanently protects pre-2018 gains from LTCG tax.
Can I claim indexation benefit under Section 112A?
No. Section 112A specifically excludes indexation benefit. The cost of acquisition under Section 112A is the actual cost (or FMV as on 31st January 2018 for pre-2018 acquisitions) without any inflation adjustment. This is different from Section 112, which historically allowed indexation for non-equity assets, though post Finance Act 2024 changes, indexation has been largely removed.