LTCG Exemption of ₹1.25 Lakh — Who Gets It and Who Doesn't

1. What the ₹1.25 lakh LTCG exemption actually is

Section 112A of the Income Tax Act gives you a ₹1,25,000 annual exemption on long-term capital gains from certain equity assets. Gains up to this amount are completely tax-free. Gains above ₹1.25 lakh are taxed at 12.5% (no indexation).

This exemption was introduced after Budget 2018 reintroduced LTCG tax on equity after a 14-year gap. The ₹1 lakh limit stayed until Budget 2024, which raised it to ₹1.25 lakh from 23 July 2024 onwards. So for FY 2025-26 (AY 2026-27), the full-year limit is ₹1,25,000.

2. Who gets the exemption

To qualify for the ₹1.25 lakh LTCG exemption, your gain must tick all three boxes:

✅ The right asset type — listed equity and equity mutual funds

Section 112A applies only to:

• Listed equity shares traded on a recognised Indian stock exchange (NSE, BSE)
• Equity-oriented mutual funds — funds where at least 65% of the corpus is invested in equity shares of domestic companies
• Units of a business trust (REITs and InvITs do not qualify — see below)

If you invest in any of these through a broker or a mutual fund platform and hold for the required period, you are in the right universe.

✅ The right holding period — more than 12 months

Your holding period must be more than 12 months from the date of purchase. If you sell on the 365th day, that counts as short-term (STCG), not long-term. You need to hold for at least one day beyond one year.

For mutual funds, the holding period is from the date of each unit's allotment. In SIP investments, each installment has its own purchase date. So you can have a mix of LTCG and STCG within the same SIP fund depending on which units you are redeeming.

✅ STT must have been paid

Section 112A requires that Securities Transaction Tax (STT) was paid at the time of both acquisition and sale (for shares) or at the time of redemption (for mutual funds). All normal broker transactions on NSE/BSE automatically have STT included in the trade confirmation. You don't need to do anything separately — this condition is automatically satisfied for any exchange-traded transaction.

3. Who does NOT get the exemption

This is where most people get surprised. Several common investment categories are excluded from Section 112A altogether, and the exemption also depends on your residential status.

❌ NRIs

Non-Resident Indians (NRIs) are not entitled to the ₹1.25 lakh exemption. Under Section 115E and DTAA provisions, LTCG for NRIs on listed equity is taxed at a flat 12.5% from the very first rupee with no threshold exemption. The TDS is deducted by the broker at the point of sale itself.

This is one of the most common misconceptions — NRIs who have moved abroad and retained their Indian demat accounts often assume they get the same exemption as residents. They don't.

❌ Debt mutual funds (purchased after 1 April 2023)

Debt mutual funds — those where less than 65% is in equity — lost their LTCG indexation benefit from 1 April 2023 onwards. More relevantly, gains from these funds are now taxed entirely at slab rate regardless of how long you hold. Section 112A does not apply to them at all. No LTCG, no exemption.

❌ Gold and gold ETFs

Physical gold and gold ETFs are not equity assets and do not fall under Section 112A. They have their own LTCG tax rules — held for more than 24 months, taxed at 12.5% without indexation — but without the ₹1.25 lakh exemption. The exemption is strictly for equity and equity funds.

❌ International/overseas mutual funds

Funds that invest primarily in overseas equity (like US equity funds, or funds of funds investing in foreign stocks) do not qualify if less than 65% of their assets are in Indian domestic equity. Most global/international funds fall outside Section 112A. Gains from these are typically taxed at slab rate.

❌ Unlisted shares

Shares of private companies that are not listed on a recognised stock exchange do not qualify for Section 112A. Their LTCG (held for more than 24 months) is taxed under Section 112, not 112A, and at 12.5% — but without the ₹1.25 lakh exemption. The STT condition alone rules them out since unlisted shares don't have STT.

❌ REITs and InvITs

Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are listed on exchanges but their units are not equity shares in the traditional sense. Their taxation is governed by specific provisions and does not include the Section 112A exemption.

4. How the tax calculation works with the exemption

The exemption works as a deduction from your gross LTCG. Only the amount above ₹1.25 lakh is taxed at 12.5%.

Your LTCG	Taxable LTCG	Tax @ 12.5%	+ 4% Cess	Total Tax
₹50,000	Nil (within exemption)	₹0	₹0	₹0
₹1,25,000	Nil (exactly at limit)	₹0	₹0	₹0
₹2,00,000	₹75,000	₹9,375	₹375	₹9,750
₹3,00,000	₹1,75,000	₹21,875	₹875	₹22,750
₹5,00,000	₹3,75,000	₹46,875	₹1,875	₹48,750
₹10,00,000	₹8,75,000	₹1,09,375	₹4,375	₹1,13,750

Important: the exemption is applied first, then the tax is calculated on the remaining amount. You cannot use the exemption to offset STCG or business income — it applies only to LTCG under Section 112A.

Also, if you have both LTCG and LTCG losses in the same year, the losses are set off first, and then the ₹1.25 lakh exemption applies to the net LTCG. You do not get both the exemption AND a loss deduction on the same gain.

5. The Section 87A trap that catches investors off guard

This is the most misunderstood part of LTCG taxation in India, and it has caught many investors off guard — especially since a 2024 clarification by the Income Tax Department.

Under the new tax regime, if your Gross Total Income (GTI) is ₹12 lakh or below, you get a rebate under Section 87A that effectively makes your tax liability zero. But here is the trap:

The 87A rebate applies to slab-rate tax. It does not apply to LTCG tax under Section 112A.

This was confirmed by the CBDT and reflected in the 2024 income tax utility software. If you have LTCG on equity, do not assume you are fully covered by the 87A rebate. Calculate your LTCG tax separately.

6. Tax harvesting — using the exemption every single year

The ₹1.25 lakh exemption does not carry forward. If you don't use it in a financial year, it simply lapses. This makes annual LTCG tax harvesting one of the most powerful legal tax-saving strategies available to Indian equity investors.

How it works

Before 31 March each year, check your portfolio for long-term holdings (held more than 12 months) that have unrealised gains. If those gains are within ₹1.25 lakh, sell them. Then immediately buy the same shares or fund units back at the current price.

Result: You have crystallised the gain tax-free, and your cost basis (purchase price) is now reset to the higher current market price. This reduces the taxable gain when you eventually sell the asset permanently in a future year.

Is there a wash-sale rule in India?

No. The USA and many countries have wash-sale rules that prevent you from immediately buying back what you just sold. India has no such rule. You can sell and buy back the same shares on the same day. The transaction is completely legal and does not attract any penalty or disqualification.

How much can you save over time?

If you harvest ₹1.25 lakh of gains tax-free every year, the annual tax saving is approximately ₹16,250 (12.5% tax + 4% cess on ₹1.25L). Over 10 years, assuming consistent harvesting, that is over ₹1.6 lakh in saved tax — not counting the compounding benefit of the money you kept invested instead of paying it as tax.

7. Worked examples

Example 1 — Resident investor, well within the limit

Priya's LTCG is fully within the ₹1.25 lakh limit so she pays zero LTCG tax. Her salary is taxed normally at slab rates.

Example 2 — Resident investor, gains above the limit

Example 3 — NRI, same gain, no exemption

Rohan pays ₹16,250 more tax than Aditya on the exact same gain — purely because he is an NRI and does not get the ₹1.25 lakh threshold.

Example 4 — The 87A trap in action

Sunita's GTI is below ₹12 lakh so her slab-rate tax is fully wiped by the 87A rebate. But the LTCG tax of ₹9,750 is not covered and must be paid. This is a common surprise at the time of filing.