Tax guide

Zero Tax on Up to ₹5.25 Lakh of Mutual Fund LTCG? Here's the Full Calculation

The ₹1.25 lakh Section 112A exemption plus the ₹4 lakh Basic Exemption can make up to ₹5.25 lakh of equity mutual fund LTCG tax-free. Worked examples with the relevant sections.

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A ₹5 Lakh Profit With Zero Tax — How?

If you have no other income, Long-Term Capital Gains of up to ₹5.25 lakh from Equity Mutual Funds can attract zero tax.

Most investors assume that any LTCG means a flat 12.5% tax on the entire profit. In reality, the ₹1.25 lakh exemption under Section 112A combined with the Basic Exemption Limit changes the calculation completely.

Step 1: What Is Long-Term Capital Gain (LTCG)?

When you sell Equity Mutual Fund units after holding them for more than 12 months, the profit is a Long-Term Capital Gain.

Example: You invested ₹5,00,000, and a few years later it is worth ₹8,00,000. On redemption, Capital Gain = ₹8,00,000 − ₹5,00,000 = ₹3,00,000 (LTCG).

Relevant Income Tax sections:

• Section 2(42A) (Income-tax Act, 1961): Units of listed equity and equity-oriented funds held for more than 12 months are long-term assets.
• Equity-oriented fund: A fund that keeps at least 65% of its corpus in listed Indian equity (Explanation to Section 112A).
• STT: Section 112A applies only if STT is paid on the sale; for Equity MF redemptions it is deducted automatically.

Step 2: The First ₹1.25 Lakh Is Tax-Free — Section 112A

The full ₹3 lakh is not taxed at 12.5%. In every financial year, the first ₹1.25 lakh of Equity LTCG is completely tax-free; only the amount above it is taxed at 12.5%.

• Section 112A, Income-tax Act, 1961 — for transactions up to FY 2025-26 (AY 2026-27). (incometaxindia.gov.in)
• Section 198, Income-tax Act, 2025 — the new Act applies from 1 April 2026, and Section 198 replaces Section 112A with the same rules. (incometaxindia.gov.in)

Budget 2026 kept the 12.5% rate and the ₹1.25 lakh limit unchanged for FY 2026-27.

Step 3: The Basic Exemption Limit — The Hidden Benefit

Under the New Tax Regime, the Basic Exemption Limit is ₹4,00,000. If your regular income (salary, business, interest, rent) is below this limit, the unused portion can be set off against LTCG.

• Proviso to Section 112A(2) (1961 Act) and Section 198(3) (2025 Act): If a Resident Individual or HUF has non-LTCG income below the Basic Exemption Limit, the LTCG is reduced by the shortfall.
• Section 115BAC: New Tax Regime slab rates, with 0% up to ₹4 lakh.

Case 1: Zero Other Income — Zero Tax

Suppose a person has no salary, business or other income — only ₹3 lakh of LTCG from Equity MFs. After the ₹1.25 lakh exemption, ₹1.75 lakh remains, which fits within the ₹4 lakh Basic Exemption Limit. Result: Income Tax = ₹0.

Calculation: (LTCG − ₹1.25 lakh − ₹4 lakh) × 12.5% × 1.04 · assumes zero other income

The magic number is ₹5.25 lakh (₹1.25 lakh under Section 112A + ₹4 lakh Basic Exemption). Beyond that, each additional ₹1 lakh of LTCG costs about ₹13,000 in tax. So hearing "I made ₹5 lakh in LTCG" and applying a flat 12.5% is simply wrong.

Case 2: ₹6 Lakh of Other Income — The Math Changes

On the same ₹3 lakh LTCG, a person with ₹6 lakh of other income pays about ₹22,750 in tax. The ₹4 lakh Basic Exemption is already used up by the other income, so the full ₹1.75 lakh is taxed at 12.5% plus cess.

Calculation: (₹3 lakh − ₹1.25 lakh − unused Basic Exemption) × 12.5% × 1.04

The Section 87A rebate does not help here. The slab tax on ₹6 lakh of other income (₹10,000) becomes ₹0 through the Section 87A rebate, since total income is below ₹12 lakh. But under Section 112A(6) (in the 2025 Act, Section 198(7), with the rebate in Section 156), the rebate cannot be used against tax on LTCG.

The same ₹3 lakh profit, but a very different tax bill depending on other income.

Not Every Mutual Fund Is Taxed the Same Way

The ₹5.25 lakh benefit above applies only to LTCG from equity-oriented funds. Change the fund type or holding period, and the section and rate change too.

Hybrid and international funds are taxed based on their equity exposure.

Calculate Your LTCG Tax in 5 Steps

1. Write down your total Equity LTCG for the financial year.
2. Subtract the Section 112A / 198 exemption of ₹1,25,000.
3. Unused Basic Exemption = ₹4,00,000 − your other income (only if other income is below ₹4 lakh; residents only).
4. Taxable LTCG = balance from Step 2 − unused limit from Step 3.
5. Tax = Taxable LTCG × 12.5% + 4% Health & Education Cess.

Example: LTCG ₹6,00,000, other income ₹0 → (6,00,000 − 1,25,000 − 4,00,000) × 12.5% × 1.04 = ₹9,750.

Zero Tax Means No ITR? — A Costly Misconception

Zero tax and not filing an ITR are two different things. With ₹5 lakh of LTCG, your tax may be ₹0, but your total income still exceeds the ₹4 lakh Basic Exemption Limit, so filing an ITR under Section 139(1) becomes mandatory.

• Which form? If Section 112A LTCG is up to ₹1.25 lakh, ITR-1/ITR-4 may be used; above that, you generally need ITR-2.
• Filing late? A late fee may apply under Section 234F.
• Why file on time: Capital losses can be carried forward only with a timely ITR, and the return serves as income proof for loans and visas.

The reverse is also true: if tax is payable, simply not filing an ITR does not make the liability disappear.

Checklist Before You Redeem

The Bottom Line

"LTCG × 12.5%" is not the right way to calculate your tax. With proper planning, low-income investors — such as homemakers, retirees or students — can book up to ₹5.25 lakh of LTCG tax-free every year on their own investments. Note: income from investments made with money gifted by a spouse is clubbed with the giver's income under Section 64.

Returns matter, but what you keep after tax matters more. For a tax-efficient redemption plan for your portfolio, contact The Capital Investment — thecapitalinvestment.in.

Sources: Section 112A — Income Tax Department · Section 198, Income-tax Act 2025 — Income Tax Department

Frequently asked questions

Mutual fund investments are subject to market risks. Read all scheme-related documents carefully. The figures above are for illustration only; tax rules may change.