By CA Surekha S. Ahuja
New Tax Regime | AY 2026-27 (FY 2025-26)
Introduction
Part 1 examined the legal framework governing Long-Term Capital Gains taxable under Section 112A and clarified the position following Finance Act 2025 that the enhanced rebate under Section 87A cannot be used to reduce tax payable on such gains.
Once that position is understood, the more important questions become practical.
How should Section 112A gains be computed?
How does the Basic Exemption Limit interact with Long-Term Capital Gains?
What benefits continue to remain available despite the Finance Act 2025 amendment?
What planning opportunities remain permissible within the law?
How should such gains be reported in the Income Tax Return?
This article addresses these practical aspects.
Five Numbers Every Investor Should Know
| Particulars | FY 2025-26 |
|---|---|
| Basic Exemption Limit under New Regime | ₹4,00,000 |
| Annual Exemption under Section 112A | ₹1,25,000 |
| Tax Rate under Section 112A | 12.5% |
| Maximum Surcharge on Section 112A Tax | 15% |
| Maximum Effective Tax Burden on Section 112A Gains | Approximately 14.95% |
These five numbers drive most Section 112A computations.
The Most Important Provision Investors Often Miss
While most discussions focus on the 12.5% tax rate and the annual exemption of ₹1.25 lakh, an equally important provision is often overlooked.
Before the special rate under Section 112A is applied, the law requires consideration of the Basic Exemption Limit.
Statutory Provision
The first proviso to Section 112A(2) provides:
"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, such long-term capital gains 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."
Legislative Intent and Interpretation
The purpose of the proviso is simple.
A taxpayer should not lose the benefit of the Basic Exemption Limit merely because a portion of the income consists of Long-Term Capital Gains taxable under Section 112A.
Accordingly, the law requires a comparison between:
- The Basic Exemption Limit; and
- The taxpayer's income excluding the Long-Term Capital Gains taxable under Section 112A.
Where such income is below the Basic Exemption Limit, the amount of the shortfall must first be reduced from the Long-Term Capital Gains before the special rate under Section 112A is applied.
Only thereafter is the annual exemption of ₹1,25,000 under Section 112A considered.
What the Provision Does Not Mean
The proviso does not create a separate deduction.
It does not provide an additional exemption.
It does not automatically permit every taxpayer to reduce Long-Term Capital Gains by ₹4 lakh.
The relief is available only to the extent that income excluding Long-Term Capital Gains falls short of the Basic Exemption Limit.
Where income chargeable at normal rates already equals or exceeds the Basic Exemption Limit, no benefit remains available under this proviso.
Practical Illustration
Assume a resident individual has:
- Salary Income: ₹2,50,000
- Long-Term Capital Gains taxable under Section 112A: ₹6,00,000
Step 1 – Determine the Shortfall in the Basic Exemption Limit
| Particulars | Amount (₹) |
|---|---|
| Basic Exemption Limit under New Regime | 4,00,000 |
| Income excluding LTCG | 2,50,000 |
| Shortfall | 1,50,000 |
Since the income excluding Long-Term Capital Gains is below the Basic Exemption Limit, the shortfall of ₹1,50,000 becomes eligible for adjustment under the first proviso to Section 112A(2).
Step 2 – Reduce the Shortfall from LTCG
| Particulars | Amount (₹) |
|---|---|
| LTCG under Section 112A | 6,00,000 |
| Less: Adjustment under first proviso to Section 112A(2) | (1,50,000) |
| Balance LTCG | 4,50,000 |
Step 3 – Apply the Annual Exemption under Section 112A
| Particulars | Amount (₹) |
|---|---|
| Balance LTCG | 4,50,000 |
| Less: Annual Exemption under Section 112A | (1,25,000) |
| Taxable LTCG | 3,25,000 |
Step 4 – Compute Tax
| Particulars | Amount (₹) |
|---|---|
| Taxable LTCG | 3,25,000 |
| Tax @ 12.5% | 40,625 |
| Health and Education Cess @ 4% | 1,625 |
| Total Tax Liability | 42,250 |
Understanding How Much LTCG Can Escape Tax
A common oversimplification is that ₹5.25 lakh of Long-Term Capital Gains is always tax-free.
That is not what the law provides.
The amount of LTCG that escapes tax depends on the extent to which the Basic Exemption Limit remains unutilised.
| Income Excluding LTCG | Shortfall in Basic Exemption Limit | Section 112A Exemption | Total LTCG Escaping Tax |
|---|---|---|---|
| Nil | ₹4,00,000 | ₹1,25,000 | ₹5,25,000 |
| ₹1,00,000 | ₹3,00,000 | ₹1,25,000 | ₹4,25,000 |
| ₹2,50,000 | ₹1,50,000 | ₹1,25,000 | ₹2,75,000 |
| ₹4,00,000 or more | Nil | ₹1,25,000 | ₹1,25,000 |
Thus, the benefit under the first proviso to Section 112A(2) gradually reduces as income chargeable at normal rates increases.
Benefits That Continue To Remain Available
Annual Exemption of ₹1.25 Lakh
The first ₹1,25,000 of eligible Long-Term Capital Gains continues to remain exempt every financial year.
Unlike the rebate under Section 87A, this exemption is not linked to any income threshold and remains available irrespective of the taxpayer's income level.
Grandfathering Continues
For eligible equity investments acquired before 31 January 2018, the grandfathering provisions introduced when Section 112A was enacted continue to apply.
Accordingly, appreciation accrued up to 31 January 2018 remains protected in accordance with the statutory computation mechanism.
No Change in Indexation Position
Section 112A continues to tax gains without the benefit of indexation.
Surcharge Cap Continues
The surcharge on tax attributable to gains under Section 112A continues to remain capped at 15%.
Why the Surcharge Cap Matters
A taxpayer with very high ordinary income may otherwise be exposed to surcharge rates of up to 37%.
However, tax attributable to Long-Term Capital Gains taxable under Section 112A continues to enjoy a statutory surcharge ceiling of 15%.
As a result, the effective tax burden on such gains remains substantially lower than the maximum rate applicable to ordinary income.
Tax Planning Opportunities Within the Law
Annual Exemption Utilisation
The annual exemption of ₹1.25 lakh under Section 112A resets every financial year.
Investors may consider periodic review of their portfolios to ensure efficient utilisation of the available exemption.
Low-Income Years
Years involving retirement, sabbaticals, business losses, career transitions or temporary reduction in income may allow greater utilisation of both:
- The Basic Exemption Limit; and
- The annual exemption under Section 112A.
Capital Loss Management
Long-Term Capital Losses may be adjusted against eligible Long-Term Capital Gains in accordance with the provisions governing capital gains.
Proper utilisation of carried-forward losses can significantly reduce future tax liability.
Financial Year-End Review
A year-end review of gains, losses, holding periods and exemption utilisation remains one of the most effective tax planning exercises available to long-term investors.
Important Clarifications for Investors and Taxpayers
Rebate Eligibility and LTCG Taxation Are Two Different Concepts
A taxpayer may satisfy the conditions for rebate under Section 87A and yet remain liable to pay tax on Long-Term Capital Gains taxable under Section 112A.
Eligibility for rebate and computation of LTCG tax operate independently under the Act.
The Basic Exemption Limit Does Not Automatically Reduce LTCG
The benefit under the first proviso to Section 112A(2) arises only where income excluding Long-Term Capital Gains falls below the Basic Exemption Limit.
Once income chargeable at normal rates equals or exceeds the Basic Exemption Limit, no relief is available under the proviso.
The Annual Exemption of ₹1.25 Lakh Is Available Regardless of Income Level
Unlike the rebate under Section 87A, the annual exemption under Section 112A is not linked to income thresholds.
The exemption remains available even where the taxpayer's income runs into several crores.
Chapter VI-A Deductions Do Not Reduce Section 112A Gains
Deductions available under Sections 80C, 80D, 80G and other provisions of Chapter VI-A do not reduce Long-Term Capital Gains taxable under Section 112A.
The 15% Surcharge Cap Continues To Protect Equity Investors
Even where a taxpayer falls within a higher surcharge bracket, tax attributable to gains under Section 112A continues to enjoy the statutory surcharge ceiling of 15%.
Accurate Reporting in Schedule CG Remains Critical
The annual exemption under Section 112A should be claimed through the prescribed computation mechanism.
Investors should avoid reporting only the net gain figure and should carefully reconcile disclosures with AIS, broker statements and demat records.
ITR Filing Precautions
Use the Correct Return Form
| Situation | Applicable Return |
|---|---|
| Capital gains and no business income | ITR-2 |
| Capital gains along with business income | ITR-3 |
| Taxpayer having capital gains | Not eligible for ITR-1 |
Report Gross Gains
Gross Long-Term Capital Gains should be disclosed in Schedule CG.
The exemption under Section 112A should be claimed through the prescribed computation mechanism rather than by reporting only a net figure.
Reconcile With AIS and Supporting Records
Before filing the return, reconcile:
- AIS
- Contract notes
- Broker statements
- Demat statements
to minimise mismatch-related notices and adjustments.
Review Grandfathering Computations Carefully
For investments acquired before 31 January 2018, grandfathering computations should be independently verified and not accepted blindly from pre-filled data.
Key Takeaway
While Finance Act 2025 settled the controversy relating to the availability of rebate under Section 87A against Long-Term Capital Gains taxable under Section 112A, the core structure of Section 112A remains largely unchanged.
The annual exemption of ₹1,25,000, the relief embedded in the first proviso to Section 112A(2), grandfathering protection for pre-31 January 2018 acquisitions, capital loss set-off provisions and the statutory surcharge cap of 15% continue to provide meaningful benefits to investors.
For AY 2026-27 onwards, successful tax planning will depend less on rebate-based interpretations and more on understanding the statutory computation mechanism, utilising available reliefs efficiently and ensuring accurate reporting of Long-Term Capital Gains in the Income Tax Return.
