Section 112
Section 112 of the Income Tax Act, 1961 governs the taxation of long-term capital gains on assets not covered by Section 112A — including unlisted shares, debt instruments, gold, immovable property, and foreign assets — at a flat rate of 20% with the benefit of indexation, or 10% without indexation at the taxpayer's option.
Section 112 acts as the residual LTCG provision for all capital assets other than those specifically covered by the concessional Section 112A regime. While equity investors typically encounter Section 112A, Section 112 is the relevant provision for a wide range of assets that form part of a diversified portfolio — debt mutual funds (for units purchased before April 1, 2023), unlisted company shares, physical gold and gold bonds, foreign equity, and immovable property.
The defining feature of Section 112 is the indexation benefit. Using the Cost Inflation Index (CII) notified by the Central Board of Direct Taxes each year, the purchase cost is adjusted upward for inflation, reducing the effective gain and thereby the tax liability. For assets held over long periods in an inflationary environment, indexation can substantially reduce taxable gains, sometimes bringing the effective tax rate well below the nominal 20%.
However, Section 112 also allows an alternative: if the taxpayer forgoes indexation, the gain is taxed at a flat 10%. This option is particularly useful for inherited assets where the indexed cost may still be lower than the unindexed cost, or for assets held in foreign currency where indexation may not be beneficial. The taxpayer is permitted to compute tax under both methods and choose the more favourable outcome.
Budget 2024 made a significant amendment affecting debt mutual funds. For units purchased on or after April 1, 2023, gains are taxed at slab rates regardless of holding period — effectively removing the LTCG advantage under Section 112 for new debt fund investments. Units purchased before that date continue to be governed by the older Section 112 provisions if held for more than 36 months.
For unlisted shares, Section 112 applies after a 24-month holding period. NRIs selling unlisted Indian company shares are subject to a flat 10% tax without the indexation option under specific provisions of their applicable Double Taxation Avoidance Agreement. The interplay between Section 112, DTAA provisions, and the applicable surcharge rates makes this one of the more complex areas of capital gains taxation.