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nism-series-va-section-112a-capital-gains-tax-calculation[ MUTUAL FUND DISTRIBUTORS ]

An individual unitholder realizes a Long-Term Capital Gain (LTCG) of ₹3,75,000 upon redeeming units of an equity mutual fund held for 24 months. Under Section 198 of the Income-tax Act, 2025 (the erstwhile Section 112A of the Income-tax Act, 1961) (post-Budget 2024), what is the exact base LTCG tax payable (excluding surcharge and cess)?

[ A ]₹46,875 (12.5% on the entire ₹3,75,000 gain without applying exemption)

[ B ]₹25,000 (Pre-Budget 2024 rate: 10% on gain exceeding ₹1,00,000)

[ C ]₹0 (Equity mutual fund LTCG is 100% tax-exempt)

[ D ]₹31,250 [ 12.5% on the gain exceeding ₹1,25,000 exemption: (₹3,75,000 - ₹1,25,000) * 12.5% ][ CORRECT ]

Takeaway

Option D is correct: ₹31,250 [ 12.5% on the gain exceeding ₹1,25,000 exemption: (₹3,75,000 - ₹1,25,000) * 12.5% ]

Derivation

Total LTCG realized is ₹3,75,000. Section 198 of the Income-tax Act, 2025 (the erstwhile Section 112A of the Income-tax Act, 1961) grants a statutory annual exemption of ₹1,25,000 on long-term equity gains before any tax applies, so taxable LTCG = ₹3,75,000 − ₹1,25,000 = ₹2,50,000. Applying the post-Budget 2024 rate of 12.5%: ₹2,50,000 × 0.125 = ₹31,250. This is the base liability before the 4% Health and Education Cess (and surcharge, if applicable) is layered on for the actual ITR filing. The exam consistently tests whether candidates remember to subtract the exemption first — applying 12.5% to the full ₹3,75,000, as in Option A, is the single most common error on this calculation.

Why the others fail

A — ₹46,875 (12.5% on the entire ₹3,75,000 gain without applying exemption)

Applies the 12.5% rate to the full ₹3,75,000 gain without first deducting the ₹1,25,000 statutory annual exemption under Section 198 (the erstwhile Section 112A) — overstates the tax by ₹15,625.

B — ₹25,000 (Pre-Budget 2024 rate: 10% on gain exceeding ₹1,00,000)

Uses the pre-Budget 2024 rule of 10% tax on gains above ₹1,00,000, which was replaced by the 12.5% rate on gains above ₹1,25,000 with effect from the amendment.

C — ₹0 (Equity mutual fund LTCG is 100% tax-exempt)

Equity LTCG loses its tax-free status once it crosses ₹1,25,000 in a financial year; Section 198 (the erstwhile Section 112A) taxes the excess at 12.5%, it does not exempt it entirely.